The meaning of our enormous structural current account surplus

294Jaargang 99 (4685) 17 mei 2014
The meaning of our
enormous structural current account surplus
a neglected opportunity
afscheidslezing
i
F
or a long time now, the Netherlands have had a size –
able surplus on the current account of its balance of
payments, being the total of trade in goods and ser –
vices and capital income. From 2000 onwards, this surplus
has never been less than 3.2 percent of GDP. In 2000 it was
5.2 percent, in 2007 8.4 percent, and in recent years – 2013
and 2014 – 9.7 percent and 9.75 percent. This is a very large
amount, the largest among European countries. And Germa –
ny with 7.6 percent in 2013 is next in line (CEP, 2014). In our public discussion very little attention has been given
to this remarkable aspect of our economy, nor have even poli-
tics or the announcements of the Dutch Central Bank (DNB)
drawn attention to it. Perhaps because it does seem to throw
some doubt on the government’s need for large budget cuts. In
the European Union there is a rule about balance of payments,
deficits and surpluses. Surpluses should not for any length of
time be higher than six percent of GDP. But neither the Eu –
ropean Commission nor the Dutch government ever seems to
have evoked this rule in discussions of the budget deficit.
ii
In itself, such a surplus is of course favourable. It increases our
international reserves and wealth. But is it also favourable to
the growth of our economy? In a system where the exchan –
ge rate cannot be adjusted – such as the present Monetary
Union – the balance of payments cannot be brought to an
equilibrium by an adjustment of the exchange rate. As in the
old gold standard system, equilibrium would then be brought
about by a movement of the national income. Deficits with
gold losses would force a country to follow a restricted policy
reducing incomes and imports. Surplus countries on the other
hand would receive payment in gold, which would increase
their reserves. This would enable them also to introduce an
expansionary policy, but they would not be forced to do so.
They could maintain their surplus situation and accumulate
more gold. This was called the ‘deflationary tendency of the gold standard’. The present European Monetary Union clear
–
ly also suffers from such a deflationary tendency. Thus, our
enormous balance of payments surplus does not force us to a
more expansionary policy, although in itself it would create
a tendency towards a certain growth of the national income
that would increase imports and therefore reduce the surplus.
The extra income increase during this process would then also
increase consumption, tax payments and savings. A stationary
situation would be reached when the total of additions to the
income stream would equal the leakages from it. This would
be when the budget deficit and the payments surplus toge –
ther would equal the savings surplus. In that way, a multiplier
process could be set in motion showing how much the income
would increase as a consequence of an increase in exports or,
as the case may be, of additional government expenditures.
The size of this multiplier depends on how much of the extra
income flows away from the income stream through imports,
savings or taxes. It is then also important in how far these sa –
vings would bring about larger investments, so that leakage
would cease, and whether the government would spend the
additional tax receipts. iii
In the present Dutch situation, we have a balance of pay –
ments surplus of more than nine percent and a budget deficit
of three percent of GDP. This means that there should be a
savings surplus of no less than twelve percent of GDP. That
is the other side of the balance of payments surplus. So, how
should we judge this? There are two components in this savings surplus: busi-
ness saving in the form of retained profits that are not used
for investment in our country, and the savings of pension
funds and life insurance companies that are not invested wit –
hin our country. There are no exact figures as to the size of
these components. But we know from an investigation by
DNB that only fourteen percent of the investments of pen –
sion funds stays within our country (DNBulletin, 2013). As
Johan
Witteveen
Emeritus hoogleraar
aan de Erasmus Uni-
versiteit Rotterdam
eSB drieluik over Johannes Witteveen

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295Jaargang 99 (4685) 17 mei 2014
these savings are more than six percent of GDP, it follows that
their contribution to the savings surplus must be five percent
of GDP. That would then leave seven percent of GDP for
business companies. This saving surplus has helped to bring
down the rate of interest to levels below two percent, but in-
vestment has not reacted upon this with an increase. Thus, in
this way a recession developed. This failure of an equilibrium
mechanism on the capital market is the essential element of
the theory that J.M. Keynes developed in 1936, The general
theory of employment, interest and money. And our experience
during this recession completely confirms his theory. Of course it is disappointing that policy makers in Eu –
rope seem to have completely forgotten these relationships.
In the United States, this also goes for the Republican party
– though the former chairman of the Federal Reserve system,
Ben Bernanke, has shown clear insight in the business cycle
mechanism, but was only able to instigate a very expansionary
monetary policy because Congress left too little room for any
stimulating additional expenditures.
iV
But we must recognise that it has been the development of
economic science which was greatly responsible for all this.
