Hatzius on Sector Balances, NGDP Targeting, Fiscal Policy & More

Joe Weisenthal has a really fantastic interview with Goldman’s Chief Economist Jan Hatzius over at Business Insider.  They touch on a lot of moving parts, but I found the sections on the sector balances of particular interest.  Obviously, I am biased because this is very similar to the framework I’ve been working under for the last 5 years, but Hatzius really gets the big picture view and does a great job connecting all the dots.

Other things he touches on include the outlook for 2013, the fiscal cliff, the risk of recession, NGDP Targeting, Richard Koo and the efficacy of fiscal policy versus monetary policy.

Here’s a brief snippet:

“HATZIUS:There is an accounting identity which is issued, if you start with the global economy, to simplify it, that every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero.That’s the starting point. It’s a truism, basically.

Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector financial balances.

If the business sector is basically trying to reduce its financial surplus at a more rapid surplus than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger higher, more income, and ultimately feeds back into spending.

Conversely, if the business sector reduces its desired surplus by less than the government sector tries to reduce the budget deficit, then you end up with cyclical weakness. It’s a little heavy-going, to put this into words, and can be challenging.

There’s a reasonable amount of jargon involved (ex post, ex ante type of stuff), and I generally try to avoid having too much jargon and too much heavy going in the sort of things that we write, but in this particular case it is useful and worthwhile to wade through this a little bit. It’s an exception, but I think it is useful in this case.”

Read the whole thing here.