Economic crises bring forth a great deal of nonsense. One of the most frequent bits of such nonsense is the idea that the countries in crisis in the eurozone are full of idle people, while the countries that are not in crisis are full of hard-working ones.

This, it so happens, is the reverse of the truth. Indeed, if one went by the hours worked on average by each worker, one would conclude that the fewer hours  people work, the less crisis-prone will be the country.

Here is a relevant chart for the eurozone, which comes from the Conference Board database I have frequently used. The reader will note that the crisis-hit countries are in the middle or right of the chart. (I have excluded former communist countries, which have somewhat different characteristics: most are much poorer than those listed below. But, again, the people in crisis-hit ex-communist countries, such as Estonia and Latvia, tended to work long hours.) 

I look at this through the lens of “sectoral financial balances”, an analytical framework learned from the work of the late Wynne Godley. The essential idea is that since income has to equal expenditure for the economy, as a whole, (which is the same things as saying that saving equals investment) so the sums of the difference between income and expenditures of each of the sectors of the economy must also be zero. These differences can also be described as “financial balances”. Thus, if a sector is spending less than its income it must be accumulating (net) claims on other sectors.

The crucial point is that, since sectoral balances must sum to zero, a rise in the deficit of one sector must be matched by an offsetting change in the others. It follows that if the fiscal deficit is increasing, the sum of the surpluses of the other sectors of the economy must be increasing in a precisely offsetting manner. 

My column this week We still have that sinking feeling examined the progress of post-crisis deleveraging, focusing on the US. I would like to elaborate on this issue.

 The chart attached to the column showed the cumulative total of gross private sector debt, relative to gross domestic product. In the chart below, I show total debt, including government debt, relative to GDP. The reader will notice that the economy as a whole has deleveraged, despite the rising debt of the government. 

The chart below comes from the Conference Board’s wonderful “total economy database”. It uses GDP per head, at PPP, in 2011$s (computed according to the Eltoto, Kovacs and Szulc method).

 

On June 14 2012, I wrote a column [Two cheers for Britain’s bank reform plans] on the government’s plans to implement the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, of which I was a member.

I noted that the government had rejected the Commission’s recommendations on several points, in favour of the banks. After the scandal of the deliberate misreporting of the London Interbank Offered Rate (Libor), these concessions must now be reconsidered.