Why it should matter to Leftists that (X-M) = (S-I)+(T-G)

Dean Baker is an indispensable source for anyone who wants to understand how the economy works.

His recent blog post explains why any country that has a trade deficit must have a budget deficit or negative public savings or both.  Baker bluntly says 

"If you don't eat, drink and sleep these identities, then you do not understand the economy, end of story. Identities are by definition true, there is no way around them."

Using basic definitions and a little algebra Baker shows here that

(X-M) = (S-I) + (T-G) 

X-M is exports minus imports, or the trade surplus,
S-I is private saving minus private investment,
T-G is taxes minus government spending, or the budget surplus

If (X-M) is negative (a trade deficit exists) then (T-G) must be negative (a budget deficit exists) OR (S-I) is negative (the savings rate is very low) OR both. 

Neoliberals routinely scoff at any practical ideas for bringing down trade dificits by shrieking "protectionism" or "inflation", but also rail against budget deficits and blast people for not saving. In other words, they are ignorant of  accounting identities. Fortunately for them, the corporate media is a de-meritocracy.

Leave a comment