So a govt surplus (T > G) implise a leakage such that total expenditure is greater than total income. Alternatively, a deficit (G > T) implies that total income is greater than total expenditure–because the government is a net addition to the economy as a whole, raising total income without raising total expenditure.

The further impliactions are obvious. And are the borne out by the empirical record? Why, yes:

1. 1817-21: In five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.

2. 1823-36: In 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.

3. 1852-57: In six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857..

4. 1867-73: In seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.

5. 1880-93: In 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.

6. 1920-30: In 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

Oh, and add the Clinton surpluses–but it wasn’t like these were followed by any kind of crash, right?

Obviously, there are leakages. That’s what we’re discussing! So the question is, how can total income exceed total expenditure? Alternatively, how can total expenditure exceed total income?

Probably out of time on this for now…

It still works if you include taxes, investment and savings.

If people are saving, money is draining out of the economy, whereas investments/credit injects “extra” money into the economy. The equation only holds if savings are exactly the same as investments.

If we divide our closed economy into two identical private sectors (no government just yet), when one is in deficit, the other is in surplus [...]

What happens if one sector is doing its business poorly and losing money—but not borrowing?

If we divide our closed economy into two identical private sectors (no government just yet), when one is in deficit, the other is in surplus; that is, total spending in one exceeds total income, and total income in the other exceeds total spending by the same amount. That’s just rearranging what we’ve already said. Agreed?

Total income = total expenditure

Of course, in our theoretical closed economy. As you mentioned, this is the way to look at a country’s GDP. It doesn’t add up if you throw in investments, savings and taxes, though, but I suppose you’re getting to that.

Start with this:

Total income = total expenditure

Are you familiar with it? It’s just an identity. It’s true by definition. If we’re on the same page with this we should go and look at what a deficit is again.

A government deficit means that its expenditure exceeds its income. A private sector deficit means that income exceeds expenditure for this period. In a closed economy, these two balances are equivalent and net to zero [...]

As I pointed out earlier, you’re ignoring growth. The numbers don’t add up if the private sector is making profits on its own.