For whom America's bell tolls
J. Bradford DeLong, Project Syndicate
These days the Chairman of President Bush's Council of Economic Advisers, Ben Bernanke, likes to talk about a 'global savings glut' that has produced astonishingly low real interest rates around the world. But that is the wrong way to look at it.
America certainly does not have a savings glut. Its savings rate has been distressingly low for decades. Then the Bush administration's reckless fiscal policy pushed it lower. Falling interest rates in recent years pushed up real estate prices and allowed America's upper middle class to treat their houses as enormous ATM's, lowering savings still more. America has a savings deficiency, not a glut.
And the rest of the world? A global savings glut would suggest that rebalancing the world economy requires policies to boost America's savings rate and to increase non-U.S. households' consumption. But what the world economy is facing is not a savings glut, but an investment deficiency.
Divide the world into three zones: the United States, China, and all the rest. Since the mid-1990's, the net current-account surplus of 'all the rest' has risen by an amount that one Federal Reserve Bank economist has put at US$450 billion a year, not because savings rates have increased, but because investment rates have fallen.
Declining investment rates in Japan, the newly-industrializing Asian economies, and Latin America, in that order of importance, have fueled the flood of savings into U.S government bonds, U.S. mortgage-backed securities, and U.S equity-backed loans-- the capital-account equivalent of America's enormous trade deficit.
The investment deficiency in Asia relative to rates of a decade ago amounts to an annual shortfall of $400 billion a year, with the decline in investment in Japan-- a consequence of more than a decade of economic stagnation-- accounting for more than half of the total. Moreover, investment rates in the newly industrialized economies of Asia have never recovered to their pre-1997-8 crisis levels, and investment rates in the rest of Asia outside China have fallen off as well.
This would seem to call for a very different set of policies to rebalance the world economy. Yes, the U.S needs tax increases to move the federal budget into surplus and policies to boost private savings. But the world also needs policies to boost investment in Asia, Latin America, the Middle East, and Africa.
And here we face a difficulty. People like me who have been cheerleaders for international integration in trade and finance, as well as for reductions in tariffs and other barriers, have cited three benefits:
* Maximizing economic-- and also social and cultural-- contact between rich and poor nations is the best way we can think of to aid the flow of knowledge about technology and organization, which is the last best hope for rapid world development.
* Lower trade barriers will make locating production in the poor low-wage parts of the world irresistible to those who have access to finance.
* Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce.
The first reason still holds true. Maximizing economic, social, and cultural contact between rich and poor remains both the best way to aid the flow of knowledge and the last best hope for rapid world development.
But the second and third reasons look shaky. Those with access to finance appear to be capable of resisting the urge to locate production in poor low-wage parts of the world (China aside). Rather than leading rich-country savers to invest their money in poor countries out of greed, liberalization of capital flows has led poor-country savers to park their money in rich countries out of fear-- fear of political instability, macreconomic disturbances, and deficient institutions (especially those that protect the rights of bondholders and minority shareholders).
Something may well happen in the next several years to radically boost America's savings rate by making U.S households feel suddenly poor: tax increases, a real estate crash, rapidly- rising import prices caused by a plummeting dollar, a deep recession, or more than one of the above. It would be nice to believe that when the tide of dollar-denominated securities ebbs, the flows of finance currently directed at America will smoothly shift course and boost investment in Asia. But don't count on it, especially considering the share of marginal investment in Asia that is aimed, one way or another, at exporting to the American market.
Those outside America, especially in Asia, should regard the unstable state of the U.S. macro-economy with grave concern. As the seventeenth-century poet John Donne put it, "Ask not for whom the bell tolls it tolls for thee."
The writer, Professor of Economics at the University of California at Berkeley, was Assistant US Treasury Secretary during the Clinton administration.