Note: In a blog entry two months ago, I wrote that because of rather poor management of my blog, some entries seem to have disappeared. Fortunately for me, several other sites reproduce many of my blog posts, so when I have had to look for them and can remember the title, I have usually been able to find them. From time to time, if I think they might still be useful, I will repost them here on the Carnegie site with a little bit of editing to correct typos, clarify points, and add links. The first blog entry to receive this treatment was posted on February 28, 2017.
This is the second one, a reprint of a May 23, 2014, entry in which I tried to explain how savings gluts work their way through the global economy. My conclusion, and one that I repeat often, is that it is useless to approach the issue of savings without considering the underlying conditions that determine how changes in the savings rate are to be transmitted and counterbalanced. This is an especially important topic when we consider trade issues, income distribution, and a global economy suffering from structurally weak demand.
Debate about the global savings glut hypothesis is mired in various points of confusion, a fundamental one of which is the seemingly obvious but false claim that a global savings glut must lead to higher global savings. As one of my favorite economists, Barry Eichengreen, states in a recent piece, “There is only one problem: the data show little evidence of a savings glut. Since 1980, global savings have fluctuated between 22% and 24% of world GDP, with little tendency to trend up or down.”
But while the fact that global savings have not changed seems to present a pretty formidable refutation of the global savings glut thesis, in fact it refutes nothing. As surprising as it might sound, global savings gluts do not result in higher global savings except under specific, often unlikely, conditions. The main impact of a global savings glut is to create a mechanism that transfers savings from the glutted part of the global economy to another part of the global economy in which either investment consequently rises, resulting in an overall increase in global savings, or debt or unemployment rise, resulting in no change in overall global savings.
What Is a Savings Glut?
There is no formal definition of a savings glut, but whenever market conditions or policy distortions cause the savings rate in one part of the economy to rise excessively (itself an ambiguous word), we can speak of a savings glut. This phenomenon has at least two main causes.
- A rise in income inequality. We see this in China, Europe, the United States, and indeed in much of the world. As wealthy households increase their share of total income, and because they tend to save a larger share of their income than do ordinary households, rising income inequality forces up the savings rate.
- A decline in the household share of GDP. We’ve seen this mainly in China and Germany over the past fifteen years. When countries implement policies that intentionally or unintentionally force down the household share of GDP (usually to increase their international competitiveness), they also automatically force down the consumption share of GDP. Because savings is defined as GDP minus consumption, forcing down the consumption share forces up the savings share. There are many policies and conditions that do this, and I discuss these extensively in my book, The Great Rebalancing: the main ones are low wage growth relative to productivity, financial repression, and an undervalued currency.1
Notice that in both these cases—and completely contrary to the popular narrative that praises high savings as a virtuous consequence of household thrift—the rise in the savings rate does not occur because ordinary households have become thriftier. In the former case, household savings rise simply because the rich increase their share of total income. In the latter case, national savings rise without households in the aggregate increasing their savings at all. In fact, household savings in the latter case often declines as a share of GDP, as does household consumption. But total savings rise because lower household income is matched by higher income elsewhere (business profits or net government revenues) that is channeled into savings.
Because this seems so difficult for many to conceptualize, a simple numerical example might help. Consider the following economy in which households retain 70 percent of GDP, of which they spend half in the form of consumption and save the other half. For simplicity’s sake, we will assume that there is no government consumption, so that all consumption is household consumption:
| Total GDP | $100 |
| -Household income | $ 70 |
| …of which | |
| …Consumption | $ 35 |
| …Savings | $ 35 |
| -Government income | $ 10 |
| -Business income | $ 20 |
In this economy, total consumption is $35 and total savings is $65.
Now assume that like Germany in 2003–2005, this economy implements labor reforms that increase business profits at the expense of household income, so that the share households retain of GDP drops to 60 percent. This is what the new economy would look like:
| Total GDP | $ 100 |
| -Household income | $ 60 |
| of which | |
| …Consumption | $ 30 |
| …Savings | $ 30 |
| -Government income | $ 10 |
| -Business income | $ 30 |
Alternatively, assume that the government has engaged in financial repression or implemented other forms of hidden taxes, like those in China, that reduce the household share of GDP (also to 60 percent), except this time in favor of the government. In that case, there would be a small difference in the structure of the economy:
| Total GDP | $ 100 |
| -Household income | $ 60 |
| …of which | |
| …Consumption | $ 30 |
| …Savings | $ 30 |
| -Government income | $ 20 |
| -Business income | $ 20 |
Notice what happens to total savings in the economy. In either case, the household share of GDP has dropped to 60 percent, of which households continue to spend half in the form of consumption and to save half. In both cases, household consumption drops from $35 to $30, as does household savings. In both economies, however, total savings—which is simply equal to GDP minus consumption—rises from $65 to $70.
