Macroeconomic analysis since the advent of the Keynesian Cross and national income analysis that birthed the Bureau of Economic Analysis (BEA) in the United States is a seminal event in the evolution of modern economics. The output equation for gross domestic (meaning, within a country’s borders) national income, expenditures and output, which should theoretically all be equal to each other, consists of four components: personal consumption expenditures (C), government expenditures (G), private investment (I) and the net of exports and imports (NX). The reasoning is simple ― what has been produced has to be consumed. It is a cycle on page 1 of every macroeconomics textbook.
The central bank’s money supply, which on average increases at some rate over time accounting for the tiny wiggles above and below a line with an upward or positive slope might as well be the national output which is the sum of all real things. At least, ideally it should be if prices are reflective of real scarcity and the corresponding periodical technical change to deal with it. All of economic reality is subsumed in that implicit correspondence between money and output and that is its beauty.
Policymakers, given all the effort that had gone into continuously improving the methods of aggregation or adding up numbers to get the big numbers corresponding to the macroeconomic big picture since the end of World War II, must therefore pay close attention to how they are interpreting what each of the components of the national output equation mean in the ever changing global economic reality.
The sum of the first three terms in the current economic context, C + G + I, quite correctly is saying a lot about what the United States must do domestically to make that number bigger if the correspondence between the Fed’s money supply and the economic reality represented by that arithmetic is not to go out of whack. The last term, NX, is saying a lot about its relationship between the first three because corporations on this ever smaller planet are always evaluating where to increase the first three using the last to maximize the bang for the buck, that is to keep inflation or their products costs low. And this is the crux of the problem being faced by policymakers everywhere around the world.
Bumper stickers may work well for politicians, but if used well they can fix serious problems for economists as well who, unfortunately crunch numbers more than advise politicians. Domestic output of the United States, C + G + I, without regard to other countries, is saying that domestic investment must rise to raise personal consumption. If we now bring in the last term, NX, it is saying that to make it add to the first three, instead of subtracting from them as the country is doing now depressing the national output, other countries must consume more and in the process buy more from the United States. Therefore, the United States of America must reform to raise domestic investment and trade with other countries to develop them. The bumper sticker for improving the dismal economic condition the country is in is “Reform to grow. Trade to Develop.”
Bumpers of cars are a nuisance if they cause fender benders below the deductibles on auto insurance policies but a blessing if the cars on which they go are in fact indicative of the rise in domestic investment to hire people who can buy what they make and what others in the society make. In a world where corporations are constantly making trade-offs between how much to invest at home and how much to invest abroad and in what kinds of activities to create a global production chain that contains small businesses as one segment within every country, small business lending cannot rise unless big and medium size businesses are raising capital to produce something gainful in a country.
The question currently being faced by members of Congress and the White House is how to make U.S corporations invest in the type of activities domestically that can create as many local jobs as soon as possible for Americans to begin saving once again so that those savings can be recycled into future domestic investments without having to borrow from other countries as much as we do now to do that. The elementary macroeconomic identity that savings always equals investment (S=I) always holds whether a country is taken as a standalone or the world is taken as a whole, because what remains in any income after all the expenditures are met is savings (S) which then gets expended on investment (I) to produce future income, given some level of money supply and zero inflation if money is a perfect proxy for the valuing the real world.
The elected representatives must ensure that the Fed, given the context of the economic paralysis produced by the crisis, cleans up the banking sector both directly (working together with the Federal Deposit Insurance Corporation where necessary) and with the help of the investment banks on Wall Street through mergers and acquisitions (M&A). The government budget, as it has already to some extent, provide greater incentives such as targeted corporate tax cuts to make it more attractive for U.S corporations (Ivy League MBAs) to produce at home rather than producing in China, as an example, and shipping it here for small businesses to install and maintain (community college graduates), if middle America is to be strengthened. They can still produce in China for the Chinese. This summarizes the immediate policy arithmetic of C+G+I even as the politicians work on the reform legislations.
The world is at once a large and small place. The National Geographic’s Afghanistan to Zimbabwe (A to Z) which every nerdy geography bee-er learns can be very relevant to the Undersecretary of the Treasury for International Affairs. The Treasury department must come out with an easy to understand trade policy summary every Federal budget year of the list of foreign trade incentives and punishments based on the diplomatic relationship of the United States with every country in the world, by country, no different from the Central Intelligence Agency’s (CIA) World Fact Book to ensure the competitiveness of international trade for the U.S economy in the context of C+G+I to bias the balance of payments (BOP) of the United States or the monetary flip-side of NX (also known as the current account or the difference between how much all foreigners owe to the United States and how much the United States owes to the foreigners and therefore does not include the domestic debt borrowings of any government. The two together ― domestic and foreign debt ― make up the national debt) in favor of raising the overall domestic national output under price stability with the long view in mind so as not to compromise the consumers’ pocket books as the Clinton administration had done because debt-to-income ratios of 70 per cent of the U.S economy relative to investment (I) matters at all times. Meaning, domestic investment rose during the Clinton administration but did not rise to the extent it ought to have risen creating conditions for its subsequent decline during the Bush administration, but all along drilling deeper holes in the pockets of consumers.
Repairing the domestic investment disconnect will also repair the monetary transmission mechanism and vice versa.