Here is a terrific chart showing the Sectoral Balances since 1952:
This is worth some study. If you want to see the detailed numbers behind this chart,
here is the link: Sectoral Balances . Some observations:
1. Blue, which is Net Private, ran positive continuously until 1997. From there until 2nd Qtr, 2008, it ran negative, with a slight positive balance through 2003. What happened in 1997 is that the consumer began a serious borrowing binge, which ended abruptly in 2008, when housing prices collapsed. By early 2009, the consumer was deleveraging, i.e., saving, at an historically high rate, and although the External Sector Balance improved, the slack was necessarily taken up by an offsetting increase in the Government Deficit.
2. The Clinton surplus was supported by an historic run-up in private borrowing. The Bush economy was similarly financed. Had the credit bubble not been building during the Bush years, and if consumers had been saving at historical rates, the Bush deficits would have matched current levels. Specifically, if the 2006 Private Sector Balance had been 3.8% positive, instead of 3.8% negative, the deficit would have been 10%, not 2.2%, exactly our current level.
3. It's impossible to look at this chart and not see that a healthy US economy has a Government Sector Deficit that supports a Foreign Trade Deficit (hopefully more in line with current levels (2.5% - 3.5%) than the 5% - 6% range under Bush) and Net Private Savings. For example, a 3% negative trade balance and a 4% private savings rate would require a 7% deficit.
A balanced budget amendment in this context is ridiculous. Austerity budget cuts make no sense. Why do none of our leaders understand this? Why have many, if not most, mainline economists supported the austerity position? We will look into the changing perspectives of our leading economists over the last forty years in my next blog.