Tuesday, April 10, 2018

Cheaters, Saving, and Investment

It is easy and perhaps even fun to describe the US balance of trade as born of cheaters and clearly unfair to US workers. The logic seems simple and intuitive. We are a great nation, and yet we import more goods from other countries than we can export to other countries. If trade was perfectly fair, then, of course, Americans could not lose. After all, we are smart, educated, attractive, competitive, and whatever else you want to add. How could we possibly be so uncompetitive? Surely those other guys are cheating. End of story. Where is my celebratory JD?

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

Saving Investment S-I
United Kingdom 13.4 17 -3.6
Sub-Saharan Africa 15.3 18.7 -3.4
USA 17.5 19.8 -2.3
Italy 19.6 16.9 2.7
Canada 19.9 23.3 -3.4
Advanced nations 22 21.1 0.9
France 22.1 23.1 -1
Spain 22.5 20.6 1.9
Emerging Europe 22.5 24.8 -2.3
Middle East, Africa, etc 25.2 26.8 -1.6
CIS 25.6 24.3 1.3
Japan 27 23.4 3.6
Germany 27.6 19.4 8.2
Emerging and developing nations 31.7 32 -0.3
Emerging Asia 40.5 39.6 0.9


  1. Larry—
    I still struggle with whether this is a causal connection or a parallel, but unrelated, effect. If I substitute the noun “desire” for “ability” in line #2, above, meaning that within my discretionary spending pool I choose to get more foreign goods than US made goods than it seems to me that I accept an imbalance of trade but don’t care because I feel I am getting greater value for the same dollar I will spend in any event and this expenditure impacts my saving philosophy in no discernible way. If, on the other hand, I am spending money beyond my discretionary pool, and increasing my debt position (for other than a short term benefit), then I see the impact on savings independent of whether I spend the dollar on foreign or US goods. As you point out, this concept is so counter intuitive that I continue to struggle.

    1. Suppose you spent all your income on imported foreign goods because they seemed better. Thus you and your friends would buy from abroad but no one would be buying what you produced in America. This should put pressure on the price of US goods to fall or the dollar to depreciate. Over time this would restore the US competitive position of US goods and the deficit should narrow.

      Now assume your problem is that you save little and spend a lot and more than your income. America cannot produce all the goods you want. So you import. So long as you love to spend and this won't disappear and we are stuck with a trade deficit. Also the trade imbalance implies you do not earn enough foreign currency so foreigners have to lend it to you. This capital inflow -- foreigners buying dollars to lend them to you -- causes the value of the dollar to rise and this further hurts the trade deficit in goods. I realize that is a lot to swallow but it happens. It ain't just me blowing smoke up your ...

  2. Clarification: I am referencing line two of the paragraph starting with "To Review".

  3. DearLSD. The data you typically present to support your argument is always very convincing. I’d like a little more data to better unnerstand why us ‘mericans don’t save a much as Germany and Japan. Specifically, I’d like to see for the U.S., Germany and Japan the average household income and average household spending for basic stuff like housing (rent and mortgage costs), food, utilities, healthcare, and payments for consumer debt. In other woids, some micro stuff vs. macro stuff. It would also show the relative cost of living in those countries and the percentage of income left over (e.g. available for saving vs. spending on consumables) after meeting basic costs. I assume that comparison whould show U.S. folks’ consumer debt (assuming use of credit cards) greater than Germany’s and Japan’s—in support of us being second-class savings citizens.

    1. Thanks Tuna. First, I'd like free JD to fall from the sky. Can you make that happen? Second, this is a blog and I already have the longest blog posts on the planet. Third, I think you obfuscate. Let's study this a lot more...and more. I agree that saving across countries is not a simple thing. But I do think that even if I did do all the research you suggested, we would find that Americans love to spend...and we spend a lot more than we make or can reasonably pay back. Maybe you can explain why people borrow hundreds of thousands to get a BA in Chaucer. Cheers.

  4. Dear LSD. Without lifting the hood a lot higher to compare countries’ spending and saving behavior I think it implausible to say that we ‘mericans are second-class savers (though much macro-based research via Google shows U.S. saving rate low). I agwee that such research would likely reduce your JD consumption and that you’d have to make a hard decision—JD or research? Allow me a comparison using company income statements to evaluate relative profitability. Company A has taxable income of 10% of sales; Company B’s is 5%. Conclusion: B is less profitable. But, raising A and B hoods we find B’s contribution margin (CM) @ 50% and its fixed costs (FC) @ 25% of sales: A’s CM @ 15% and FC @ 50% of sales. If B increased sales a lot @ CM @ 50% and FC @ 25% it would blow past A’s taxable income of 10% of sales. B’s inherent profitability is much greater than A’s and its FC (e.g. cost structure) much lower as % of sales: That insight significantly alters the initial implication of relative profitability. Cost of living comparisons between countries, average household income vs. expenses, tax rates, etc. all affect how much is left toward saving and discretionary consumption and likely would alter conclusions regarding savings rates. I agwee that lifting hoods can create immense thirst—cozy up to a cold JD.

