America’s Saving Perils

May 23, 2016 Stephen S. Roach

American politicians love to blame China and trade deals as the major source of pressure on US jobs and wages. But when it comes to the trade deficits that are weakening America's middle class, the US made its own bed, in the form of a massive saving deficit.

NEW HAVEN – 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, 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, as I recently argued, America 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 United States is the most obvious example, with a net national saving rate of 2.6% in late 2015 – less than half the 6.3% average in the final three decades of the twentieth century – and trade deficits with 101 countries.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Already have an account? Log in

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 49 Comments on this article

Bruce Steinback Jun 20, 2016

Sounds good on the surface, but several problems strike me:

1. Consumers in the US may not be saving more, but we have cut our debt significantly since '08. Isn't that worth anything?

2. Saving more is a wonderful thing if there's any place worth investing it. You have any good suggestions? Investment in the US has been pathetic for years, even decades now (and certainly not for lack of available money - bond and other borrowing rates are insanely low). What good would more savings do if there's no place to put them?

3. Even as you decry our lack of increased savings, our trade deficit has been mostly falling since 2007. That seems to go against your assertion about the relationship between savings and debt. Admittedly some of the fall-off has been due to increased oil production internally, but certainly not the whole amount.

There seems to be a tendency among a lot of economists to want to come up with universal rules. But as an engineer it strikes me that life isn't that simple, everything needs to be understood in context.
A new reply to this comment has been posted.
Cary Fraser May 30, 2016

Is there the assumption that the majority of American political leaders are capable of understanding the argument that is being advanced - given that their priorities are focused upon fund-raising for purposes of self preservation? American political and business leaders have embraced the illusion that tending the corporate bottom line and election campaign war-chests is a sustainable strategy for America's long-term competitiveness. They are apparently unable to see the forest for the leaves.
The Chinese are aware that they have a chance to shape the future and are quite willing to be both resourceful and focused upon managing the forest.
A new reply to this comment has been posted.
Neil Gundel May 30, 2016

Based on reading many of the comments, it's clearer than ever that while it may be "time for politicians to own up to the uncomfortable truth" about the need to save more, their constituents are unlikely to permit it.
A new reply to this comment has been posted.
Doug Huggins May 30, 2016

Excess reserves with the Fed are currently USD 2.62 trillion, suggesting the market for savings and investment isn't clearing. Perhaps before we undertake initiatives to increase the pool of available savings still further, we should pursue policies that would support greater investment.
A new reply to this comment has been posted.
Lars Hektoen May 30, 2016

Thanks Mr. Roach for tidying up. It's a tragedy that disenchanted American voters are desperate enough to endorse Trump as the saviour.
A new reply to this comment has been posted.
Euan Taylor May 30, 2016

Does the author include the savings held offshore in tax havens thereafter laundered through higher property prices. Banks bought distressed properties after crash and now jacking up rents to pay off exposure further skewing savings away from poor into financial assets. Or are these trillions included in the author's productive economic model?
A new reply to this comment has been posted.
Michael Underwood May 29, 2016

Thank you for your for your confirmation for after 40 years of teaching lecturing and consulting the very poor, the very rich in rural and urban West East Central and Southern Africa where I have "development issues" or whatever they call it this week "upliftment" "sustainable livelihoods" etc. Most of the time I have been in the role of mentoring people, from which of course you always receive much more than you give, and invariably it is the poorest who are the most generous of spirit and have the greatest intellect. For as humanity claws up the ladder of apparent success, so does it become more "covertness" respecting only those from whom further advancement might be received. Slowly they become narrower and less human, dried husks, self-centred dull and uninteresting.

Recently I had the excitement of doing some development work which I hope may contribute eventually to the improvement of somebody's lot and about the same time attend a ministerial meeting. For a change I was very impressed by the commitment of the notaries present. And yet with all the splendour and good intentions of the occasion I recall something that a man, much better than I thought and then put pen to paper.

