Not so fast. Economists have another explanation, and it has to do with how much a country saves and invests. Whammo, the intuition vanishes and the reader is pretty sure that economists are from another planet. In defense, I will point out that intuition has an advantage when people decried the Earth flat. From anyone’s vantage point, the world did not look round. This “saving and investment thing” lacks intuition but that doesn’t make it wrong.
One more point. Some friends have told me that maybe saving and investment do matter to the trade balance – but there is no way to get Americans to consume less and save more. While it might seem like an uphill climb, the data in the table below suggest that the USA is an outlier. When compared to other countries and other regions of the world, we are second-class citizens of saving. Maybe if people understood that this imbalance is truly a problem we might begin to do something about it. If the choice was between a devastating trade war and inducing Americans to save more, might one not entertain policies to raise saving?
To review: If a nation spends more (and saves less) than its ability to produce then it will import the difference. Or put another way, the paucity of saving means that firms and government will have to draw in or borrow foreign money to meet its spending needs. This capital inflow raises the value of the dollar, increases imports of goods, and reduces exports of goods. Viola. A lack of saving leads to trade deficits in goods.
What do the numbers in the table show you?
First, I have 15 countries and regions listed in the table (data taken from an International Monetary Fund report). The highest saving rate among those 15 in 2017 was the 40.5% of GDP for emerging Asia. Just below are Japan and Germany with respective saving rates of 27% and 28%. The lowest in the list is the United Kingdom at 13.4%. At 17.5%, the US was in the third place from the bottom. We clearly do not save very much. I knew that Japan saves more than us by a long shot. But so do 12 of the 15 in the table. The average for all developing countries was 31.7%, and for all advanced countries, 22%.
We do better at investment. The almost 20% investment ratio for the US is bigger than our desire to save. But in looking down the list, our investment ratio is bigger than only Germany, Italy, UK, and Sub-Saharan Africa. The average for developing countries was 32%; for advanced 21.1%. So we are a laggard when it comes to both saving and investment. Does the low saving retard investment?
What really matters for the trade deficit is how short our saving is relative to investment since that gap is the key to capital inflows as explained above. Half of the regions included have negative saving ratios – meaning that saving is less than investment and those countries will have capital inflows and trade deficits. Our saving deficit of 2.3% of GDP puts us in the middle of those countries with the (negative) deficit sign. So it looks like we are in the bottom third of the whole group when it comes to saving insufficiency as a percent of GDP.
If so many of these countries can have adequate savings, then why can’t we in America? Do we really need all that crap we buy? Are there no policies that might improve incentives for saving?
Table. Saving and Investment as a Share of GDP, 2017
USA and Selected other Countries and Regions
|Middle East, Africa, etc||25.2||26.8||-1.6|
|Emerging and developing nations||31.7||32||-0.3|