Don’t Mistake Accounting for Economics



There’s one mistake that’s particularly common and damaging. Too many observers try to derive economic principles from accounting principles. This is flat-out wrong. The reason is simple: Economics is not accounting. Economists try to understand the causal relationships in commerce and government. Accountants document stocks and flows in an orderly fashion. Economics obviously makes use of accounting, and accounting can be improved through knowledge of economics, but they’re not the same thing.

The most egregious abuses of economics that we see today start with an accounting identity — a true statement or equation — but end with an absurd economic claim. Importantly, an identity is true by construction. Based on the definitions of the variables, the formulation must be so. But it doesn’t say anything about the real world. It certainly doesn’t capture the causal relationships among those variables.

Author(s): Alexander William Salter

Publication Date: 9 April 2021

Publication Site: National Review

The constraint on public debt when r < g but g < m




Since real interest rates have been well below the growth rate of the economy, but the marginal product of capital has remained above, modern economies are dynamically efficient, yet there is a bubble component in public debt. Thus, the present value of primary surpluses can be lower than the outstanding debt and governments can run perpetual deficits by collecting the bubble premia. Yet, there is an upper bound on the size of the deficits that depends on how safe and liquid government debt is and on financial development. Higher spending lowers the interest rate and increases inequality, while redistributive policies shrink the feasible amount of persistent public spending, income tax cuts pay for themselves, inflation volatility reduces fiscal space available for spending, and financial repression increases it.

Author(s): Ricardo Reis

Publication Date: December 2020

Publication Site: London School of Economics