The person in question is a Rolland Bunch who's work with aging memory I am about to paraphrase. His book is probably the only really good book on how to conduct community development – it is called “Two Ears of Corn”.

The work if I recall was conducted by World Neighbours in Latin America (with apologies if my memory is playing ticks) and he notes that “people who write book don’t do, and people who do don’t (have the time) to write books but they had decided to put down our experiences.”

In the opening of the book he quotes Johnathan Swift who wrote the book “Gulliver’s Travels” and here again I rely on fading memory, my volume of his work long misplaced with constant moving, Bunch starts his book quoting Johnathan Swift and here again I paraphrase slightly:

“If I have passed this way but once and planted but two ears of corn, then I have done more for the promotion of humanity that a plethora of politicians”

I have thought a lot about this of late, and hope that even if not in exact words, that certainly in the spirit I have encapsulated intention of Mr Bunch's work. Where I wonder have I progressed to in three score years and nine, have I really done anything, certainly not made any money? Am I slipping into the abyss (is that the correct spelling?) of clawing my way up the ladder of society; the retribution for which mindlessness is now beginning to rapidly manifest itself in the form of climate change, which I suspect is mother nature's form of retribution for endless and needless greed.

Perhaps in these troubled times its appropriate for us all to take stock and try and make the difference before it is too late
I hope this makes some sense
Go well Mike mjuagroforestry@gmail.com
A new reply to this comment has been posted.
Douglas Leyendecker May 29, 2016

I would suggest that the single biggest threat to the American Dream is the destruction of the traditional nuclear family. Create and sustain more traditional nuclear families and savings will naturally rise as attachment to human beings is much more emotionally satisfying, reassuring and endearing than attachment to things.

Imagine the reductions in crime, welfare, and substance abuse as well as the increases in educational outcomes, worker productivity and savings that would come from a greater number and greater sustainability of the traditional nuclear family.
- Martin Screeton Jun 2, 2016
  
  Cannot have a traditional family without a Living Wage to Sustain it... that's why America is 52% Single now...
  A new reply to this comment has been posted.
- Oeufs Bruns May 29, 2016
  
  Capitalism, confusing cause and effect since the 16th century.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
E Walker May 29, 2016

And exactly what does the eminent Roach suggest people cut? Or is he suggesting Capitalists should pay better?
A new reply to this comment has been posted.
Louis Stouch May 29, 2016

So glad you cleared up the reasons for the 2008 Crash. Social engineering via mortgages for folks that shouldn't have gotten them, and overleveraged investment banks stuffed full of derivatives had nothing to do with it.
Right.
A new reply to this comment has been posted.
John Doyle May 29, 2016

The whole world is living beyond its means in so far as credit means consuming today what would otherwise be available tomorrow. That's OK as long as there are resources available into the future, and we should know by now we are in a finite world. So this means credit will cease one day not too far away.
Imports are a benefit as is pointed out .Importers benefit from the imports and they pay for them with numbers in accounts. which theoretically are infinitely available.
Exports are costs which can impoverish the exporting nation. There is only so much gold or coal or soils available. So saving means favouring imports over exports. Not the other way round, which seems to be the preferred option for the author.
A new reply to this comment has been posted.
S M May 29, 2016

So, in a country without real wage growth for anyone but the top 0.5% of the population (but still with a good deal of hidden inflation in everything from CPG to digital services) there is no overt reason to save - any surplus capital is best used in low-load mutual funds that will return a few percentage points.