This is why we must stop thinking of savings purely in terms of what households do. It is very possible, as these two cases show, for total savings to go up even as household savings goes down and household thrift remains unchanged.
How Does the Economy Balance?
To continue my explanation of how savings gluts are transmitted, it is helpful to remember a couple of additional definitions. An economy’s total production of goods and services (GDP) can be defined either from the demand side (consumption plus investment) or from the supply side (consumption plus savings). By definition, in other words, in a closed system, savings is always exactly equal to investment.
An economy experiencing a savings glut must maintain this balance. It is consequently just a matter of logic that an increase in savings arising from a savings glut must be accompanied by a balancing adjustment—either by an increase in investment or by a reduction in savings in another part of the economy—and this adjustment must occur simultaneously. The necessary implication is that whatever causes a savings glut must also cause one or both of these balancing adjustments.
There are only two ways investment can rise and two ways savings elsewhere can drop. A savings glut, in other words, must result in one or more of the following adjustments, enough to fully offset the savings glut:
- Productive investment rises. If productive investment has been constrained by a lack of savings, productive investment will rise. There may be a rise in debt associated with an increase in productive investment, but because this debt can be fully serviced by the increase in productive capacity, higher debt will not result in a higher debt burden.
- The debt burden rises. Nonproductive investment can also rise. Excess savings can cause unsold inventory to rise because the economy produces more than it consumes. It can also cause large speculative flows into real estate or other assets, perhaps even setting off asset bubbles. When this happens, it can create additional investment outlets for excess savings in the form of projects, including most often real estate projects, whose economic value can only be justified by rising price expectations. The debt associated with a rise in unproductive investment represents a rise in the debt burden.
- The debt burden rises. Rising asset prices can unleash a consumption boom if this causes ordinary households to feel wealthier and so increase their consumption (the wealth effect). This increased consumption creates what I will call, perhaps clumsily, a consumption glut. A savings glut can also force changes through the financial system. As deposits pile up in the banking system or as money flows into funds, there is pressure within the banks and funds to deploy them into riskier assets. One way this happens is through a weakening of credit standards, so that households that once might have been denied access to consumer credit suddenly find it easy to borrow. They expand consumption. Needless to say, in either case, the debt associated with a rise in consumption represents a rise in the debt burden.
- Unemployment rises. If the reduced consumption caused by a savings glut is not matched by higher investment or by a consumption glut, total demand drops, resulting in higher unemployment. Unemployed workers stop producing goods and services but do not stop consuming. Because savings is simply the gap between production and consumption, unemployment causes the savings rate to drop.
Economists almost always miss this point. A global savings glut must be accompanied by one or more of the four adjustments listed above, two of which result in a rise in overall global savings and two of which don’t. The former occurs if the economy rebalances either in the form of higher productive investment or in the form of higher unproductive investment (although in the second case it is only temporary). The latter occurs if the economy rebalances either in the form of a consumption glut or in the form of a rise in unemployment.
Nothing else is possible. Notice that a savings glut must result in an increase in productive investment, an increase in the debt burden, or an increase in unemployment.
The best outcome, of course, is the first: when a savings glut is accompanied by higher productive investment. This is often referred to as trickle-down economics when both the rich and the poor benefit from productive investment, with the rich benefitting more. If productive investment has been constrained by an inability to access funding—that is, if the world is savings constrained—it will, but productive investment tends to be constrained by insufficient savings mostly in undeveloped countries. Most excess savings, by contrast, have originated or flow into rich countries.
In rich countries, there are often many productive projects that desperately await investment, but this failure to invest is driven by other factors, and usually not by a lack of savings, so a savings glut is unlikely to lead to higher productive investment. In his 1951 memoir, Beckoning Frontiers, former Federal Reserve chairman Marriner Eccles (1934–48) even argued that a savings glut could reduce productive investment. “By taking purchasing power out of the hands of mass consumers,” he wrote, “the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants.” Eccles was only able to complete his high school education, going no further than that, and he did not have a banking background. But as a very successful, self-made businessman, he understood that whereas banking and finance can distribute wealth, wealth can only be created by producers, and their investment decisions reflect not just the cost of capital but also the expected returns on such investment.
The events Eccles warned about in fact seem to be what happened in Germany after the Hartz labor reforms of 2003–2005, to make a brief digression into current policy choices. The reforms increased desired savings by transferring wealth away from consuming households and toward saving businesses. Instead of increasing, however, after the reforms investment actually fell, perhaps because less domestic consumption reduced the incentive for German businesses to maintain existing investment levels.
This is why President Donald Trump’s proposals to cut taxes on the wealthy are likely to backfire. It is assumed that cutting taxes on the wealthy—which is effectively a wealth transfer from ordinary Americans to the rich—will increase American savings and, with that, American investment. But this is only likely to be the case if American businesses are capital starved and if American investment were currently constrained by inadequate savings. If not —and they almost certainly are not so constrained—investment will not rise and so savings cannot rise.
