Cycles and Trends in U.S. Net Borrowing Flows: Pro-Cyclical Household Net Borrowing, Counter-Cyclical Government, Consumption and the Current Account, and Elusive Twin Deficits

Trend and cyclical patterns of household, business, government, and foreign net borrowing shares of GDP are reviewed using diagrams and covariance decompositions of the identity stating that the sum of the shares equals zero. Household and business net borrowing shares and thereby those sectors’ contributions to effective demand are pro-cyclical. Household borrowing is led by residential investment. Household consumption varies counter-cyclically but it is offset by rising taxes as opposed to saving, suggesting that the “consumption-smoothing” featured in much macro theory is not empirically important. Pro-cyclicality of private net borrowing is countered by a counter-cyclical government deficit along traditional lines. In terms of trends, “twin” fiscal and foreign deficits appear infrequently, with the household and external deficits much more closely related. The former is linked to a strong upward trend in health care spending as a share of disposable income.