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Big Deficits or Low Savings, but Not Both
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20641 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
10 / 1992 |
1,690 Words |
| Author
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Alan Reynolds
Alan Reynolds is director of economic research at the Hudson
Institute, Indianapolis, Indiana. |
The U.S. obsession with Japan's alleged industrial superiority has lost all contact with reality. By mid-1992, as U.S. politicians continued to debate how to catch up with Pan, industrial production in Japan was nearly 9 percent lower than a year before. Japanese land prices were down by a third, and its stock market had fallen by almost 60 percent. Even Japan's infamous "competitiveness" is hard to find. While U.S. exports nearly doubled in real terms from 1986 to 1992, Japan's exports merely inched up by less than 3 percent a year.
Arthur Laffer provides us with excellent analytical tools with which to examine Japan's future economic prospects. But rigorously adhering to this analytical framework does not necessarily yield his predictions. He rightly criticizes the Keynesian concept of savings as income not spent, for example, as opposed to the classical concept of savings as an increase in wealth. Yet he reverts to the Keynesian view when attributing much of Japan's economic growth to a high savings rate, even while noting that an almost equally high savings rate did not produce comparable growth in Switzerland.
Laffer likewise debunks the idea that any nation's investments have to be limited to its savings, since economies with new profit opportunities can attract savings from less-promising economies. Yet one of the main reasons he argues that Japan's economy will slow is that a falling household savings rate will be inadequate to finance much domestic investment. If future savings could be more profitably invested in Japan than elsewhere, though, the Japanese could simply repatriate some of their foreign investments, while also enticing foreigners to invest in Japan. It is investment opportunities that generate and attract savings, not the other way around. More savings in any particular city or country does not automatically mean more investments in the same location, since money knows no borders. The Paris-based Organization of Economic Cooperation and Development estimates a that the return on business capital in Japan will remain far below that in the United States for at least several years. If so, larger savings in Japan surely would not be invested there. And smaller savings matched by reduced foreign investment need not reduce the savings left over for domestic investment.
Will Japan's savings rate fall?
In any case, why should we assume that Japan's savings rate will fall? Here, Laffer seems to abandon one of his main lessons. After explaining that a big increase in the value of accumulated wealth will naturally reduce
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