These days the chairman of US President George W. Bush's Council of Economic Advisers, Ben Bernanke, likes to talk about a "global savings glut" that has produced astonishingly low real interest rates around the world. But that is the wrong way to look at it.
The US certainly does not have a savings glut. Its savings rate has been distressingly low for decades. Then the Bush administration's reckless fiscal policy pushed it lower. Falling interest rates in recent years pushed up real-estate prices and allowed the US' upper middle class to treat their houses as enormous ATM's, lowering savings still more. The US has a savings deficiency, not a glut.
And the rest of the world? A global savings glut would suggest that rebalancing the world economy requires policies to boost America's savings rate and to increase non-US households' consumption. But what the world economy is facing is not a savings glut, but an investment deficiency.
Divide the world into three zones: the US, China, and all the rest. Since the mid-1990s, the net current-account surplus of "all the rest" has risen by an amount that one Federal Reserve Bank economist has put at US$450 billion a year, not because savings rates have increased, but because investment rates have fallen.
Declining investment rates in Japan, the newly industrializing Asian economies, and Latin America, in that order of importance, have fueled the flood of savings into US government bonds, US mortgage-backed securities and US equity-backed loans -- the capital-account equivalent of the US' enormous trade deficit.
The investment deficiency in Asia relative to rates of a decade ago amounts to an annual shortfall of US$400 billion a year, with the decline in investment in Japan -- a consequence of more than a decade of economic stagnation -- accounting for more than half of the total. Moreover, investment rates in the newly industrialized economies of Asia have never recovered to their pre-1997 to 1998 crisis levels, and investment rates in the rest of Asia outside China have fallen off as well. This would seem to call for a very different set of policies to rebalance the world economy.
Yes, the US needs tax increases to move the federal budget into surplus and policies to boost private savings. But the world also needs policies to boost investment in Asia, Latin America, the Middle East and Africa.
And here we face a difficulty. People like me who have been cheerleaders for international integration in trade and finance, as well as for reductions in tariffs and other barriers, have cited three benefits: Maximizing economic -- and also social and cultural -- contact between rich and poor nations is the best way we can think of to aid the flow of knowledge about technology and organization, which is the last best hope for rapid world development.
Lower trade barriers will make locating production in the poor low-wage parts of the world irresistible to those who have access to finance.
Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce.
The first reason still holds true. Maximizing economic, social, and cultural contact between rich and poor remains both the best way to aid the flow of knowledge and the last best hope for rapid world development. But the second and third reasons look shaky. Those with access to finance appear to be capable of resisting the urge to locate production in poor low-wage parts of the world (China aside).