The President’s Policy Agenda Defies Simple Accounting Identities

July 31, 2013

In Chattanooga yesterday President Obama spoke about his priorities for the economy for the remainder of his term. One goal of his was an increase in net exports. “Number four,” he enumerated, “we've got to export more. We want to send American goods all around the world.” He expressed concern that foreigners were selling more products to Americans than vice versa, and expressed a desire to push back against that trend.

This preference is hard to square with the President’s tax policy priorities. The president has focused on raising taxes on saving; for example, the 3.8% surtax on capital income from the Affordable Care Act, and the 5% increase in the top capital tax rates starting this year.

The incongruity here is that tax policy with an adverse effect on saving must necessarily have an adverse effect on net exports. If Obama wants to raise exports – to have Americans send goods abroad in exchange for financial assets – why does he push Congress to drain the returns of those financial assets through taxes?

The relationship between saving and net exports can be confirmed using the equations of national accounts, the accounting algebra we use to show where our output and income go. One of the most basic of these accounting identities is S = I + NX. Saving (S) equals investment (I) plus net exports (NX). In other words, when America as a whole saves more, that saving goes to two places. The first is to fund the production of domestic investments, like factories or shopping malls. The second is to acquire net financial assets from foreigners, which must necessarily be done by exporting goods and services.

It’s unclear why anyone who wants to increase I and NX could look at the equation S = I + NX and decide to levy higher taxes on S. The President's words on exports are lip service at best.

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