Wednesday, January 28, 2015

Savings gluts, bubbles, and the state

A common term in macroeconomics for the last many years has been captured in the phrase "savings glut." An example is Martin Wolf in his book The Shifts and the Shocks, cited in this post by Brad deLong.

The idea is that there are people saving significant portions of their income: thrifty people in Asia, people looking toward their retirement in countries with aging populations (some of them also in Asia), and wealthy people everywhere.

And what do you do with your savings? For you as an individual saver, it may feel like you're just putting your money "in the stock market" or in the bank. But collectively, the reason we savers get a return from the stock market (or, in the old days, from the bank), is that the money one way or another found its way into the hands of companies who could make use of it in their businesses, and make more money, some of which found its way back to you.

In any kind of glut, you've got too much of one thing, relative to how much there is of something else. In a savings glut, the thing there's too much of is savings. And what's in short supply? Things to do with those savings that will earn a decent return - or rather, that will earn the sort of return the savers think they're entitled to.

Two obvious candidate explanations for this involve aging populations and wealth inequality.

In many wealthy countries, the population mix is shifting toward there being a much larger share of old people than has been usual. That's the natural consequence of people living longer while people delay having children and have fewer children once they finally start. But it feeds a fear of the sustainability of pension systems, which goads people into increasing their saving for retirement.

Now, in aggregate, that's not much of a solution, since the lack of younger, economically active people will tend to hit the value of your savings in the same way as it squeezes governments' ability to fund pensions, but at least it feels like you're doing something, so people do more of it.

And as people's wealth goes up, they raise their consumption, but also their saving, as they try to acquire financial capital as a source of an income stream even before they retire. (Thomas Piketty's Capital in the Twenty-first Century has lots of info on the dynamics of such financial holdings over time.) Growing income inequality is shrinking the share of households with moderate savings but creating an expanding class of people with very large savings, and very high expectations for how well those savings will perform.

And the shortage of good places to put those savings has been discussed for many years, including as one explanation for the housing bubble. An interesting presentation of that idea, set among many factors, is here. The thinking is that excess savings abroad flowed into the U.S., lowering interest rates, which raises housing prices, which started a bubble dynamic, which was then further fed by the sub-prime mortgage phenomenon, which in turn thrived in part because it offered the appearance of high yields with safety, something very attractive to that glut of savings that started the whole thing.

But why aren't there good places for people to put their savings in the first place? Why did  the markets resort to the absurdities of the sub-prime market in order to get savers the kinds of returns they thought they deserved?

Are there not enough promising business opportunities? Are there not enough needs and desires to be met?

I would say there are plenty of needs, but not necessarily that many business opportunities.

The pressing need of our time is action to radically reduce our emissions of CO2. There's plenty for private enterprise to do in that regard, but the profitability of such action is impaired as long as governments aren't acting to shape the economy in ways that favor efficiency (e.g., tradable permits or taxes for carbon-emitting fuels).

And there are big parts of what needs doing that naturally fall to government, primarily public transit and the long-term reconstruction of our cities so that people can live decently while using significantly less energy.

There are writers who question whether we actually have a savings glut (see here, here, and here for examples). But if it's real, maybe it partially results from a mismatch between our ideology and our needs.

We live in a time when the state is denigrated as a fundamentally incompetent, harmful actor, and yet our greatest challenge is unsolvable without a competent state. Society's savings - its income in excess of what is desired to be consumed today - has been withdrawn from the state just when, with the right state management, it could do the most good, and so instead it flounders in the private markets "reaching for yield" and always in danger of inflating another asset bubble.

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