Greg Mankiw's Blog: Bernanke to China: Stop Saving
リンク: Greg Mankiw's Blog: Bernanke to China: Stop Saving.
Ben Bernanke says the Chinese should stop saving so much:
If a friend of yours is saving a high fraction of his income, how can you tell him he is saving too much without knowing his personal rate of time preference and his desire for precautionary savings? Judging another person's saving rate is difficult. Judging another nation's saving rate cannot be any easier.
The positive economics here is impeccable, but the normative economics is open to debate.Today, about half of China's GDP is devoted to investment and to producing net exports for the rest of the world, and thus only the remaining half is available for consumption, including government consumption. In particular, household consumption in China last year was only 38 percent of GDP, down from 45 percent in 2001. In comparison, household consumption was about 60 percent of GDP in India in 2004, according to the most recent available data. China's low share of consumption in GDP is, of course, the counterpart of its high national saving rate.
Policies aimed at increasing household consumption would clearly benefit the Chinese people, notably by improving standards of living and allowing the fruits of economic development to be shared more widely. Such policies, by reducing saving and increasing imports, would also serve to reduce China's current account and trade surpluses.
If a friend of yours is saving a high fraction of his income, how can you tell him he is saving too much without knowing his personal rate of time preference and his desire for precautionary savings? Judging another person's saving rate is difficult. Judging another nation's saving rate cannot be any easier.
44 Comments:
there are behavioral economists who believe that governments should engage in benevolent paternalism, e.g. setting policies that require people to invest in their 401(k)'s by default, or forcing cigarettes to be sold in large bundles instead of individually, precisely because people are prone to make behavioral mistakes and governments can improve their welfare by making choices for them. Perhaps the Chinese government sees its saving policies as a form of benevolent paternalism, intended to help the Chinese people do what will make them happier in the long-run.
"Judging another person's saving rate is difficult. Judging another nation's saving rate cannot be any easier."
I disagree. While individual discounting rates may be quite dispersed, averag disperson less so. Why should the average person in China be that different from the average person in the West?
Message to Paulson: "Shoemaker, know thy last." What if China were to lecture the US on its savings rate? Sauce for the Goose is sauce for the Peking Duck?
Why should the average person in China be that different from the average person in the West?
Call me crazy, but I suspect that smaller social safety net, more extensive social/familial obligations, a more volatile economy, poorer general health, and corrupt local governments, might result in a slightly different risk profile than the average westerner... not to mention a deep, longstanding cultural abhorrence of debt.
Why should the average person in China be that different from the average person in the West?
Recent experience suggests that the average person's saving behavior in Japan is quite different from that of a person in the West, so I don't think it's such a stretch to assume that the Chinese have different values and views on the subject.
In one of your posts some months ago, you mention the bad economic education in vast regions of Europe. And that a good economic education is fundamental to a healthy political system. I wonder if there is Chinese version of your textbook on macroeconomics ? And whether this would help to develop financial markets in China for long-term global benefits ?
Old habits are hard to kill. For decades the Chinese have learned how to live with less.
This "consumption inertia" is a product of China's sociopolitical evolution. It's naive to expect their preferences and attitude towards risk to be similar to ours.
I would expect them to continue on cautious path.
While the Chinese absolutely have fewer (much fewer) social safety 'nets' and larger family burdens (financially), perhaps their risk aversion is still too great.
I think that Dr. Manikiw's statement "Judging another person's saving rate is difficult. Judging another nation's saving rate cannot be any easier." misses the point on two conts. First, perhaps Bernanke simply means that in order to achieve the golden rule level of output the Chinese need to save more. As such programmes to increase savings (not by force, but by persuasion) would be good for the people and it would not be subject to individual differences (just economic theory). Secondly, it is much easier (I would argue) to make an aggregate claim such as this. This is evidenced in the fact that companies to do not price discriminate per customer, but rather create a single price based on the average consumer (most often).
Ah well, perhaps I just missed the point.
Want minimisation and consumption minimisation is the right path for attaining self reliance according to Gandhian principles.Reduce consumption and save more..small is always beautiful.My congrats to the Chinese people.
Paradox of thrift on the one side and increased happiness of the Chinese people on the other side
gvv:
Well, if preferences are not monotonic, you are right that most of recent economic theory doesn't apply ...
Being chinese,the primary, and i mean, possibly the only reason that chinese people as a whole, save a lot, is because of the total lack of a social safety net and the obligations to your elders.
My grandparents, while they are doing fine, have essentially no medical [financial assistance] should they fall sick. and god forbid, the only people that could guarantee their treatment at hospitals that more or less require up front payment now, also due to the lack of a insurance/gov't safety net, is my parents.
Thus, this causes both my grandparents and parents to 'over-save' as their is no mechanism to distribute the risks across society, i.e. insurance etc.
why isn't there a social safety net? corruption etc, among other reasons, that answer i can't provide.
However, the point is that, when you have essentially no method of spreading risk across society, you will essentially be forced to over-save, and appear more risk averse than say, americans.
My american friends, imagine you didn't have medical insurance, you had no place to purchase auto-insurance, imagine you have no social security, oh, and you also have to take care of your parents, 'cause they lost all their promised retirements to enron/the old communist system. Now think about how much you would save.
As a note, now that i'm at harvard, i have a negative savings rate, and my parents save significantly less than their chinese counterpart.
In my view, this is all "fixable" by developing financial markets etc.
