Saving deficit, not China, threatens American dream
US 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 Agreement, holding them up as the scourge of beleaguered US workers. While this explanation may be politically expedient, the truth lies elsewhere.
When it comes to trade, as I recently argued, the United States has made its own bed. The culprit is a large saving deficit, the country has been living beyond its means for decades and drawing freely on surplus saving 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.
The saving critique merits further analysis. The data show that countries with saving deficits tend to run trade deficits, while those with saving surpluses tend to run trade surpluses. The US is the most obvious example, with a net national saving rate of 2.6 percent in late 2015 – less than half the 6.3 percent average in the final three decades of the twentieth 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, the Republic of Korea, Sweden, and Switzerland all run trade surpluses.
Saving imbalances can also lead to destabilizing 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 saving imbalances, as measured by the disparities between countries with current-account deficits and surpluses, hit a modern record. The asset and credit bubbles fueled 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 “saving 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 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 saving 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 servicesdriven job creation and urbanization-led
increases in real wages. But China has lately shown a commitment to addressing this shortcoming. Its recently enacted 13th Five-Year Plan (2016-20) aims to dampen feardriven precautionary saving through interest-rate liberalization, 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 saving issue, let alone implementing policies to address it. A pro-saving US policy agenda should drawon the following: longerterm fiscal consolidation, expanded individual retirement accounts and 401Ks, consumption-based tax reform (such as value-added or sales taxes), and interest-rate normalization. Instead, US politicians continue to focus on keeping the consumption binge going, regardless of its implications for the US’ saving imperative.
The asymmetrical response of the world’s two largest economies to their respective saving dilemmas has far-reaching consequences. To the extent that China makes progress on the road to consumer-led rebalancing, it will shift from surplus saving to saving absorption. Already, China’s gross national saving rate has declined from a peak of 52 percent of GDP in 2008 to around 44 percent 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 saving 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 saving, 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, 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 recognize 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 saving deficit is the single greatest threat to the American dream.
Stephen S. Roach, a faculty member at Yale University and former chairman ofMorgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Project Syndicate, 2016. – will
publish an English edition of ChinaWatch publication once a month. The first edition was published on Friday, drawing favorable responses from Australian readers on both the content and the model of cooperation.
As for the two media outlets, the cooperation will create a win-win situation for them: On the one hand, China Daily will be able to reach a wider readership in Australia. On the other hand, the ChinaWatch publication, which caters to Australian readers’ growing interest to learn more about China, will help enrich the Australian newspapers’ content and increase their diversity, which, in turn, will make them more appealing to readers.
Yet, for me, the most significant part of the cooperation is the two media outlets’ courage and efforts to blaze a newtrail in forging a closer working relationship between them.
Obviously, media organizations in China and Australia differ from each other in cultural and political backgrounds, media philosophy, media ownership and even in the role each assumes in their respective society.
These differences used to form a big barrier for media organizations on both sides and impacted hugely on their coverage on each other’s country. Australian media, as part of theWestern media world, have often harbored a bias against developing countries, China included, and such a bias cannot possibly contribute to better understanding betweenWestern countries and China.
In this context, the newagreements that signal wider and closer cooperation between media outlets in China and Australia can help mitigate the negative effects of their media differences and deepen mutual understanding between the two countries.
Chinese and Australian mediamay differ in manyways, but they also share increasing commonground, and they both need to present their countries to the world and vice versa, especially as globalization and newmedia have turned the world into a global village.
Hence, sharing content, launching joint media products and conducting journalist exchanges, as shown in the latest efforts in China-Australia media cooperation, will enable media on both sides to better play their role as a bridge that helps enhance understanding and friendship among the two peoples.
In recent years, people in both countries have viewed each other’s country in a more positive way, with a number of opinion polls in Australia showing more Australians now attach greater importance to Australia-China ties. For example, the 2015 Lowy Institute Poll, released in June last year, found that most Australians see China as “more of an economic partner to Australia” than a “military threat”.
Given the media’s strong role in shaping public opinions, that media outlets in Australia are willing to cover China and Australia-China ties in a more comprehensive and objective manner should only further strengthen this perception.
Such a favorable momentum needs to be maintained as it helps foster a cordial atmosphere for reciprocal interaction between China and Australia, which is in the interests of both countries. Needless to say, media organizations on both sides, such as the China Daily and FairfaxMedia, can play an important role in this.