Why the Flow of Funds Don’t Explain the Flow of Funds: Sectoral Balances, Balance Sheets, and the Accumulation Fallacy

Roth, Steve (2021): Why the Flow of Funds Don’t Explain the Flow of Funds: Sectoral Balances, Balance Sheets, and the Accumulation Fallacy.

Abstract

This paper highlights and unpacks a little-known reality about the Financial Accounts of the United States: the Flows matrix on page 1 of the Federal Reserve’s quarterly Z.1 report does not explain period-to-period changes in the Levels matrix on page 3. The same is true of the sectoral Flow and Levels tables underlying those matrixes. Nor do those tables provide balance-sheet-complete accounting of household or national wealth accumulation. Measures of net saving/investment/capital formation and accumulation, and national wealth accumulation, diverge by tens of trillions of dollars. The discrepancy is explained and resolved by assembling a balance-sheet-complete empirical derivation of comprehensive U.S. “Haig-Simons” income, based on the Integrated Macroeconomic Accounts. The comprehensive measure is 23% higher than national accounts’ “primary” income. Relationships to the Piketty/Saez/Zucman Distributional National Accounts (DINAs) are discussed, along with implications for economic theory and empirical modeling, both mainstream and heterodox/Post-Keynesian.

• Item Type: MPRA Paper
• Language: English
• Keywords: wealth; flow of funds; capital; accumulation; integrated macroeconomic accounts; IMAs; income; gains; holding gains; capital gains; haig-simons
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology; B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution

References

Alvaredo, Facuno, Garbinti, Bertrand, and Piketty, Thomas, 2017. “On the Share of Inheritance in Aggregate Wealth: Europe and the USA, 1900–2010.” Economica 84, 2017 pp 239–260.

Cagetti, Marco and Holmquist, Elizabeth and Lynn, Lisa and Hume McIntosh, Susan and Wasshausen, David, “The Integrated Macroeconomic Accounts of the United States” (January 7, 2013). Available at SSRN: ssrn.com/abstract=2197527 or dx.doi.org/10.2139/ssrn.2197527.

Ederer, Stefan and Rehm, Miriam. “Will wealth become more concentrated in Europe? Evidence from a calibrated Post-Keynesian model.” Cambridge Journal of Economics, Volume 44, Issue 1, January 2020

Godley, Wynne and Lavoie, Marc. Monetary Economics, second edition. Palgrave Macmillan, 2012.

Hicks, John. Value and Capital. Clarendon Press, 1946.

King, John R. “The Concept of Income.” In Shome, Parthasarathi, ed. Tax Policy Handbook. Washington, International Monetary Fund, 1995. PDF version: bit.ly/3wrEEQv

Kotlikoff , Laurence J. and Summers , Lawrence H. “The Role of Intergenerational Transfers in Aggregate Capital Accumulation.” 1981, Journal of Political Economy vol. 89, no. 4. p. 706. Available online: piketty.pse.ens.fr/fichiers/enseig/ecoineg/articl/KotlikofSummers1981.pdf.

Lainà, Patrizio. “Money creation under full-reserve banking: a stock–flow consistent model.” Cambridge Journal of Economics, Volume 43, Issue 5, September 2019, Pages 1219–1249, doi.org/10.1093/cje/bey034

Laski, Kazimierz and Walther, Herbert. “Kalecki’s Profit Equation after 80 Years.” Working paper, Vienna Institute for International Economic Studies, 2013. bit.ly/3sV93EB

Nikiforos, Michalis and Zezza, Gennaro. “Stock-flow Consistent Macroeconomic Models: A Survey.” Levy Economics Institute Working Papers #891, May 2017. levyinstitute.org/pubs/wp_891.pdf

Palley, Thomas, 2017. “Inequality and growth in neo-Kaleckian and Cambridge growth theory.” Review of Keynesian Economics, vol. 5, no. 2, 146–69. ideas.repec.org/p/imk/wpaper/167-2016.html

Piketty, Thomas. Capital in the 21st Century. 2017, Harvard UP.

Robbins, Jacob. “Capital Gains and the Distribution Of Income in the United States.” 2019 Meeting Papers 202, Society for Economic Dynamics. users.nber.org/~robbinsj/jr_inequ_jmp.pdf

Romer, Paul. “Mathiness in the Theory of Economic Growth.” American Economic Review: Papers & Proceedings 2015, 105(5): 89–93. dx.doi.org/10.1257/aer.p20151066

Rosenberg, Joseph. “Measuring Income for Distributional Analysis.” Urban-Brookings Tax Policy Center, 2013. taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/412871-Measuring-Income-for-Distributional-Analysis.PDF

Roth, Steve. “How downward redistribution makes America richer: An empirical, ‘money view’ model of spending, wealth concentration, and wealth accumulation.” Real-World Economics Review 95, March 2021, p. 43. paecon.net/PAEReview/issue95/Roth95.pdf

Saez, Emmanuel and Zucman, Gabriel. “Progressive Wealth Taxation.” Brookings Papers on Economic Activity, September 2019. brookings.edu/wp-content/uploads/2019/09/Saez-Zucman_conference-draft.pdf

— Triumph of Injustice. 2019, W. W. Norton.

Tymoigne, Eric and Wray, L. Randall. The Rise and Fall of Money Manager Capitalism. Routledge, 2014. bit.ly/2PVfGIR