Often enough, when excess savings are high, they flow into real estate and stock markets, perhaps even setting off bubbles, with overinvestment in real estate an almost inevitable consequence of rapidly rising housing prices. (We saw this most obviously during the past decade in China, peripheral Europe, and the United States.) These speculative flows have another impact that allows the economy to balance savings and investment. A real estate bubble makes households feel wealthier, which encourages a consumption glut, so that between the real estate boom and the consumption glut, the savings glut is fully absorbed.
But this is temporary. When asset bubbles burst, the resulting surge in unemployment brings down the savings rate enough again to maintain the balance between savings and investment.
Savings Must Balance
The point here is that a savings glut need not result in an overall rise in savings. It can just as easily cause a consumption glut elsewhere whose positive impact on total demand fully mitigates the negative impact of the savings glut. The idea, however, that a savings glut can simultaneously create a consumption glut seems to be one of the most difficult things for many economists to understand, perhaps because it seems at first so counterintuitive.
The other way a savings glut need not result in an overall rise in savings is through higher unemployment. In fact, because neither an asset bubble nor a consumption glut is sustainable, unless productive investment has been constrained by a lack of savings, the only long-term consequence of a savings glut is a rise in unemployment and no rise in total savings.
In that case, there might be only two sustainable ways to address the resulting unemployment. Either the savings glut is reversed, or governments act to eliminate whatever previous constraints existed on productive investment (perhaps by liberalizing constraints to investment or even by initiating a kind of new deal in infrastructure investment). A third way, although not sustainable, is for another asset bubble to be inflated so as to encourage another consumption glut—this seems to currently be the preferred way of U.S. and European governments.
Which Way Does the Causality Point?
It is just a matter of logic that unless investment rises substantially, a savings glut must combine with a consumption glut or with a surge in unemployment, so that there is no net increase in savings. But logic only tells us that the two must occur simultaneously. It implies no obvious direction of causality. Does a savings glut cause a consumption glut, or does a consumption glut cause a savings glut? To put this question in contemporary terms:
- Did Chinese policies aimed at forcing up domestic savings (by forcing down the household income share of GDP) set off a consumption glut in the United States? Or did profligate U.S. consumption require that Chinese savings rise to accommodate it?
- Did German policies aimed at restraining workers’ wages force up the German savings rate, with excess savings pouring into peripheral Europe, setting off real estate bubbles, which then in turn set off consumption gluts? Or did overenthusiasm about the euro cause overly confident citizens of countries like Spain to embark on a consumption binge, which could only be balanced by a rise in the German savings rate?
One way of resolving these questions might be to examine the cost of capital. Pulling capital from parts of the economy that are low in savings to places that are high in savings might seem to require rising interest rates. Pushing capital from parts of the economy with high savings to those with low savings, meanwhile, might seem to require declining interest rates.
Underlying Conditions Matter
The point to recognize is that a savings glut does not mean a rise in savings. It means that within some sector of the economy conditions are such that they force desired savings levels to exceed the local need for savings. In the wider system—the global economy—whether a savings glut causes total savings to rise will depend on what happens next.
Under certain conditions, it is possible that this rise in desired savings in one part of the global economy is met with a flow of savings into capital-starved parts of the global economy, setting off a surge in productive investment. This is usually what occurs when capital flows from developed countries to developing countries, the latter being almost always capital constrained except in cases, like that of China, where significant distortions in income distribution have forced up the savings rate by constraining consumption.
But if the rise in desired savings in one part of the global economy is met with a flow of excess savings into developed economies or parts of the global economy that are not capital starved, the savings glut will not set off a surge in productive investment. In this case, the only possibility is some combination of the following three outcomes: either there is a temporary increase in nonproductive investment, in which case savings overall do rise, or there is a counterbalancing adjustment that lowers savings elsewhere so that savings overall do not rise—in the latter case, this counterbalancing must result either in higher consumer debt or higher unemployment.
There is so much misunderstanding about the savings glut hypothesis that much of the debate has verged on the nonsensical. Unless it unleashes a truly heroic surge in investment—productive or nonproductive, although the latter can only be temporary—a savings glut must always be accompanied either by a consumption glut elsewhere with rising debt or by a rise in unemployment. No other option is possible. This is why savings gluts rarely result in higher overall savings.
