David Doney Profile picture
Apr 18, 2021 15 tweets 5 min read Read on X
THREAD:
So you're running the U.S. economy.
Q: How big should the U.S. budget deficit be?
A: Bigger than the trade deficit, to avoid crises.
Not expecting that answer? Wondering why? Learn about one of the coolest economic concepts, the sector balances. 1/ Image
There are 3 sectors described by CBO:
1. Govt: The federal budget balance.
2. Foreign: The current account, roughly equal to the trade balance plus some investment-related $ flows.
3. Private: Household savings minus business investment. 2/
cbo.gov/publication/54…
Government sector: CBO uses the federal budget deficit as its measure. In 2020, the U.S. ran a 15% GDP budget deficit; it had been 2.4% in 2014 (about historical average) and increased to 4.6% in 2019. 3/ Image
The foreign sector is the U.S. current account balance (mostly trade plus some investment flows) multiplied by -1, as we view it from the foreigners' perspective. A U.S. trade or current account deficit is a foreign surplus. It has been about 3% GDP for a decade. 4/ Image
The third sector is the private sector, saving minus investment.* It was in deficit from 2002 to 2008, then reversed dramatically in the Great Recession.

*CBO includes state & local government budget balances here, as they use federal budget as government to simplify. 5/ Image
Putting them all into one graph, we see the first graph in the thread again. Note that the 3 balances in 2020 add to zero, as they do each and every year. This is a mathematical identity (equation that must hold true) based on how the sectors are defined. 6/ Image
Yes, you read that correctly. The sum is always zero. Here is the data table used to create the chart, and a handy FRED link for the chart and data. 7/
tps://fred.stlouisfed.org/graph/?graph_id=549449 Image
Looking at the equations in the table in graphic form, you basically have the federal government spending $ into the private sector and removing $ via taxation. You don't want the private sector in deficit (i.e., accumulating debt) for very long; bad things happen... 8/ Image
...like the GR in 2008. Private sector ran sizable deficits in the decade prior, borrowing via foreign surplus and was forced to stop borrowing suddenly and deleverage. Note this drove the government deficit up to maintain the identity. 9/
levyinstitute.org/publications/s… Image
Trump's goal of lowering the trade deficit and increasing the budget deficit via tax cuts were not compatible. If the red line moves farther from zero, the sum of the blue and green lines must shift up; people spend extra money injected by government on imports too. 10/ Image
Here is a quiz you can use to see if you got it; solutions on next tweet. 11/ Image
Quiz solutions: 12/ Image
So why should the U.S. run a budget deficit larger than the trade deficit (foreign surplus)? Because that's what it takes to have a private sector surplus. You want government steadily injecting money into the private sector, at a level that doesn't create inflation. 13/ Image
If the U.S. takes its trade deficit (~foreign surplus) of 3% GDP as a given, then the budget deficit has to be at least 3% GDP so private sector in surplus. That's the floor. The goal is not a budget surplus.

14/THE END.
Fixed: The link to the CBO method sector balances.
fred.stlouisfed.org/graph/?graph_i…

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More from @David_Charts

Mar 16
🧵Monthly economic update, through the February 2025 results, Trump's first month. First, we added 151,000 jobs in Feb and are now nearly 7 million jobs above the pre-pandemic peak, which was regained in June 2022. We've set records for number with jobs monthly thereafter. 1/ Image
Job creation (Establishment Survey) has averaged about 200,000 over the past 3 months, very solid historically. 2/ Image
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🧵Where does the national debt come from?
1. Recessions, which cause revenue to fall and automatic stabilizer spending (like unemployment insurance) to rise w/o legislation.
2. Tax cuts
3. Wars
4. Recessions, via stimulus legislation
5. Interest 1/
cbo.gov/sites/default/…Image
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Budget deficits have increased under every Republican but Eisenhower, and fallen under every Democrat but Kennedy. Deficits increase/worsen 3.25% GDP on average under Republicans, and fall/improve by 3.0% GDP under Democrats. So who's the party of fiscal responsibility? 3/ Image
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The monthly job creation rate had been fading, but surged in the past 3 months to a robust 237,000 average. This was after benchmark revisions, done routinely each year. 2/ Image
No matter how you slice it, job creation under Biden was faster than Trump, even comparing Trump pre-pandemic (180k/mo) to Biden post-recovery (217k/mo). 3/ Image
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🧵The MSM created 4 fake crises (Inflation, Immigration, Housing, and Crime), which helped Trump get elected while hiding record prosperity. Here are slides explaining the counter-arguments to such misinformation, plus a few charts and links included for more details. 1/ Image
Facts regarding the false narratives on housing and crime. 2/ Image
Wages & Inflation should be reported in context. Purchasing power is what matters.
☑️Wages have outgrown inflation.
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☑️Biden has the highest avg. real wages among the last 11 presidents. 3/ Image
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Jan 5
🧵President Biden's economic legacy, in charts. First, the unemployment rate at 4.1% on average is the lowest (best) among the last 14 presidents, for FRED data back to 1948. 1/ Image
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🧵Monthly economic update, through November:
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🏆Biden is the only president with positive job creation every month in office.

No matter how you slice and adjust it, job creation is much faster under Biden than Trump:

Biden July 2022-present: +239,000 / month
Trump pre-pandemic: +180,000 / month 2/ Image
The unemployment rate increased by 0.1% in November, to 4.2%. The historical average back to 1948 is 5.7%. The 2022 & 2023 annual average of 3.6% was lower than Trump's best of 3.7% in 2019. The last 3.5% year was 1969. 3/ Image
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