After the Second World War, new economic theories were
developed on the basis of ‘rational expectations’. Starting out
from that assumption, they had been able to build on earlier
equilibrium theories, such as the system of Leon Walras (16
December 1834 – 5 January 1910) who formulated a general
economic equilibrium with beautiful mathematical equati-
ons. These new theories made far-reaching assumptions, for
instance asserting that all markets would always precisely and
immediately reach an equilibrium. All economic subjects
would act rationally on behalf of their own interests and were
entirely able to foresee the future. And because in the markets
all economic subjects together allegedly created an equilibri-
um that reflected their preferences, government intervention
would not be necessary. The inventors of these neo-classical
theories, like for example Robert Lucas Jr. (American eco –
nomist, born 15 September 1937), won Nobel prizes in eco –
nomics (the Sveriges Riksbank Prize) and found quite some
general support. In these equilibrium systems, there could
therefore be no business cycle. As there is clearly some fluctu –
ation in the real world, theories were developed that explain
fluctuations by changes in real data for the economy. In this way, economists have created a ‘platonic world’
of perfect efficiency, as Robert Skidelsky put it in his clear
and amusing book Keynes, the return of the master (Skidelsky,
2010). That world has little to do with the real world of unex –
pected events and mass psychological reactions, which often
constitute unreasonable and dangerous disequilibria. But the
political visions developed during the Reagan-Thatcher revo –
lution were strongly influenced by these neo-classical theo –
ries. These theories were in tune with their political instincts:
budgets should be balanced, and monetary policy should only
focus on price stability and be carried out by independent
central banks. The unfortunate deregulation of the financial
sector in the United States by the repeal of the Glass-Steagall
Act also resulted from this thinking that regarded all markets
as working perfectly.
V
Returning now to the situation in the Netherlands, we have
seen a very large savings surplus (difference between savings
and investments). This surplus started around the year 2000,
when investments fell below savings. After that, the savings
surplus increased by six to eight percent of GDP. Saving in –
creased to the highest level ever, while investment sank to a
longtime low. This is shown clearly in figure 1. This also shows that saving and investment in the Euro –
pean Union and in the core countries of the European Union
remain close to each other and are at a much lower level. So,
we may now say that this large saving surplus is a rather uni-
que Dutch phenomenon. We should regard it as a serious
disequilibrium in the economy – for, although it means that
our national wealth increases, it also implies that our produc-
tion capacity is expanding inefficiently, so that not enough
employment is created for our workers. This might lead to
structural unemployment, which could be very damaging and
bring suffering to part of our working population while limi-
ting the growth of our national product.
Vi
The government has worsened this recession by a policy of se –
verely cutting the budget deficit, in order to satisfy its Europe –

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296Jaargang 99 (4685) 16 mei 2014
18Percentage GDP per year
16
14 12
10 86
‘80 ‘82‘84
Savings The Netherlands
1 Core- EU: Germany, France, Belgium en Italy.
Investments The Netherlands Savings Euro area
Investments Euro areaSavings Core EU1Investments Core EU1
‘86
‘88 ‘90‘92 ‘94‘96 ‘98‘00 ‘02‘04 ‘06‘08
an maximum of three percent for the budget deficit. In setting
an aim for the necessary coordination of budgetary policies
in the eurozone, European policy makers have been strongly
influenced by Germany and by the neo-classical economic
theories, so that the final aim was set very low, at 0.5 percent,
while the earlier goal of three percent became an absolute
maximum. As most European countries have large budget
deficits and the recession tended to increase the deficit even
further, this has led to very severe and painful austerity mea –
sures. In 2000, the budget deficit in the Netherlands was still
very low at 0.8 percent, but during the recession – with falling
tax receipts and rising unemployment expenditures – it incre –
ased to 5.6 percent while, notwithstanding severe budget-cut –
ting policies, the deficit remained above three percent until
2013, when the recession seemed to end. These budget cuts
of course decreased incomes and caused unemployment, set –
ting in motion a negative multiplier mechanism. Economic
studies from the International Monetary Fund made it clear
that such multipliers were much larger than assumed in the
past. Different estimates have been made as to this multiplier
(Blanchard and Leigh, 2013). It has become clear that its size
depends on the business cycle situation. In a situation of full
employment and fully used capital equipment, an increase in
savings would also leave more room for investments, but in a
recession this would not be the case. On the contrary, then in –
vestments would also fall because of the reduction in demand.