This is a drop in the bucket however when you consider the wholesale export of capital to tax havens by corporations and the most wealthy, though to be fair some of it does come back as shell-corporation investments in markets - the final cruel laugh of "trickle down economics".
A new reply to this comment has been posted.
stephan Edwards May 25, 2016

A quick question for you Professor, When the inflation rate is higher then the interest payed saving benefits me how? Assuming I could afford to?
A new reply to this comment has been posted.
Martin Screeton May 25, 2016

This whole thing is very flawed since the US Worker has not received a raise in 40 years... inflation adjusted of course. Suffice to say all the money on the weekly paycheck is spent.. and as well consumer debt reached catastrophic levels only because of the long-term malaise on wages! Perhaps some few bankers will listen to you on Wall Street. Not me.
A new reply to this comment has been posted.
Alex Piascik May 24, 2016

Americans spend more because the Fed has maintained low interest rates for decades, encouraging borrowing rather than saving. It also doesn't help that the rest of the world wants to park its' money here because of the perceived safety of the dollar as the world's reserve currency. The Chinese save largely because they lack the social safety nets found in Europe in the U.S. A large medical bill, or period of unemployment, essentially has to be paid for out of pocket, so of course they save as much as they can. I haven't seen any indications that China is fixing these issues, and until they do, their "rebalancing" will only go so far. Germans don't enjoy the mortgage interest deduction that American homeowners do, and banks require down payments of 30% or more, so Germany doesn't experience housing bubbles. The euro has also allowed them to dump their exports on the rest of Europe, since they don't have to contend with an appreciating Deutschemark, which would make their exports more expensive, and allow other countries to compete. They gladly sell their wares to Greece and other Eurozone countries at artificially depressed prices, and encourage cheap lending at low rates, and then hypocritically blame and lecture them when they can no longer pay.

Many, if not most, of the spending / saving patterns in the world's countries are due to these structural factors. People, by and large, make rational choices based on the conditions in place around them.
- yw yap May 25, 2016
  
  does that mean it's the politicians fishing for votes at fault?
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
dan baur May 24, 2016

To save or not is an individual decision. Furthermore, the same person can look like a big % spender in college and a big % saver approaching retirement. Economists and Armchair Economists have no business interfering.
A new reply to this comment has been posted.
markets aurelius May 24, 2016

For reasons that are not entirely clear, Prof. Roach fails to recognize two fundamental truths in his continual chastising of the U.S. savers:

1) China's wealth is entirely a function of the U.S. and other "advanced" economies, particularly the EU, opening their markets to trade with China. As trade increased, the advanced economies failed to enforce equal access rules on China that would offset the historic wealth transfer from the latter to the former.

2) China refuses to wean itself off heavy-industrial growth, which continues to flood an already-saturated world with more heavy exports. The fiction that China will somehow transform itself into a consumer society requires a suspension of disbelief that even Prof. Roach cannot muster. As a result, China will continue to export deflation to the rest of the world as it resists any and all attempts to shift employment from heavy industries to services. It has found such a shift to be impossible, and is now intent on maintaining incomes by maintaining massive inefficiencies in steel, e.g., and other basic industries to support employment.

We're at the endpoint of a process started by Deng Xiaoping, who understood his country could not emerge from subsistence farming without trade with advanced economies. His opening to the West allowed him to capitalize on a labor-cost arbitrage, which, beginning with low-tech manufacturing, led to higher incomes for his peasants and higher savings, since incomes were growing at a vastly higher rate than consumption.

In the early years of this transformation low-cost consumer goods flowed into the U.S. and EU, which greatly stretched the purchasing power of consumers there. Over time, however, as the share of exports rose, domestic production in the U.S. and EU was displaced. Importantly, there was no effort at all to absorb the workers being displaced in the U.S. or EU into equal or higher-paying employment. Capital actually flowed to China to take advantage of the labor-cost arb, and governments in the advanced economies made no effort to retrain displaced workers or demand access to China's growing economy by threatening to cut off access to U.S. and EU consumers.

As a result, the long-term decline in savings in advanced economies ensued -- incomes fell, but consumption remained constant as consumers borrowed to sustain a lifestyle to which they'd become accustomed. In time, consumption, too, fell in the U.S. and EU as households and firms ate thru their savings and found themselves dangerously overextended going into and coming out of the GFC.

