Cycles and trends in U.S. net borrowing flows

Trend and cyclical patterns of household, business, government, and foreign net borrowing shares of gross domestic product 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 procyclical. Household borrowing over the cycle is led by residential investment. Consumption varies countercyclically, but it is offset by rising taxes as opposed to saving, suggesting that "consumption smoothing" by households as featured in much macro theory is not empirically important. Procyclicality of private net borrowing is countered by a countercyclical government deficit along traditional lines. In terms of trends, "twin" fiscal and foreign deficits appear infrequently, with the household and external deficits being much more closely related. The former is linked to a strong upward trend in health-care spending as a share of disposable income, with a corresponding downward trend in saving after the early 1980s.