And in that way, a savings surplus would result. The rate of
interest might fall, but this would not lead to any larger in –
vestment as assumed in the classical economic theories. In the
Central Economic Plan of 2013, the conclusion is that in this
recessionary situation these multipliers are much higher than
one, so that expenditure cuts would scarcely succeed in redu –
cing the deficit (Centraal Economisch Plan, 2013). In this way we are pushed into a negative vicious cycle,
with budget cuts reducing incomes that diminish tax receipts
and increase unemployment benefits, so that the budget de -ficit would increase again. Therefore, expectations that de
–
ficits would come down were disappointed time and again.
This unfortunate process has caused great production losses,
besides the painful experience of a growing number of unem –
ployed and the bankruptcy of many small companies. In the
Netherlands, unemployment is now around eight percent;
in some of the southern European economies it has reached
much higher percentages, hitting especially the younger wor –
kers. And of course, it has also made the European Union very
unpopular. All this is the tragic outcome of the total lack of Keyne –
sian anti-cyclical budgetary policies. It is indeed time for the
‘the return of the master’, as Robert Skidelsky suggested.
Vii
Nevertheless, we need to ask: how and to what extent is
Keynes able to return in the present situation? In two res-
pects, the situation in Europe is now quite different from that
in the United Kingdom of 1936, when Keynes wrote his Ge –
neral theory of employment, interest and money. In the first place, there are limits to the possibility of
financing budget deficits. If government debts increase too
much, they may cause an escalating crisis in which the pay –
ment of interest increases the budget deficit further and
further. Then repaying the debt becomes more difficult, so
that investors want higher interest rates in order to finance
the deficit. In this way, the financial markets have acquired
a very important role in the European Union. At the outset
of the Monetary Union, they had made it very easy for some
countries to profit by the lower European interest rates. But
this situation was sharply reversed when the crisis came and
the interest rates for the loans of these countries increased un –
sustainably. And the fact that many investors in these markets
were also influenced in their thinking by neo-classical theo –
ries made these barriers so much stronger. So, what kind of policies might a Keynesian European
Commission and Council have followed in this situation of
our Monetary Union, and what policies should they follow
now ? It seems to me essential to make a clear distinction
between structural deficits and temporary cyclical elements in
the budget. The structural deficit is what would result if nor –
mal growth would continue with a reasonably fully occupied
production capacity. This structural deficit often tends to be
hidden by cyclical influences on tax proceeds and spending.
It is very necessary that this structural deficit is kept under
three percent of GDP or less. This is a difficult task, for there
are many categories of expenditures with a strong tendency to
increase more than the national income. The expenditures for
our health care are a clear example. The continuing improve –
ment of medical technolog y often causes huge cost increases,
and as we live longer – also because of this improving health
care – there are more older people requiring more expensive
care. And there is also a growing need for homecare for the
elderly. A very different factor is our system of deducting the
interest of mortgage payments entirely from taxable inco –
mes. This has caused large reductions in tax receipts and has
created a ‘bubble’ in the housing market. It has left us with a
relatively high mortgage debt, which has become painful now
that house prices have fallen.
Source: Leering and Schotten, 2012
Gross savings and investments of non-financial
corporationsFIGUUR 1

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Apart from all of these influences, there are in many
countries – though not so much here in our generally so well-
organised nation – increasing expenditures that go towards
certain groups in the population as payments for their po –
litical support. So, it is an essential task for governments to
force through the structural reforms of such expenditures and
clamp down on political clientelism and of course also abo –
lish other unreasonable favours. If Keynes were alive today he
would certainly fully support such structural measures. But, as we have seen, in a recession such measures have
the great disadvantage that they reduce incomes, thereby cau –
sing the ‘vicious spiral’ of a shrinking economy. What Keynes
might have done in such a case is to combine these permanent
structural reforms with temporary stimulating measures which
would help the struggling economy but would not increase
the structural deficit. As a Minister of Finance in 1970, I crea –
ted a mechanism for this purpose – with the unanimous sup –
port of parliament – of temporary additions to or deductions
from the most important taxes of five percent maximum.
