by Joseph M. Firestone, New Economic Perspectives
It never ceases to amaze me that those who offer budget plans and projections never take into account the reality that their projections must be consistent with implications of trends in sector financial balances for their projections. This is a simple lesson that those playing the fiscal responsibility game never seem to learn. Certainly this is true of the Republican House Budget Committee, as we’ll see.
The Sector Financial Balances (SFB) model is an accounting identity, and these are always true by definition alone. The SFB model says:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.
The terms refer to balances of flows of financial assets among the three sectors of the economy in any specified period of time. Why must there be flows? Because the three sectors trade financial assets with one another. So, the equation says that the sum of all the balances of flows for the three sectors of the economy is zero, because, since there’s only so much in assets traded in any time period, the positive balance(s) of one or more sectors relative to the others must be matched by the negative balance(s) of the other two sectors.
So, for example, when the annual domestic private sector balance is positive, more financial assets are flowing to that sector, taken as a whole, than it is sending to the other two sectors.
Similarly, when the annual foreign sector balance is positive, more financial assets are being sent to that sector than it is sending to the other two sectors.
And when the annual government sector balance is positive, then it is getting more in financial assets from the other two sectors combined than it is sending to them.
Conversely, when the private sector balance is negative, the private sector is sending more to the other two sectors than it is getting from them, and so on for each of the other two sectors.
Now let’s apply this to the House Republicans’ Federal budget projections from 2016 – 2025, as in Table One, just below.
