Savings Gluts And Investment Droughts
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Global savings glut has not led to a corresponding investment boom, raising questions about why surplus economies’ exported capital is consumed rather than invested by deficit economies.
Martin Sandbu, "Savings Gluts And Investment Droughts,"Financial Times, June 18, 2020, https://www.ft.com/content/6360c193-2fa8-488a-b8d3-f2fec3f203a2
“..economists have picked up on one of the key puzzles thrown up by Klein and Pettis’s argument: if there is a global savings glut, how come there has not been a global investment boom to absorb the greater desire for saving?... On a global level saving and investment must balance. So it cannot be that the world as a whole invests less than it saves. To be precise, then, the question is why an increase in net saving exported as capital from surplus economies has not been matched by higher investment in deficit economies but instead by lower domestic saving and higher consumption. To simplify, why has the exported capital from “savings glut” countries been consumed rather than invested by the importers? (This way of stating the problem, by the way, suggests it is too one-sided to condemn surplus countries exclusively. When economies run up current account deficits while their rates of public and private investment drop, this must also reflect their own internal dynamics. I also disagree that capital exports from surplus economies have falling employment in deficit countries as the “inevitable consequence”, as Klein and Pettis suggest. The only advanced economy that saw consistently falling employment — outside of recessions — in the period in which global macroeconomic asymmetries grew was the US, and that had much to do with its own specific pathologies.)… a number of possible mechanisms to explain the failure of investment to respond to increased savings. One is that weak demand can hold back investment when macroeconomic policy fails to unlodge pessimistic expectations. (We need not accept that central banks are unable to do this to believe in this mechanism, just that they are unwilling to stimulate enough.)Another is a “financial resource curse” through which net capital inflows into technologically leading economies such as the US shift their productive structure towards non-traded activities that may be less investment-intensive. This would be a specific case of the broader problem that beyond a certain point, financial deepening is bad for growth because it allocates capital to less productive uses. The third possible mechanism is that investment incentives are weakened by more market concentration which, in turn, may have been encouraged by low interest rates….”
Sandbu on the key question arising from Pettis’ new book
Ed Comment:Oy! Sandbu (and his new book) is a particularly virulent stain of the misguided macro economists I was describing in the last email. The last Rognlie paper confirmed a large piece of the puzzle (which I have known for years). Neither savers nor investor are very sensitive to interest rates—the price that equilibrates savings. In large part, that’s because the marginal cost of capital is (constrained) equity not (unconstrained) debt. If not interest rates, then what constrains investment? Risk and expected return, especially since non-financial investors are overwhelmingly undiversified. What is needed to assess and manage risk? Properly trained talent. Good ideas can and do become money-losing ideas if you lack the talent to design, implement, and supervise them. So why don’t investors just increase the capital per worker in underdeveloped countries?Because countries are underdeveloped BECAUSE they lack the talent needed to make those investments work. Or said differently the talent is working on projects with higher returns, often project that don’t require much debt (e.g., IT).A guy like Sandbu doesn’t want to see that, so he can’t see it. And again, he only sees an out-of-date 2-factor model—labor and capital without talent.