This is also why any serious discussion of the savings glut must eschew moralizing and must focus instead on the direction of causality. Did distortions that created a savings glut force the creation of a consumption glut or rising unemployment, or did distortions that created a consumption glut force the creation of a savings glut? More specifically, was it sudden surges in savings in China and Germany that caused the consumption surges in the United States and peripheral Europe, or was it sudden consumption surges in the United States and peripheral Europe that caused savings surges in China and Germany? Rather than simply assume one or the other based on possibly obsolete models, we should examine the conditions of each, including most obviously whether they were associated with rising or falling real interest rates. Any analysis that does not recognize that both must occur simultaneously, and so must be resolved simultaneously, cannot possibly be correct.
Notes
1 Although largely and maddeningly forgotten by mainstream economists, there exists an extremely sophisticated discussion of the economic impact of excess savings, most significantly in the work of the British John Hobson and the American Charles Arthur Conant, both of whom did much of their most important work during the last two decades of the nineteenth century. The main subsequent innovation to their work is the recognition of the second of these two great causes of savings gluts. In their work, only a rise in income inequality is recognized as a source of excess savings.
Comments(40)
So you've come to the conclusion that Trump will fail by citing one specific part of his policies. Would it really be prudent, professor, to ignore the potential effects of tax cuts to the working class consumers, of a border-tax to raise the price of imported goods and decrease the price of America's exports, and the reduction in excessive regulation. You state that Trump's plan will backfire simply by taking that one segment of his policy (cutting taxes on the wealthy) into account. I think you've got a great model here, but to just nitpick certain items on Trump's policy agenda and use your model to say whether it will work or not solely on that one item seems biased at best. At worst, you seem to be pushing your own political agenda. I read your blogs because I greatly respect you and your intellectual framework. However, once in awhile, you will come to these very specific conclusions in which you use your framework to justify but could actually contradicts your very own framework if you look at the problem in the larger context of things or if you looked at the issue in a dynamic manner. So far, it seems blatantly obvious to me that you have a strong political bias against Trump and a strong political bias for Mexico. This is completely fine for me if you can acknowledge your own bias, but to use your very credible intellectual framework to selectively justify your own bias greatly takes away from the legitimacy of your posts in my very humble opinion. Best regards
John. I don't see it. For the last 37 years big cuts for the wealth & powerful. The level of inequality here and around the world is historical. The economic policy of each one of the 17 republican candidates? "Cut taxes for the wealthy and get the economy moving again." We should be swimming in well paying jobs and prosperity. Why can't anyone call it for what it is: A SELF SERVING LIE OF THE WEALTHY AND THE POWERFUL.
Yok - Not sure what you're trying to say here. Nobody has suggested that the middle class has benefited from the economic policies of the last 37 years.
I find Dr. Pettis' writings to be very consistent, if often challenging to apply. I would be curious to understand a broader approach to Trump's policies under Dr. Pettis's framework. 1. Do Trump policies reduce savings glut? More precisely, do they cause income inequality to decline and do they increase household's share of GDP? 2. If they don't -will the policies cause product investment to rise? for this to be true, there needs to be some constraint on productive investment? Is this true? Otherwise, will debt burden rise? Or will debt burden rise through unsustainable consumption glut? Or will unemployment rise? I don't have answers but I have found Trump policies to be often contradictory. There was talk of reducing the trade deficit which seemed to fit with the BAT. That was dropped and the latest tax policies seem to abandon much of the strong mechanism for reducing trade deficits with policies that increase the fiscal deficit and thus capital account surplus. I have studied Dr. Pettis well enough to know that the capital account surplus = trade deficit. So they larger our fiscal deficit, the larger we should expect the capital surplus. I have not seen addressed in Dr. Pettis' writing but given several statistics I have seen, I believe the business share of GDP is high at the expense of household's as a results of decades of policies. It seems to be pretty unlikely that the proposed Trump corporate tax rate cut will flow to households (Labor), but rather to reward Capital. This is likely to further reinforcing income equality. Other than that, I find it difficult to analyze Trump's policies under Dr. Pettis' framework.
He wrote this post before Trump was a candidate. He's simply looking at the main thrust of Trump's plan and applying the framework.
tew - I'm well aware that Michael established his framework well before Trump decided to run for presidency. My criticism is his selective application of his framework on only certain parts of Trump's proclaimed policy.
What we need are for countries like China and Germany to take up the American model of consumption driven growth and fiscal expansion as the US takes up a model to drive up productive investment. I laid out how the US could switch to an investment driven model and finance infrastructure without very much public spending. The easiest way is to sharply raise capital ratios in the financial system to ~20-25% and use ~$1-1.5 trillion of the capital raised to finance share purchases in a newly created Federal Infrastructure Bank (FIB) that'd be allowed have ~$3-4 trillion assets. We can add in another ~$500-750 billion in public capital if necessary. If any of the assets start getting shaky, we can simply resolve the problem by raising more equity capital. If we can add in stuff like cap-and-trade or carbon taxes combined with some protection like a destination-based cash flow tax (DBCFT or "border adjustment tax") mixed in with corporate tax cuts to 20%, removal of loopholes and further tax cuts for business investment (to build plant, equipment, infrastructure, etc instead of for flipping or holding condos), I think the US can easily hit ~4-5% of GDP in sustainable growth for ~15-20 years minimum. That'd drive up American savings rates, but we'd also need a rebalancing to consumption in countries like Germany, China, and much of SE Asia.
