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

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.