US politicians invariably bemoan trade as the enemy of the middle class, and the major source of pressure on jobs and wages. The current presidential campaign is no exception: Republicans and Democrats alike have taken aim at both China and the Trans-Pacific Partnership, holding them up as the scourge of beleaguered American workers. While this explanation may be politically expedient, the truth lies elsewhere.
When it comes to trade, America has made its own bed. The culprit is a large savings deficit. The country has been living beyond its means for decades and drawing freely on surplus savings from abroad to fund the greatest consumption binge in history. Politicians, of course, don’t want to blame voters for their profligacy; it is much easier to point the finger at others.
Saving while in deficit
The savings critique merits further analysis. The data shows that countries with savings deficits tend to run trade deficits, while those with savings surpluses tend to run trade surpluses. The US is the most obvious, with a net national savings rate of 2.6 percent in late 2015 – less than half the 6.3 percent average in the final three decades of the 20th century – and trade deficits with 101 countries.
The pattern also holds true elsewhere. The UK, Canada, Finland, France, Greece and Portugal – all of which have large trade deficits – save much less than other developed countries. Conversely, high savers like Germany, Japan, the Netherlands, Norway, Denmark, South Korea, Sweden and Switzerland all run trade surpluses.
If only countries like China had spent more, the bubbles that nearly broke the us would not have formed in the first place
Savings imbalances can also lead to destabilising international capital flows, asset bubbles and financial crises. This was the case in the run-up to the financial crisis of 2008, when global savings imbalances, as measured by the disparities between countries with current account deficits and surpluses, hit a modern record. The asset and credit bubbles fuelled by those imbalances brought the world to the brink of an abyss not seen since the 1930s.
Here, too, there is considerable finger pointing. Deficit countries tend to blame the yield-seeking ‘savings glut’ that sloshes around in world financial markets. As former US Federal Reserve Chairman Ben Bernanke put it, if only countries like China had spent more, the bubbles that nearly broke the US would not have formed in the first place. Others have been quick to point out that the US’ supposed growth miracle could not have happened without the capital from surplus countries.
The prudent approach would be to strike a better balance between saving and spending. This is particularly important for the US and China, which together account for a disproportionate share of the world’s savings disparities. Simply put, the US needs to save more and consume less, while China needs to save less and consume more. To succeed, both countries will have to overcome entrenched mindsets.
On this front, China has been leading the way, with a strategy of consumer-led rebalancing that it introduced five years ago. The results so far have been mixed, as inadequate funding of a social safety net continues to temper the support to household incomes provided by services-driven job creation and urbanisation-led increases in real wages.
However, China has lately shown a commitment to addressing this shortcoming. Its recently enacted 13th Five-Year Plan aims to dampen fear-driven precautionary saving through interest-rate liberalisation, the introduction of deposit insurance, the loosening of the hukou residential permit system (which would improve benefit portability), and a relaxation of the longstanding one-child family planning policy.
For another time
The US, however, is headed in the opposite direction. There is no interest in debating the savings issue, let alone implementing policies to address it. A pro-saving US policy agenda should draw on the following: longer-term fiscal consolidation, expanded IRAs (individual retirement accounts) and 401Ks, consumption-based tax reform (such as value-added or sales taxes), and interest rate normalisation. Instead, US politicians continue to focus on keeping the consumption binge going, regardless of its implications for the country’s savings imperative.
The asymmetrical response of the world’s two largest economies to their respective savings dilemmas has far-reaching consequences. To the extent that China makes progress on the road to consumer-led rebalancing, it will shift from surplus savings to savings absorption. Already, China’s gross national savings rate has declined from a peak of 52 percent of GDP in 2008 to around 44 percent. It should fall further in the years ahead.
The US, locked in a co-dependent economic relationship with China, cannot afford to ignore this shift. After all, along with reduced current account and trade surpluses, China’s consumer-led shift to savings absorption likely entails diminished accumulation of foreign-exchange reserves and reduced recycling of those reserves into dollar-based assets such as US Treasuries.
To the extent that the US fails to boost its domestic savings, the lack of Chinese capital may well force the US to pay a steeper price for external financing, through a weaker dollar, higher real interest rates, or both. Such are the classic pitfalls of co-dependency: when one partner alters the relationship, there are consequences for the other.
No country can prosper indefinitely without savings. Holding the world’s reserve currency, the US has gotten away with it, largely because the rest of the world let it. After all, the enablers – especially export-led economies like China, along with its resource-dependent supply chain – benefited from the US’ consumption binge, as it drove an outsize expansion of global trade.
But those days are numbered. US voters – especially disenfranchised, angry middle-class workers – increasingly recognise that something does not add up. Yet US politicians continue to deflect the electorate’s anger outward, dismissing the growth subsidy that accompanies the ‘kindness of strangers’. It is time for politicians to own up to the uncomfortable truth: the savings deficit is the single greatest threat to the American Dream.
© Project Syndicate 2016