Suvy, " I think the US can easily hit ~4-5% of GDP in sustainable growth for ~15-20 years minimum. " How will that increase the quality of life of Americans? Surely at some point, blind pursuit of growth does not improve things? The health cost burdens are tremendous for most Americans. I know so many who thanks to "growth" had their personal revenue increase significantly yet when one member of their family became sick the family almost lost all they had. People in Europe have far better quality of life thanks to a different system.
How does a $500-750 billion federal layout of a smart grid help Americans? It'd reduce the cost of energy and build the basis of an energy infrastructure for the next ~100 years. What'd building a high-speed rail grid network between all major areas do for regular Americans? It'd rapidly increase productivity. What'd a dam and levy repair do for regular Americans? It'd upgrade their infrastructure and reduce costs of flooding. I can keep going. The US is in desperate need for more infrastructure.
If you take up policies to restrict immigration a bit (not totally) while driving up productive investment, you'll get wage hikes combined with a rise in productivity. What'd an infrastructure buildout do to help Americans? It'd employ them for one.
You claim people have better quality of life in Europe, but I don't buy that. If I wanted to get my knee checked out in many of their health care systems, I gotta wait months to even see a specialist. In Europe, y'all pay twice as much for energy. In the US, the typical family has 2 cars. In Europe, a family might have one. In the US, I can live at the poverty line, have an apartment with roommates, and save 40% of my income. In Europe, 50-60% of my income goes to the government cuz "equality". You know what you do once you start saving money like that and start getting a return on capital while keeping living expenses low? You start piling up cash and you reach a point where you can focus on building out your empire. And when the other half of the world goes into depression (Scandinavia has a bubble and Germany has excess capacity), the US will once again be the shining city on a hill as it was 30 years ago. All the while, Europe continues becoming uncompetitive and enters terminal decline with depopulation and large immigrant populations they can't assimilate. In 5-10 years, I'll be proven right.
Suvy: "I think the US can easily hit ~4-5% of GDP in sustainable growth for ~15-20 years minimum. " I think I asked you about this on an earlier thread, but you may have missed it. 5% growth for 20 years means that the US will have a ~$50 trillion economy by then. The entire global GDP is currently about $75 trillion. How do you possibly make those numbers work?
We're growing at ~2-3% in an economy with no capacity after the fastest rate of corporate consolidation in >100 years combined with burgeoning inequality also unseen since Gilded Age levels. In spite of all of that, we're growing at ~2-3%. Our overall infrastructure needs run at ~$10 trillion if you include local, state, and federal infrastructure combined with construction of new infrastructure networks. Our GDP is ~$20 trillion right now, we can add $10 trillion of raw infrastructure, and assume no multiplier, that gets us to ~$30 trillion right there. If we add in reductions of inequality, doing things like guaranteeing everyone in society (like the young) some base level of health insurance--am against single-payer FTR--along with other basic things, we can easily hit an economy of ~$50 trillion. Most of the real wealth has already been created. GDP growth understates the amount of real wealth created.
The wealthy pay little to no taxes in the US unless you consider the money they pay their accountants and estate/business lawyers a tax. The businesses owned by Berkshire Hathaway mostly receive hidden subsidies. GWB's administration threatened to cut off the subsidy for airport landing privileges for an airplane rental company owned by Berkshire Hathaway. Railroads are still subsidized. Trump's tax cuts are aimed at small business owners. Having a net worth of a hundred million dollars means little if 99% of that hundred million is working capital. The only way for 96 million people to be added back into the work force is small businesses. Otherwise it is SNAP, EBT cards, and Medicaid for 96 million people. China could try those but might want to do Social Security and Medicare first because they are less expensive.
Thank you for your response, Suvy. Please remember that I am not an economist, so my questions may be a bit off/ However: (1) yes, the US is growing, but it's also assuming a huge amount of debt to get that growth. If you assme that the US will reduce its deficits, etc, that may generate growth, but I don't think you can assume that growth on top of the 2-3% that is debt-driven (please correct me if I am wrong). (2) where does the needed $10 trillion for infrastructure come from? Moreover, where does the money and material come from? From what I gather, if you add $10tn in government spending in the GDP equation, then you need to remove that same $10tn from the savings variable in the same equation (and presumably, at least some of that $10tn will be imported from abroad, so US GDP will not bnefit from that entire amount). Similarly, shifting medical costs from individuals to the state may increase household consumption as a share of GDP, but I don't see how it aids GDP as a whole (at least not by the amounts you sugest). Your numbers suggest that the US GDP per capita shjould be the highest in the world by a large margin (neglecting some minor countries with unique scenarios). I don't see how the structural differences between the US and most western countries can possibly be so high as to justify this optimisim...