At the end of the day, you can't escape the identity

Savings = Income - (Consumption + Taxes)

Incomes were falling in the advanced economies, as workers were displaced by the flood of imports from China and elsewhere -- while consumption remained constant, so savings fell. In time, consumption had to fall as households and firms exhausted their borrowing capacity and willingness to borrow.

The other side of the ledger in China is just the opposite: Savings rose as income growth exceeded consumption growth. There also is the fact Prof. Roach makes re precautionary savings among a peasant population that still has no support for its retirement from government retirement programs.

At this point, it is fair to say the governments and institutions in advanced economies have failed their constituencies in spectacular fashion, by allowing cartels to emerge and become evermore powerful, and by allowing the-income-generating capacity of their economies to be hollowed out. This is why the winds of fascism are blowing in the U.S. and EU. As the income-generating capacity of these economies contracted they became spoils systems, in which powerful cartels -- e.g., banking -- use their host governments to defend their privileged positions in their respective societies. China always was a cartel-based system, which was intermediated by the Communist Party, without the charade of elections and appeals to voters and the rule of law. Now we see the U.S., the EU and China converging to similar government structures in which powerful individuals control powerful cartels acting largely above the law. These individuals and cartels will continue to divide the spoils of their respective societies, as they are doing now, using the "law" to enforce their will and favor particular cartels (e.g. banks or exporters).

We are traveling the road to serfdom and have to accustom ourselves to a different discussion as this reality becomes more apparent.
- yw yap May 25, 2016
  
  @Steve Hurst
  Thank U for your clear explanation. Tom Orlik of Bloomberg Intelligence has explained in similar veins in his article. Guess the politicians know where to fight tactically in the short term. However, the losers are likely the lower income group who give their votes to the candidates. Kinda ironic?
  A new reply to this comment has been posted.
- Steve Hurst May 25, 2016
  
  @yw
  
  The main beneficary of offshoring was the corporation not the workers. Inital retail price drops were quite limited, say 10%, enough to grab market influence, yeilding massive profits on very cheaply sourced goods. Gradually retail prices dropped as the market price point umbrella of home produced goods disappeared as the home manufacturing base collapsed. Retail prices are now a fraction of the original meaning for many goods the home manufacturing base will never return. Easy profits in the early stages meant lax managament was not exposed leading to other problems. Obviously not everybody works in manufacturing so the impact within the population was skewed. Because the economy was seen as strong dispite localised problems the currency was strong. Putting interest rates up would damage exports so was kept low allowing housing bubbles to grow. Spare capital washed around seeking a return in a low interest rate environment aiding this. Some of the same dysfunctionality remains. Political steps to deal with the problem is repeatedly blocked by those who would lose out. The labour rate gradient which is exacerbated by heath and safety regulations and welfare provision remains so the problem remains. Simply the West has to face the fact it is poorer and the impact has had a skewed impact on its population. Because of the reluctance to do this the polical fringe parties are moving mainstream. This situation is not the fault of those workers who have had to operate in the evironment they have found themselves in, they have had little flexibility. Those with security and flexibility have prospered leading to inequality ratios stretching
  A new reply to this comment has been posted.
- yw yap May 25, 2016
  
  guess somebody complains that after enjoying the grand buffet prepared by some lowly paid workers he found his income got lowered simply becoz he has forgotten to work while enjoying the buffet?
  A new reply to this comment has been posted.
- Steve Hurst May 24, 2016
  
  @markets
  
  Critically Chinas industrialisation is on the East coast and is a tiny proportion of China. To the West of this nouveau riche belt very little has changed and incomes remain at a poverty level. The chances of China uplifting what is the majority of its citizens into a consumer society rapidly look remote. For the near term China looks to have to follow-on with its current mode of operation however much they want a different scenario. The oft cited population figures of China are an illusion in terms of a consumer market destination for Western goods
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Jose araujo May 24, 2016

How can someone who has been a chief economist show so litle knowledge on national accounting?

