AboutWarren D. Miller, CFA, ASA, CMA, CPA Expertise My in-depth knowledge of economics is confined to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Other questions dealing with macroeconomics, the traditional neoclassical paradigm, labor economics, environmental economics, agricultural economics, health economics, and so on should go to those who have the appropriate expertise.
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Experience I work with Austrian economics (which is different in major respects from the traditional neoclassical model), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) everyday in my work. I appraise closely-held businesses, provide exit-planning services, and offer high-level strategic analysis, advice, and clients to CEOs and owners of mid-sized businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.
Organizations CFA Institute, Strategic Management Society, American Society of Appraisers, Institute of Management Accountants, Academy of Management, Culver Legion
Publications CFA Magazine, Strategic Finance, Valuation Strategies, Value Examiner, Journal of Advanced Property Economics, Harvard Business Review, American Fly Fisher, CFA Digest, CPA Expert, and Business Valuation Review, among others
Education/Credentials MBA - Oklahoma State (1991)
BBA - U. of Oklahoma (1975)
Chartered Financial Analyst designation (2006)
Accredited Senior Appraiser (2006)
Certified Management Accountant (1992)
Certified Public Accountant (1992)
Question I don't quite understand the concepts of leakages and injections in the economy. As I understand the main leakages are imports, savings, and taxes. These are offset by exports, investing, and government spending. Am I right to expect that if imports and exports (in a particular country) are equal, then there is no net effect in that nation's money flow, no matter how much importing and exporting is going on? Is it only when these factors are out-of-balance that there is a disturbance of the money flow? Also, I am trying to find statistics about the current leakages versus injections in the USA but have not been able to through various search engines. I'd assume that right now government spending far exceeds taxes collected (as the number one imbalance), maybe imports exceeding exports as the number two imbalance, and saving versus investing as the number three imbalance. Do think this is correct. Or am I completely off about thinking the importance of this model lies in the imbalance and not the actual numbers?
Answer Very sophisticated questions, Amy. Great stuff. I'm delighted to respond.
For starters, I think you understand the concept of "leakages and injections" a whole lot better than you think you do. That is evident from the way you phrased your questions and described what you'd already done. Have more self-confidence - it's well-deserved, believe me.
Second, I think it's important for you to recognize that the notion of leakages and injections has its roots in Keynesian economics. That particular school was proved to be dead-wrong in the late 1970s when the U.S. experienced what Keynes said was impossible: stagnant economic growth AND inflation. It was called, you guessed it, 'stagflation.' My point is that Keynesian stuff is very weak stuff, relying, as it does, on the absurd notion of equilibrium in a $15 trillion economy.
Third, you are CORRECT that if imports and exports in a country are equal, there is no effect on the "circular flow." You are also CORRECT that it is only when they're out of sync that the circular flow changes. (I wouldn't call it a 'disturbance' because that strikes me as a bit negative, but I'm picking a nit here.)
Now, you talk of "government spending" in the context of leakages and injections, be sure to EXCLUDE "transfer payments"--for social security, welfare, etc. Transfer payments are not included in GDP.
"Saving vs. investing" is a tougher one. We read all this stuff about the lousy savings rate in this country, but those figures ignore 401(ks), IRAs, SEPs, etc. So I wouldn't take that one very seriously.
The huge excess of imports over exports, however, is a totally different matter. That IS important. The U.S. is the world's biggest debtor nation. China holds $1.4 trillion (that's right - TRILLION) in U.S. Treasury debt right now. How'd you like to be in their shoes and watch the off-the-charts multi-trillion-dollar deficits that the new Administration proposes to run? At some point, there should be inflation that will make that of the late 1970s and early 1980s look like child's play. Inflation punishes those on a fixed income, including bondholders (think China). If we think times are tough right now, we don't know from tough if China zips up its checkbook and quits buying U.S. Treasury bonds, notes, and bills. If that happens, we'll see double-digit interest rates almost overnight.
As for "current leakages vs. injections" in our country, I'm afraid I can't be much help there. I think that's one that you have to construct from a variety of different sources. I did find a couple of sites about the "circular flow," however, that I hope you find helpful:
I will check with an econ prof friend of mine and see if he can add anything here that will help you further. In the meantime, however, please remember to complete the rate-the-expert email that you'll receive on the heels of this reply. Your ratings and comments help me do a better job of helping like you who ask such interesting questions!
Also, please let me know if I was helpful here. I'll be back to you w/what the econ prof has to say.