    Q. Why do ‘mericans borrow/spend to get a BA in Chauser? A. ‘Cause it’s more fun drink’n the Kool-Aid with liberals than getting a PhD in macro, says Siri.

    1. Dear Tuna,

      My basic intuition about American saving is well described in the following article. I was going to cut and paste the article summary but I decided that would raise more questions than it would solve. I think this is a reasonable article that links US saving to some interesting and important things...especially the important role played by saving behavior of the poor in America. So give it a shot. It does not increase the probability that we can find easy policy choices to change our behavior. But it does point to a number of possible policies that are both intuitive yet politically difficult. https://www.theatlantic.com/business/archive/2016/04/why-dont-americans-save-money/478929/

    2. Dear LSD. Thanks for the link to the article. It presents good ‘splanations for low U.S. savings rates offering general and historic economic stuff, govomit policy, cultural, social, and demographic stuff, and edukation. It does offer a glimpse under the hood to theorize why. Likely a combo of all of them—sort of like a banana daiquiri blends various stuff—might be sufficiently conclusive to lead to govomit policy to reverse the trend—e.g as the article suggests govomit fiat. But the article doesn’t leave me thinking us ‘mericans are second-class citizens about saving (e.g. devoid of any appreciation for thrift—your implication or my inference?) and I agree with your implication that dealing with U.S. saving should have a higher priority than reducing the trade deficit—although the article does not mention the trade deficit in the context of saving. Yes, we don’t save as much as others, but I don’t see a causal connection between our savings and the trade deficit given the various theoretical reasons in the article for the savings deficit—(although you ‘splain it in reply to ED—too many inner workings and hidden mechanisms to grasp).

      Seems your suggesting the trade deficit can be mitigated/solved by more saving would require first addressing the reasons theorized in the article. You are correct the article raises more questions than you’d want to address in your blog. Better to let a sleeping dawg lie—or put more ice in your JD? Got to go read up on Absolam’s revenge in the Canterbury Tale ‘The Miller’s Tale’ and write on my erasable white board 100 times not to obfuscate—whatever that means.

    3. Dear Tuna, Since I am allergic to bananas I will stick with a lovely JD. The logic behind saving and trade deficits is not so complicated. More saving and less consumption means you don't buy as much and that includes buying fewer imports. We often hear this same point when it comes to government spending. When the government spends more (saves less) it must finance the debt. With so little domestic saving available, we sell the debt to foreigners. As we do that this causes the dollar to rise. The latter reduces exports and raises imports. Whether it is a lack of private or government saving the result is the same. More goods imports and less exports. Even if we didn't buy goods from China we would buy them from some other foreign source. It isn't cheaters. It is our own lack of saving. Viola.

    4. Yeah, yeah . . . I know. Beat’n a ded dawg . . . but I couldn’t let this one go so easily. Less consumption, more saving, and buying less? . . . whether from domestic producers or imports = shrinking economy, employment, and wage decline. That doesn’t resonate like a very pleasant sounding macro model or a viola.

      If the tax cuts are supply-side stuff to stimmilate producers to produce more (presumably to stimmilate demand) yet folks buy less to save wouldn’t those two actions negate each other?

      What if we stopped all imports and met all demand internally . . . would that result in the quintessential ideal of equilibrium of supply and demand among producers, industries, and consumers and resolve differences in wages among workers?

      Yeah, yeah . . . I know . . . and you want that last ice cube in your glass of JD . . . but these issues keep me up at high tide . . . .

    5. Supply side policy changes are meant to target AS. They are meant to generate a situation of surplus -- meaning that if supply leads demand then output will increase without higher prices. This is unlike an AD policy which leads with demand and causes output to rise with higher prices.

      A rise in saving in not necessarily a supply policy but if could be if it leads to lower interest rates and more purchases of plant and equipment. The increased plant and equipment would lead to increases in productivity and output. If saving has been deficient then the belief is that more saving would improve all that though it could reduce some consumer spending. If the supply side effect works and output and incomes rise, then the income gains would allow for an increase in consumer spending along with the rise in saving.

      Stopping all imports would not be a good equilibrium. Just like you trade with the grocery store instead of making your own veggies -- we trade internationally because we get efficiencies by taking advantage of comparative advantage.

      When have I ever not tried to answer one of your questions? Keep them coming dear Tuna.