And a savings problem in America in times of excess capital and zero interest rates, this guys have just gone crazy...
A new reply to this comment has been posted.
Greg Feigel May 23, 2016

Thanks to the out-of-control central banks the incentive to save is gone.

The central banks blindly follow irrational policies, completely ignore reality and are ignorant of the unintended consequences of their actions.

Now the rest of us pay the price.
- Steve Hurst May 24, 2016
  
  @Jose
  
  Well we both seem to think interest rates are going to flatline. We both could be wrong of course ¯\_(ツ)_/¯
  A new reply to this comment has been posted.
- Jose araujo May 24, 2016
  
  @Steve, there is where I think is our major difference, because clearly to me ZIRP has nothing to do with politics and all to do with risk aversion and generalized preference for liquidity.
  
  The recent policy of interest rate hikes (also in 2011) proved that no matter what policy you pursue, interest rates are going to remain at the ZLB and yelds ate going to be flat.
  A new reply to this comment has been posted.
- Steve Hurst May 24, 2016
  
  @Jose
  ZIRP is nothing to do with markets, it is to do with plumping the bottom line of the financial sector. It is political not market driven. It is the continuation of a rescue mission commenced in panic in 2008
  
  A 'failure' to invest can have nothing to do with risk, it can be simply there is no projected return, ie lack of demand
  
  You have to step away from all this cloud stuff and look to Darwin who describes evolution as individual action in response to environment
  A new reply to this comment has been posted.
- Jose araujo May 24, 2016
  
  Its just the opposite, the problem is that we are saving to much....
  
  Zero interest rates says there is excess capital, not shortage. We are living in times of risk aversion and liquidity preference. SAVINGS is A PROBLEM, bit the opposite that Roach sugests
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Mike Holly May 23, 2016

Roach is repeating the same nonsense that he did a month ago: that a lack of saving leads to trade deficits. More likely, a lack of competitiveness, including tougher environmental regulations than developing countries, leads to both trade and savings deficits.
- Mike Holly May 24, 2016
  
  @ Steve I agree with your statement, but this article is also obscuring the obvious problems. I do agree governments should not have artificially lowered interest rates, which tends to reduce savings and increase consumption, and built national debt, but the economy would have then tanked without dealing with the obvious problems. The obvious solution to national deficits is to reduce the bloated health care costs and military spending that have caused them, and the obvious solution to trade deficits is to increase competitiveness.
  A new reply to this comment has been posted.
- Steve Hurst May 24, 2016
  
  @Jose
  I believe markets aurelius above adequately describes how we got to where we are, a basic lack of policy, activity decline and corporate opportunism to offshore
  
  The lack of savings is simply a flag waving, the economic lockdown of 2008 was a flag waving. Nationalsim in growth is a flag waving. ZIRP, nZIRP, NIRP is a flag waving. The message of nationalism is looking after the locality because nobody - rightly or wrongly - is seen to be doing that
  
  The bottom line remains that Western real income has declined and may well continue to decline and that has consequences both for the standard of living in the West and those wanting to sell to the West; and that is all that is in process. As the standard of income declines in the West its impact is skewed and the impact is felt by those least established hence the underlying trend of upward youth unemployment which is the biggest disaster waiting just around the corner
  A new reply to this comment has been posted.
- Jose araujo May 24, 2016
  
  @Steve, we have the oppsoite problem, we live in times of excess savings.
  
  Adds that External Debt can be a consequence of trade, not the opposite.
  
  They are just national accounting equalities, they are not models and they mean nothing.
  A new reply to this comment has been posted.
- Steve Hurst May 24, 2016
  
  @Mike
  The central point is the West is propping up its lifestyle by borrowing. and has been doing so for some considerable time.
  
  That is because guvnt wants to obscure the problem with debt rather than implement policy to deal with it
  A new reply to this comment has been posted.
- Greg Feigel May 23, 2016
  
  He can't help it - he's an economist.
  
