NEW YORK – In the ongoing economic debate about what policy to pursue in the face of economic slack and prolonged unemployment, economists can roughly be divided into two groups. Keynesian economists argue for government spending as a temporary substitute for private spending, while supply-side economists call for austerity and structural reforms. But what if the main impediment to economic growth is indeed a shortfall of demand, only one that is structural rather than cyclical?
In 2005 then Fed governor Ben Bernanke, reflecting on the puzzlingly low long-term interest rates at the time, raised the specter of a global savings glut. He singled out emerging economies for their high national savings rates, suggesting that Americans acted as the world’s consumers of last resort. While American consumerism has since dwindled along with home values, the global savings rate is projected to reach a fresh high at 25% of world GDP this year.
Companies instead of households account for most of global savings. In the United States households save on average a meager 2.5% of disposable income. U.S. companies, on the other hand, hold on to $1.7 trillion in cash, which amounts to over 10% of U.S. GDP. Even in China, where households save on average an impressive 30% of disposable income, companies do the bulk of the saving, just as in Canada and the United Kingdom. Moreover, natural resource companies account for a disproportionate share of the world’s corporate cash piles.
Companies’ profits have soared due to the unlimited supply of labor in a world with exhaustible stockpiles of natural resources. As long as the supply of labor exceeds demand, workers are unable to translate productivity gains into higher wages. Employers will only pay the subsistence wage that keeps workers alive and fit to work. The economic rents extracted due to the excess supply of labor accrue to corporations and their shareholders.