This whole dog-and-pony show with the delegation to China is designed to head off Schumer-Graham, there is no real substance and therefore whatever BB says is laregely eaningless anyway.
errata:
"largely meaningless"
too much Christmas party last night
I couldn't have said it any better than most of you. Socio-political factors are key to determining consumption patterns and consequent saving patterns. But given that for the past few years, China's poverty situation has been improving, I can only guess that something's getting bigger. (I'd have to look into data to confirm this intuition.)
Hint: China has been on double digit growth for the past decade or so.
Maybe Chairman Ben should have said: Americans - start saving.
Steve Kyle (the new Angrybear) has a related post.
Oh, Ben, Ben, Ben..... Academics certainly don't know how to speak. Without even trying to understand China's cultural patterns (i.e. supporting elders), this baldy man is dare making a suggestion that "China should save less"? Go back to Princeton or Harvard or wherever you came from. Academics are really sick as hell.
And all of you cyber philosophers that come here to brag your economic knowledge because you have absolutely nothing better to do with your free time than studying, start studying at least one Asian language and culture while you're in college/ 21st century will be lead by Asian countries.
It cant be all social safety net related. Think: the Europeans have a more generous social safety net then the US. According to the safety net theory, the Europeans would be small savers - and big risk takers to boot. This aint so.
Now, Adam Smith famously said "consumption is the sole end and purpose of all production" (or something like that). Fact is, the entire economy revolves round consumption. I think theres something odd about economies that save so much. Looking across nations, esp Europe, these economies tend to be less dynamic. Also, I think a Keynesian demand creates its own supply thing holds in the long run too. Who'd bother to invest if there were no consumers? Who'd bother to work, if there was nothing to buy? And remember, it was a commercial revolution in the 1700s that got the Industrial Revolution -and sustainted economic growth- started.
How much of China's saving is voluntary,
and how much is it just the government running surpluses? Government-directed overinvestment and underconsumption -- haven't we seen that before, in the USSR?
I don't understand the fascination some people have with trying to force a country to save more or save less. A country, presumably in the long-run especially, saves whatever it thinks is best to save precisely because individuals, presumably, save optimally. When someone says someone is saving too much, or not enough, they are assuming that those people or countries are acting in an inefficient manner - which is fine - but if you think that, you'd better well support your idea.
To me this is just one country (the US) complaining about how another country not only has positive net exports (especially against the US), but has a relatively higher savings rate and therefore does not have to worry as much (relative to if they saved as little as the US did) on large levels of their capital flowing to other countries reducing their domestic investment potential. It's just the US being jealous.
"Policies aimed at increasing household consumption would clearly benefit the Chinese people." Again, that assumes that the Chinese are saving too much in relation to dynamic efficiency. Last I heard, a healthy savings and investment level lead to the benefit of an economy. So if that assumption is wrong, there goes the baby, and the bath water
How much did the United States save at a similar point in its economic development (say 1890)?
>>> Perhaps the Chinese government sees its saving policies as a form of benevolent paternalism, intended to help the Chinese people do what will make them happier in the long-run.
Yes, to make them so much happier 100 years from now. But, wait a minute... Never mind...
Quite easily actually. As China pegs its currency and saves its dollars, this puts deflationary pressure on the US which lowers returns here. As consumers of last resort, we must amass great debt to balance the situation or embrace depression. Should China panic, the peg and the dollar would fall, inflation and rates here would rise likely triggering a recession. It will probably be a long time before China feels wealthy enough not to save more though.
In other international news; the talent of France continues to flee their excessive taxation.
http://www.breitbart.com/news/2006/12/15/061215180641.fuw3ri1r.html
Chinese people understand economics way better than Americans do. This knowledge is something that Chinese people have acquired along with their long and great history. On contrast, US, which has only 200 years of baby history, is being very jealous of China becoming better and better off every year. Stupid Americans...
Also, I think a Keynesian demand creates its own supply thing holds in the long run too.
Perhaps in the sense that preference for consumption over leisure encourages people to work but you're not seriously suggesting that demand creates its own productivity growth, are you?
"Chinese people understand economics way better than Americans do."
Yeah, definitely! And dolphins can fly way better than pigeons! But pigeons are just jealous and try to prove they're better by flying everyday, while dolphins prefer not to because they don't like to show off! Thank you for your invaluable anonymous insights!
Karl -
Productivity is pro-cyclical right? Why is it so outrageous to suggest that demand would create productivity growth? Better to think it comes out of the sky - or that ridiculous concept called "capital accumulation"?
Let's agree that productivity growth is first and foremost created by innovation (technological progress or whatever). Now, what leads to innovation? I'm not suggesting it's necessarily demand-led, but why is that thought so outrageous to you?
Demographics. Demographics. Demographics.
China is in a race to get rich before it gets old. Its dependency ratio will peak at 1-to-2.6 between 2010 and 2015. But then it’s back to a little over 1-to-1.5 by 2050. That’s a pretty dramatic change. Thirty per cent of the Chinese population will be over sixty by 2050. That’s four hundred and thirty-two million people. That is why the Chinese are saving.
Source: http://www.newyorker.com/fact/content/articles/060828fa_fact
I was from China and most of my relatives are in China with low incomes. They save as much as they can because (1)there is no good medical insurance and secure retirement/ social benefit,(2)they do not/ will not trust the current or future government,(3)there are too much corruptions. Their savings are their only safety net for them and their children. I totally agree with Prof. Mankiw's point. Thanks.
"you're not seriously suggesting that demand creates its own productivity growth"
No, Karl, Im not suggesting that, Im saying that. Fundamentally, all innovation is driven by demand. Where'd you rather innovate or open shop: NYC or Alaska? Catch my drift? Similary, which environment leads to bottlenecks etc thus necessitating new productivity improvments. Now, is any coincidence that almost all economic activity occu