This analysis formalizes the argument presented in Ednaldo Silva’s LinkedIn post “U.S. Surplus Growth is Debt-Fueled: Investment Stagnation is the Core Malaise.” My purpose is to demonstrate through national accounting identities, specifically the surplus equation S = (C − W) + (I − D) + (G − T) + (X − M), how surplus growth can rely on debt-financed consumption and fiscal deficits rather than productive capital accumulation.
I reference the OECD’s 𝘜𝘯𝘥𝘦𝘳𝘴𝘵𝘢𝘯𝘥𝘪𝘯𝘨 𝘕𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘈𝘤𝘤𝘰𝘶𝘯𝘵𝘴 (2nd edition, 2011) for all national accounting definitions and identities.
Starting point:
Let Y denote GDP. By expenditure and income accounting:
Y = C + I + G + (X − M) = W + S + T + D,
where W is employee compensation, S is net operating surplus, T is taxes less subsidies, and D is depreciation. Rearranging gives:
S = (C − W) + (I − D) + (G − T) + (X − M).
Interpretation:
The net operating surplus S can only grow from four sources:
1. Consumption beyond wage income
Consumption beyond earned income is characterized by
(C – W) > 0 ⇔ C > W.
This must be financed by:
1. Debt (consumer loans, mortgages).
2. Reduction of savings.
The consequence is that S increases with debt-driven (C – W) > 0, where
C = W + ΔDprivate,
whereby ΔDprivate must be covered by the above-mentioned financing options.
This is not sustainable because debt must be repaid with interest, and savings are finite.
2. Investment stagnation (the core malaise)
We define the net capital stock equation as follows:
K(n) = K(n-1) + I(n) – D(n),
which is the perpetual inventory measure of fixed assets.
Rewriting:
K(n) – K(n-1) = I(n) – D(n) ⇒ ΔK = I – D.
(OECD (2011), p. 249).
Interpretation:
If I > D ⇒ ΔK > 0, the capital stock is growing.
If I = D ⇒ ΔK = 0, the capital stock is stagnating.
If I < D ⇒ ΔK < 0, the capital stock is shrinking.
The capital stock is an essential factor of production. If the capital stock does not grow, expansion of production capacity is limited. A higher capital stock therefore has a positive effect on production capacity and enables growth without debt.
(OECD (2011), p. 207).
3. Government deficit
(G – T) > 0 ⇔ G > T
The government spends more than it collects in taxes. A government deficit must be financed by
G = T + ΔDpublic,
with the financing of ΔDpublic through
1. Government debt.
2. Depletion of budget funds.
4. Trade deficit
A trade deficit is characterized by
(X – M) < 0 ⇔ X < M,
and can be financed by
1. Foreign debt (capital imports, loans from abroad).
2. Sale of domestic assets to foreigners (e.g., real estate, companies, government bonds).
The golden age is characterized by
C = W, I > D, G = T, and X > M,
Substituting into the surplus equation yields
S = (I – D) + (X – M) = ΔK + (X – M) > 0.
Interpretation:
- I > D: More investment than debt, thus expanding production capacity.
- X > M: More exports than imports.
- C = W: Households consume within the limits of their wage income.
- G = T: Balanced government budget
- X > M: Trade surplus.
Surplus growth in the golden age is calculated as follows
ΔS = Δ(I – D) + Δ(X – M).
Conclusion
The last equation may not describe reality, but rather
I ≤ D ⇒ ΔK ≤ 0,
which means stagnation or even a decline in net investment.
S can only grow here through debt financing, as it grows with (C – W) > 0 and (G – T) > 0.
Without ΔK > 0, there is no basis for a sustained high S.
In Ednaldo Silva’s post, the goal of macroeconomic policy is to increase the surplus by boosting net investment rather than increasing private and public leverage (debt accumulation).
References
OECD (2011). 𝘜𝘯𝘥𝘦𝘳𝘴𝘵𝘢𝘯𝘥𝘪𝘯𝘨 𝘕𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘈𝘤𝘤𝘰𝘶𝘯𝘵𝘴 (2nd edition)