It's Consumer Spending, Stupid by James Livingston

Dean Baker comments:

While part of the story sounds very good -- reverse the upward redistribution from wages to profits -- some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer.

In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. This doesn't change the fact that it is investment, not consumption, that provide the basis for productivity gains which will make the country wealthier in the future.

Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S. owned companies. I understand how this helps the shareholders in these companies, but I can't see what this does for the rest of us.

The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.