I’ve written a bit on the housing bubble here, and why, if anything, it’s more a macroeconomic danger than anything else. But there’s a greater, more easily identifiable problem: our currently low savings rate. Kash at Angry Bear considers capital flows and savings behavior and provides a useful chart comparing the savings rate of several countries.
Unsurprisingly, the U.S. is very much at the bottom of the list, with a low gross savings rate and very low household savings rate. A low savings rate is a bad thing: it means that we do not save the capital necessary to grow our economy (and consume our economic output instead) or else we grow our economy only by borrowing the savings of other countries. The latter is the situation we’re currently in, which explains our current account and trade deficits. Unfortunately, it’s not sustainable. As Kash notes, "the upshot is that the US will continue to borrow from the rest of the world until it starts to save more, or households around the world start to consume more of their income. So the real question then becomes this: what will make either of those things happen?" We can imagine a number of corrections, some gradual, some hard landings. In any case, I don’t see how aggregate demand won’t contract or how our economy won’t face recessionary pressure. I’d be eager to hear if and why my Econ 101 reasoning is wrong.
Practical suggestions for avoiding a crisis? Clearly, we need policy that’s geared toward encouraging savings. "Piper" at TPMCafe has an interesting suggestion for a progressive consumption tax. I’ve generally been opposed to consumption taxes because they’re regressive and because a sales tax of sufficient magnitude would be unwieldy (imagine paying 60% on everything you buy). Piper’s version would really be a modified income tax, with deductions for savings; this would lose the advantage of most consumption taxes (ease of administration, tax simplification), but would have the benefit of rewarding savings without disrupting the current tax burden.
Mind you, if I’m right and any move to increased savings would trigger a recession, a new consumption tax regime would unfortunately take the blame for the inevitable.
SIDE NOTE: In another post, Kash points to the drastic changes in material wellbeing that China has seen in the last decade, again with a nifty chart. "There’s a lot to criticize about China’s government and its policies," he writes. "But say what you will, it is hard to argue that China’s recent economic success has not lead to vastly improved lives for hundreds of millions of people — a sizeable proportion of the entire human race. It’s an achievement that deserves to be appreciated and celebrated by all of us."
SIDE NOTE2: Surfing around, there seem to be group of reactionaries hellbent on solving the savings issue with a return to the gold standard. Also, some conservatives deny that we even have a low savings rate. I’d give the argument more credence if the WSJ op-ed that’s the source of it didn’t have this zinger: "Without it, the personal savings rate would have been only 0.9%, nowhere near enough to finance a fast-growing economy if it were a true measure of saving." No that rate’s not enough to finance a fast-growing economy, but the current account borrowing the U.S. has undertaken is. That’s rather the point of our concern about savings rates, after all.
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