The US needs to catch up with China in tackling its savings deficit
The US has been living beyond its means for decades and drawing freely on surplus saving from abroad to fund the greatest consumption binge in history. Holding the world’s reserve currency, America has gotten away with it, largely because the rest of the world let it. PHOTO: REUTERS
American politicians invariably bemoan trade as the enemy of the middle class, 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, do not want to blame voters for their profligacy; it is much easier to point the finger at others.
The savings critique merits further analysis. The data show that countries with savings deficits tend to run trade deficits, while those with savings surpluses tend to run trade surpluses.
The United States is the most obvious example, with a net national savings rate of 2.6 per cent in late 2015 — less than half the 6.3 per cent average in the final three decades of the 20th century — and trade deficits with 101 countries. The pattern also holds true elsewhere. The United Kingdom, 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.
Savings imbalances can also lead to destabilising international capital flows, asset bubbles and financial crises. That was the case in the run-up to the financial crisis of 2008-2009, when global savings imbalances, as measured by the disparities between countries with current-account deficits and surpluses, hit a modern record.
OPPOSITE DIRECTIONS
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 America would not have formed in the first place.
Others have been quick to point out that America’s supposed growth miracle probably could not have happened without the capital provided by surplus countries. The prudent approach would be to strike a better balance between saving and spending. That is particularly important for the US and China, which together account for a disproportionate share of the world’s savings disparities.
Simply put, America 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.
But 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 relaxation of the one-child family planning policy.
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-savings US policy agenda should draw on the following: Longer-term fiscal consolidation, expanded IRAs (individual retirement accounts) and 401Ks (a retirement savings plan sponsored by employers where workers save and invest part of their pay cheque before taxes are taken out), 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 America’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 per cent of GDP in 2008 to around 44 per cent this year. It should fall further in the years ahead.
The US, long locked in a codependent 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 America 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 codependency: When one partner alters the relationship, there are consequences for the other.
No country can prosper indefinitely without saving. Holding the world’s reserve currency, America 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 America’s consumption binge, as it drove an outsized expansion of global trade.
But those days are numbered. American 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
ABOUT THE AUTHOR:
Stephen Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.