These changes could immediately be introduced by the gover –
nment for reasons of business cycle policy, with the approval
of parliament after their introduction. In that way, the gover –
nment could act quickly, which is very necessary in business-
cycle policy. I myself have used this so-called ‘wobble tax’ in
order to put a brake on the economy in 1970 when it was gro –
wing too fast, while my successor augmented this temporary
tax increase even further and abolished it afterwards. After
that, it was never used again. But it could have been used now,
as a strong antidote to the overpowering negative influence of
structural expenditure cuts. Besides this, the government could also increase invest –
ment in the needed infrastructure, which might be financed
now with an exceptionally low rate of interest and which
would thus alleviate any budgetary problems later on. I myself
had suggested several times to accelerate the implementation
of the Delta Plan, in order to strengthen our defences against
the rising sea level that we must expect. Eventually, it was pos-
sible to finance this through a special fund, so that it was kept
separate from all other expenditures under the austerity re –
gime of those days. An important aspect of such a policy stance was that it
helped the government to show confidence in the future. And,
as I will show in my conclusion, basic confidence is at the pre –
sent time an essential necessity for our economy. It goes without saying that our large balance of payments
surplus could give us ample room for such stimulating mea –
sures. Such payments would also be favourable within the
context of the European Union, because they could help the
weaker countries with their balance of payment deficits. Alt –
hough, in a monetary union, the separate balance of payment
situations for the individual European countries are not vi-
sible, they do exist and might cause financial flows between
central banks. So, it remains necessary for the European
Union to gradually move closer to balancing the internal Eu –
ropean payments.
Viii
A very different limitation to Keynesian budgetary policies
follows from the fundamental international shift in the rela –
tive scarcity of different production factors. It was Professor Bertil Ohlin (Swedish economist, 23 April 1899 – 3 August
1979) who analysed how the structure of international trade
depends on the relative scarcity of the main factors of pro
–
duction, labour, capital and entrepreneurial capacity (Witte –
veen, 2012). As a consequence of the increasing efficiency and
therefore of the lower costs of international transportation
and communications, some low-income countries have now
been able to fully engage in international trade, becoming
‘emerging economies’. This means that the great abundance
of labour in for example China, where more than one bil –
lion people still live in absolute poverty, makes it possible to
produce labour-intensive products very cheaply. This has had
a great impact on the industrial countries, which could not
compete with such cheap products and therefore imported
them. This has made labour in their own countries relatively
more redundant. In relation to this, capital had become scar –
cer because many capital installations are in need of being
replaced or adjusted to the new scarcity and price relations-
hips in the world markets. In the United States this resulted
in a relative lowering of real wages, which had not increased
over the last ten years while productivity continued to grow.
Against this, profits did increase and especially entrepreneuri-
al income went up in sky-high bonuses. And in Europe similar
tendencies can be seen. With respect to Keynesian policies, this scarcity of capi-
tal means that the industrial countries need to increase their
savings. That can be an argument to aim for low budgetary
deficits. Germany’s policies then fit in with this fundamental
situation. For the Netherlands however, with its large saving
surplus, the problem is rather to bring business investments
to a higher level.
ix
This brings me back to the beginning of our large structural
savings surplus. There are two aspects to it. We have seen that
we now have a savings surplus of approximately eight percent
of GDP in the non-financial business sector: high retained
profits and low investment. The other element is formed by
the savings from pension funds and life insurance companies
of six percent of GDP. How can this be explained? As Schotten and Leering (2012) point out, the elements
in this situation are perhaps that we have a relatively large
number of multinational companies with their head offices in
the Netherlands, which then receive dividends from daughter
companies in other countries. Dividend taxes in our country
are relatively low and the sharp decrease of the rate of interest
has also helped. But a more fundamental factor seems to me that inter –
national capital movements have greatly increased in recent
years. Limiting government regulations have mostly been
abolished and financial communications have improved. Due
to this, emerging economies like China, Brazil and others can
grow very strongly and attract large capital imports in order
to do so. Then multinational companies are able to find more
attractive investment possibilities in these economies than
here. This is of course an aspect of the change in the relative
scarcity of the production factors – labour and capital – I
mentioned earlier. The resulting scarcity of capital becomes
manifest here by the large outflows of capital in the form
of direct investments or of participation in the shared capi-

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298Jaargang 99 (4685) 16 mei 2014
tal of foreign companies. Dr. J. van Duijn, who wrote a very
penetrating article about our economic disequilibrium (Van
Duijn, 2013), also discerns a shift in power here from labour
to capital, with lower real wages and higher profits as a re-
sult, a tendency strengthened by the general lowering of profit
taxes. An interesting aspect of this development is also that
large companies are more easily taken over by competitors,
and have to defend themselves against this or prepare to take
over other companies themselves. This leads to an accumula –
tion of large cash holdings. Also Schotten and Leering have
mentioned these, and see this as a precaution against greater
economic volatility.
x
This raises the question what view governments should take
of all this. The present paradigm includes complete freedom
of international capital movements. The idea is that efficient
markets know best. But, apart from the question whether it is
always best for shareholders, large take-overs can sometimes
clearly damage the national interest with respect to employ –
ment and growth. It is clear that governments of the larger
European countries sometimes interfere, visibly or invisibly.