Suvy, Thank you for your replies. Much appreciated. I have family in Europe, and you are right, if you got a cold you have to wait, but from real experience when people got emergencies or rare conditions they were treated without having to spend a dollar and their lives went on. " In the US, I can live at the poverty line, have an apartment with roommates, and save 40% of my income." I also agree about the potential in the U.S. compared to Europe, a potential to become rich. Also, you must be a single healthy guy with no family. How many succeed? Most households do not benefit from that. You say that increase in productivity would necessarily benefit households. Fine, but what if healthcare costs rise as well as they have been? What would be the net benefit? We are already at or near full employment. How much of that productivity increase would go to households compared to those that already have plenty of assets? As for energy prices, the private sector is taking care of that well enough and indeed all benefit. The drop in oil prices also boosted the economy together with the drop in the cost of fracking and the rise of renewables. "What'd building a high-speed rail grid network between all major areas do for regular Americans? It'd rapidly increase productivity. " More than supporting automated public transport and ride sharing? Even bike sharing and cycling lanes have tremendous productivity increase. My point is, there's a hella productivity increase going on right now without any major government spending.
Claire, that $10 trillion (if I was doing it) wouldn't be done with direct government spending in a Keynesian style. First off, there's no way that much government spending passes Congress. Secondly, there's no reason all of that has to come from government spending. The way I'd finance infrastructure is by sharply raising capital ratios across the banking system to ~20-25% and using some of that capital to purchase shares in a newly created Federal Infrastructure Bank (FIB). Get ~$1.5-2.5 trillion from our banking oligopoly and then get some amount from our federal government issue ~$3-5 trillion in shares for FIB and let maximum assets in FIB be ~$7-10 trillion. If you run into problems in the financial system, continue raising capital in the financial system. I'd basically turn the large banking oligopoly into a utility to finance an infrastructure build-out. There's no reason you'd need trillions to go through Congress.
John2, I agree with you on healthcare here. I think a mix of a system like Singapore, Australia, and Switzerland can work well here. I don't think a Canadian or British style single-payer healthcare system will work. I'm not sure I buy the full employment argument. There's still a significant amount of long-term unemployed. I'm of the view we can get much higher employment in this country. If there's a labor shortage, then wages will rise. If there's still not enough, we'll have more immigration.
FTR, fracking was a two-way bet. When oil prices fell sharply, that hurt some areas but benefited others. Overall, I'm of the view fracking is a net wash close to 0 in terms of impact on growth over the past few years.
OK, Suvy, let's break this down piece by piece. The first assumption is that there actually enough of an infrastructure deficit in the US that the country can actually spend $10 trillion on infrastructure and get a return on its investment (as opposed to building empty airports, bridges to nowhere, etc). Why do you believe that the US is underinvested in infrastructure by $10 trillion (or ~50% of its existing GDP)? I guess if I get the rationale behind this number, the rest of your argument may get a little clearer to me.
Agree with Claire - a $10 trillion investment in infrastructure would be most unlikely to be productive. This is the point of many of Prof. Pettis' posts. The surplus countries eg Germany are sending capital in amounts that cannot be used productively so either results in unproductive investments (eg Spain housing) or consumer debt or unemployment or a mix of all three.
Agree with Claire - a $10 trillion investment in infrastructure would be most unlikely to be productive. This is the point of many of Prof. Pettis' posts. The surplus countries eg Germany are sending capital in amounts that cannot be used productively so either results in unproductive investments (eg Spain housing) or consumer debt or unemployment or a mix of all three.
Where is there a gap? As of today, a foreign country like China could send an EMP and fry our grid. Most of our grid is incapable of handling renewable energy as well. From estimates I've seen, it'd take ~$750 billion to build-out a federal smart grid. A federal high speed rail network alone takes at least ~$1-2 trillion (probably more). Then, you add in stuff ranging from dams and levies across the country to pipes to roads to airports and that'll get you another ~$1-2 trillion (again, these are low-end estimates). We're at ~$4-5 trillion already and I haven't even touched stuff like nuclear power. We could invest several trillions into thorium reactors that'd still be productive. Hell, it'd be wise to update all of our nuclear power plants whether we plan to use thorium in the future or not. Now, your ~$4-5 trillion becomes ~$5-7 trillion and I haven't even touched on local infrastructure from state/local governments or on private infrastructure. There's still places in the US that don't have broadband. Just start to tally the numbers up for these projects and you'll see that what I'm saying isn't really unreasonable at all.