  They are all locked into narratives and are slaves to probable reasoning (see Liebnitz, Locke). They have zero understanding of cause and effect.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Norm Winn May 23, 2016

I wish Roach would have cited actual numbers and their source(s). That said, I read an interesting article a few weeks back that discussed the impact of NAFTA and our trade deficit with China on our job market. Of the approximate 7.5 million jobs that have been permanently lost in the US economy since 2000, NAFTA accounts for only 1 million and our trade deficit with China another 2 million. The balance according to the article is due primarily to advances in process automation and robotics. They went on to state over the next two decades, they foresee another 40+ millions low income and low-middle income jobs disappearing as technological advances become more mainstream in the service and hospitality sectors.

Its one thing to identify various factors that have and will continue to contribute to the erosion of the middle class. Its entirely another to propose real world solutions that don't entail more government or consumer indebtedness. So where will the replacement jobs come from?
- yw yap May 25, 2016
  
  "Like" (y)
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Eric Einhorn May 23, 2016

The US certainly needs to save and invest more, both privately and publicly. BUT, most Americans do not or cannot save because for most Americans, real income has stagnated or declined over the past 30 years. That's why private borrowing has been problematic. Until the US does something about economic inequality and stagnant growth (especially in the public sector: infrastructure, personnel, etc.), the savings rate will remain low.
A new reply to this comment has been posted.
MARY Healey May 23, 2016

If this article is indeed the truth of the economic woes in the US. it is also the reason why so many people are voting for Trump. Simply put, the establishment has lied and lied to us for so long that anything outside of it(anyone) will get the vote.
- yw yap May 25, 2016
  
  guess U are learning, and learning fast; good for U (y)
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Steve Hurst May 23, 2016

Common sense at last
- yw yap May 25, 2016
  
  guess Mr Roach is not popular becoz he speaks the truth?
  A new reply to this comment has been posted.
- Jose araujo May 24, 2016
  
  @Steve
  
  Debt is a stock and GDP is a flow. Why you insist in linking both is behond me. More, Debt is growing but liquid assets are growing in the same proportion, i,e, Debt is being transformed in cash (in fact is just the opposite, cash and liquid assets are being transformed in debt)
  
  So the last we wan't is more savings. We have excess savings, can't you see it?
  A new reply to this comment has been posted.
- Steve Hurst May 24, 2016
  
  @Jose
  
  It is not possible to ever increase debt as a proportion of GDP which is the tale to date. The US has 'recovered' by doubling its nominal national debt - as domestic savings are donimated by pension funds it follows that the addittional debt has been sourced overseas. Much the same has happened elsewhere, where 'recovery' is boasted about
  A new reply to this comment has been posted.
- Jose araujo May 24, 2016
  
  The opposite of common sense. Zero interest rates, a generalized preference for liquidity, and advocate for savings.
  
  Its just crazy, and just says that Roach has no clue on whats happening.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
mark bas May 23, 2016

But the whole goal of the Federal Reserve and other central banks for the last 8 years is to make borrowing easier and to encourage spending as a way to stimulate the economy. Negative interest rates are another method to penalize savers and encourage borrowing. Seems like you need to get your fellow economists on the same page first. Some of you want Hot and others want Cold. Pick one.
- yw yap May 25, 2016
  
  guess the politicians & their associates just want an easier life :)
  A new reply to this comment has been posted.
A new reply to this comment has been posted.

https://prosyn.org/0kKPx3t

Cookies and Privacy

America’s Saving Perils

To continue reading, subscribe now.

Support High-Quality Commentary

America’s Trade Deficit Begins at Home

New Comment

Email this piece to a friend

Contact us

Log in/Register

Cookies and Privacy

America’s Saving Perils

To continue reading, subscribe now.

Support High-Quality Commentary

Edit Newsletter Preferences

Set up Notification