It seems to me that in our small country – though medium-
sized with respect to economics – the government should
have the power, as in the United Kingdom, to veto large take-
overs when they consider them not in the national interest.
With such a power our government could have prevented the
very unfortunate and destructive take-over of ABN Amro
by Fortis, the Royal Bank of Scotland and Banco Santander.
Our central bank – de Nederlandsche Bank – had foreseen
the great difficulties arising from this, but the government
saw no possibilities to act. The result was finally that we lost a
large network of foreign bank offices, that had been built up
over the centuries and had proved very helpful to our expor –
ters. Banking services were also an export category in which
we had a comparative advantage. So, this meant a loss to the
national economy. Apart from this, the relatively low level of our invest –
ments is an argument for a fiscal regime that is more favoura –
ble to investment and innovation. Research spending should
be stimulated and we should have ample opportunities for an
accelerated depreciation of investment expenditures that can be a very effective stimulus to investments. This could also be
variable as an instrument for anti-cyclical policy.
xi
Then there is also the question of the lack of financing. This
plays a part as regards medium and small-scale businesses,
which brings us to the other element in our saving surplus:
pension funds and life insurance companies. Our govern
–
ment has seen the great potential in these enormous savings,
85 percent of which are now flowing out of the country. It
has engaged these institutions in discussions to induce them
to increase their financing in Dutch businesses. However, this
discussion seems to have deadlocked, because these instituti-
ons fear that the returns on such credits would be relatively
lower. Therefore, they are at least asking for government gu –
arantees, which naturally the Minister of Finance is not pre –
pared to give. Is there a way out of this deadlock? Then we will first
have to recognise that the present supervisory rules forcing
these institutions to aim for the highest possible returns, are
completely unreasonable. They are unreasonable because
they require the funds to build up a capital from which all
future obligations, over the next thirty or forty years, can be
financed at the present exceptionally low rate of interest. If we
would moderate this accounting rule by taking the moving
average over the last ten years of this rate of interest, then their
financing problems would be alleviated and these institutions
would have more room for credit to medium and small-scaled
businesses with lower returns. Against this, the government
should then re-introduce a maximum for investment in shares
and participations in large corporations, which is the largest
share of the total investments of pension funds:  323  billion
euro of a total of 959.6 billion euro (DNBulletin, 2013).
conclusion
When we examine the condition of our economy in its diffe –
rent aspects – over-saving , lack of investment, super-cautious
rules for pension funds and insurance companies, and large
liquidity holdings by businesses for precautionary reasons –
we can see a single basic spiritual weakness behind it. Clearly,
a saving surplus reflects a lack of confidence, of trust. The re –
sults of investments depend on developments in the future,
and the future is uncertain. There are risks, but there are also
basic opportunities. Some basic confidence, some optimism
is needed. Keynes has written about the ‘long-term state of
expectations’ and the need for ‘animal spirits’: “But individual
initiative will only be adequate when reasonable calculation
is supplemented and supported by animal spirits, so that the
thought of ultimate loss which often overtakes pioneers, as ex –
perience undoubtedly tells us and them, is put aside as a heal –
thy man puts aside the expectation of death.” (Keynes 1936). I would like to add that human beings, faced with all the
future changes and dangers in the material world, are always
able to find astounding strength and insight in their inner life.
Yet we will have to discover this turning of our attention from
the outer material world to the inner spiritual world, in order
to find this One Source of Energ y, Life and Light.
What we need is the power of confidence: Faith!
Literature
Blanchard, O. and D. Leigh (2013) Growth forecast errors and fiscal multipliers. IMF Working
Paper, 13(1).
Centraal Economisch Plan (2013) Centraal Economisch Plan, The Hague: Centraal Planburau.
DNBulletin (2013) Vermogen pensioenfondsen voor 14 procent belegd in Nederland. DNB, 27 au-
gust.
Duijn, J. van (2013) De economische crisis en de aanpak ervan. Tijdschrift voor Openbare Fi-
nanciën, 45(4), 180.
Keynes, J.M. (1936) The general theory of employment, interest and money. London: MacMillan.
Leering, R. and G. Schotten (2012) De puzzel van het Nederlandse spaaroverschot. Artikel op
www.mejudice.nl, 2 february.
Skidelsky, R. (2010) Keynes: the return of the master. London: Penguin.
Witteveen, H.J. (2012) De magie van harmonie. Amsterdam: Gibbon.