Excess savings in Germany surely went to Greece to fund the housing bubble. But euro enthusiasm in Spain helped. There need be no simple direction of causation but a loop. As when two people push a roundabout from opposite sides to set it spinning. Who gave the first push seems not to but important.
Yes, Peter, these processes are almost always self-reinforcing, but remember that interest rate convergence meant that low inflation countries had excessively high interest rates, as Berlin kept insisting, and high inflation countries had low or negative interest rates.
Hmm...I think you might have missed the point of much of these posts (and two of Michael’s books) that Spain's outcome was more or less dictated by German domestic policies. To recap his hundreds of pages of writings within the allowed 2,500 character limit provided: Germany did not increase its exports by increasing productivity--it did so by enacting a series of policies that forced down consumption, which necessarily forced an increase in its savings rate because GDP = Savings + Consumption. German businesses had no reason to invest domestically because Germans were unable to consume, so there was no increase in domestic investment, and because the Current Account Surplus = Savings – Investment, those savings *had* to be exported elsewhere. They went to the Eurozone periphery, which Michael refers to as "Spain". Once that happened, "Spain" was very limited in its ability to respond. The ideal approach, which would have been to intervene in trade via lower currency valuation or increased tariffs, was not allowed under Eurozone rules. Spain could therefore either use the imported German capital to (a) increase domestic investment (which it did in the form of a real estate bubble) (b) binge on consumption and sharply reduce its savings as a function of GDP (which it also did) (c) accept higher unemployment (which it is now forced to do) which forces GDP to fall faster than consumption falls or (d) try to emulate Germany by passing off a trade imbalance at the expense of the rest of the world (which Europe as a whole is trying to do and which will go nowhere in the long run because only one country is even remotely capable of accepting such massive inflows, and it is increasingly unwilling to import the unemployment caused by German and Asian policies). Spanish laziness or preferences for shopping or love of the Euro have nothing to do with anything, except that for whatever bizarre reason “Spain” has (so far) refused to improve its economic condition by withdrawing from the Euro and basically force Germany to absorb the imbalances (unemployment) that it created by its own policies. As an aside, it's interesting that the ECB--which basically catered its policies to match Germany's economic conditions and not "Spain's" hasn't received far more criticism from the indebted countries than was actually the case.
Just to finish up with my last response, Michael has pointed out that in theory, either "Germany" could have "pushed" its savings onto the reluctant periphery ("Spain"), or the periphery could have "pulled" the savings out of a reluctant Germany. If Spain was eagerly demanding this money and Germany felt compelled to give it, then interest rates should have risen. Since they fell, it suggests that Germany was "trying" to "force" its savings onto the borrowers. I guess if that line of thought works, then Spain could only be criticized for not borrowing under more favourable terms (ie, for not waiting until excess German savings forced interest rates to drop even more before Spain borrowed en masse). Of course, Spain (like Germany) is not a monolithic entity making a single decision, I guess this is probably a more accurate criticism than the noe about "euro enthusiasm"
One commentor:"People in Europe have far better quality of life thanks to a different system." Too broad a statement and with no criteria to test the assertions. I have personal experience that plenty of German people are willing to move to the US permanently. Few in the US would move permanently to Germany even if it was allowed. People respond to incentives. Most people are more than willing to work hard and put in long hours when taxes and restrictions are low. That is everywhere. The US is much more restrictive and taxed than it was in the 1980's. That is one of the reasons DJT was elected President. Lets talk of good public policies for China and the world. I think the Professor's idea of selling off under performing public assets is a good one for China, the US, and could do good things for Europe too.
following from CM While it is discussed as Spain did, we are talking generically about what occurred in the Spanish Economy. So, places used to high interests, with greater union of the EU financial system, saw EU harmonized interest rates, lower than normal for the Spanish Economy. Then, those that could invest in Spain, did. This was both Spanish, other Europeans, and investors further afield, mooting the socio-cultural arguments along the way (Confucians can't save, the paragon of savings, German austerity versus Southern profligacy, etc...). So, harmonized EU interest rates, and property values far lower than elswhere in EU, saw a flood of investment. There would be Northern Euro contractors, investors, Real Estate agents, restaurateurs, tourist companies, etc...All these, and others globally, involved with and competing for resources, stressing normal market conditions and driving costs, thus values higher (not dissimilar to Chinese stimulus feeding into rising investment to service the stimuus, and competing up the cost of segments of the investment process along the way). These all leading to rising prices and a switching of the structure of the Spanish/Chinese/what-have-you economy(ies). So, not able to be discussed as some Germans prefer to (especially as they and the Brits and other Northern Euro's were greedy buyers and investors into the market (greedy, as in fast, voracious appetite and glutinous, not implications toward social marxian image of evil capitalist). So, while it is easy to say something happened in a place like Spain, we can not forget that Spain is/was under EU rules, and a relatively open market for trade and investment, and under conditions of the new Euro, rise in value, fall into harmony interest rates across the union, and so forth, it isn't anything uniquely Spanish, or even German, except insofar as the structures as they exist. If you give me a Ferrari, you can bet that I will be speeding. Give me a 40 year old Opel station wagon, likely not so.
I have a friend, a post-keynesian economist sticking to the endogenous money theory by which it is investments that create savings, who obstinately refuses to even consider that a savings glut can occur. How can I convince him that on the other hand this could be the case? On my part, I am unable to understand why, once savings are created (even by virtue of investments), they could not exceed what is best for the economy. Thanks for your help, prof. Pettis.
Carlo. It is from Savings, that investments are made. A Glut happens when the wages within a portion of the economy are forced down so that that particular portion of the economy cannot consume everything of value that is produced, creating a surplus. This is an aggressive act. People are denied the full value of what they have created. This forced surplus is forced to another part of the economy where it supplants local production and leads to debt servitude. It's an aggressive and hostile act. Glut. Why the word Glut? To my thinking, because the savings greatly exceed what can productively be used in that portion of the economy, so they are squandered into worthless local investments, and so destroy portions of those savings, or forcefully moved to another part of the economy where they are not needed and throw a moneywrench into the dynamics of supply and demand. The whole point of production is consumption. If a portion of the economy is fair and just the best use for production is local consumption with a portion saved for anticipated productive investment. This gross unbalancing is greedy, aggressive and hostile. It's a kind of a cold war. The wealthy & powerful fall into it naturally because the regime of accumulation of sawing has them at the center and it feels so right and good for them they can't see things otherwise.
I don't understand why we are not commenting more about China. As an outsider I see little interest in reducing SOE percent of the Chinese economy. If that is true I would suggest that China create a Social Security Administration similar to the original created in the US in 1935 to accomplish similar goals. The original US Social Security was much more modest than the current monster. Intended or not it helped with the transition from rural to urban. My understanding is a similar transition is desired by China. By setting the taxes to pay for Social Security lower than break even China could reduce the savings glut as defined by the equation the professor references. I have bought the Professor's book and read it. Good book.
Savings Glut in this context is used in a technical sense. It is caused by an action or actions to increase exports. Some think China is exporting too much for China's own good. Same for Germany, japan and maybe South Korea. Hard to tell since good and bad have no universal definition.
Do you think savings and credit are the same thing? That when banks extend credits to finance real estate purchases, they are lending out excess savings?
Good point, I agree with you - hence with the advocates of the endogenous money theory. What I am at loss to grasp is the purpose savings serve once we accept that they stem from the investments financed out of credit, not the other way around. As I wrote in a previous comment to this post, those who support the sequence of investments leading up to savings tend to rule out the savings glut hypothesis. It would seem as if once created savings disappear from the picture. I dared hope Prof. Pettis could help me understand, but I am aware the fault is entirely mine (on account of my venerable age).
Do you think savings and credit are the same thing? That when banks extend credits to finance real estate purchases, they are lending out excess savings?
Mr Genius, I think Carlo gets it.
You allocate Household income as either consumption or savings. You do not allocate Government and Business income in the same way. They must also be either consumption, presumably investment, productive or not, or savings (positive or negative). American government and corporate debt are both high now though some American corporations are holding a lot of cash (savings). Is all that irrelevant? If so why? If a Household buys a solar panel for their home is this consumption or investment (or both)? How is the distinction between consumption and investment (productive or not) drawn? A second question is about the distinction between productive and unproductive investment. Assume an investment in a large solar cell factory in the 1970s would have lost a lot of money. Governments and corporations invested money on research in the interim. Assume they did not make money doing so. Assume that large solar cell factories can make money today. Was the research investment productive?
Obviously. Your 2nd. How I c it. The research was productive. It increased the productivity of the economy as a whole. The Govm enjoys indirectly. Corporations may depending on patents etc. 1st. Solar panels on a home roof? Or even the entire house. It's hard to parse these things. To the degree your house by wholesome environment increases your productivity it is an investment. Above that level it is a consumption. Panels on roof if considering all true costs, is a more efficient producer of power, it is an investment. With investments you get back more than what you put into it.
Claire. I addressed you unkindly back in December. Forgive me for that. Let me try and make amends. I thought you made a post questioning "(even burning the dollar bill or leaving it forgotten in some drawer, it turns out, does not violate this rule)." GREAT REBALANCING, page 18. I happen to agree with you - I don't see it. I think Mike got a little carried away with himself, but the main point was very true and important to understanding for me. The burnt dollar - he'd have to prove it to me in some way. Look, the govm spends the dollar into existence - it is a redeemable tax credit, a tax voucher. The loss of that voucher means that it can never be redeemed at the federal govm. The govm gained that bit of value for nothing - the receipt was lost.
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