In general, I read Michael Pettis, Brad Setser and Matthew Klein and am amazed by what I learn. They are experts in the best sense of the word: inquisitive, open to argument and very effective at presenting complex ideas. Based on recent posts (Klein, Setser) and an old post (Pettis), I see a gap in the analytic approach being used. (NB: I was unable to watch the Geoeconomics plenary yesterday, so this post is not informed by that discussion. Nor have I read Trade Wars are Class Wars – but only because my ‘must read’ list is too long.)
Both Pettis and Klein are explicit that in the context of endogenous money their analytic framework is based on drawing a distinction between an economy with slack and an economy without slack (or at full employment). And it is because of this distinction that “One country’s trade deficit is another’s excess production (or under-consumption/under-investment). There is no financial system capable of removing this real resource constraint.”
What I think is missing from this analytic picture is Schumpeterian growth. (Which BTW was also missing from Keynes and as a result Business Cycles was Schumpeter’s response the General Theory IIRC.) The theory of Schumpeterian growth starts from bank credit. Creative destruction can take place because the elastic flow of bank credit very fluidly and continuously redirects the flow of the economy’s resources into innovative activity that is thus enabled by the system of financing to challenge and then ‘destroy’ incumbent firms. It is essential to this theory that this finance be a monetary, bank-based activity because that is what allows a fluid, unobserved shift in the price system away from dying firms and towards innovative firms. It is bank finance that ensures that we do not notice how easy it is for consumers to choose the better product simply because its there. In Schumpeter’s world that product is there, because some banker made a decision to finance it – and to facilitate the destruction of its competitors.
The problem with the slack/no-slack framework for understanding the economy is that it misses the whole point of the modern economy, which is not full employment but creative destruction and the continuous creation of economic slack due to the continuous changing of what it means to be at full employment. From a Schumpeterian point of view ‘full employment’ is a static and somewhat bewildering concept, because in fact if the economy is doing what it should be doing, then the ‘full employment’ boundary is always dynamically changing.
Thus, a competing explanation for the savings glut is the death of Schumpeterian growth. Our financial system has been so dramatically reformed that it no longer is very effective at financing creative destruction, but instead is geared towards financing incumbent firms. In this environment there is no impetus for firms to invest; the goal instead is for firms to entrench the ‘moats’ around their market power. Thus, the ‘corporate savings glut’ – which is also necessarily a corporate investment famine – accompanied the ‘global savings glut.’ It is this fact that makes ‘savings’ as a causal driver of the contemporary world’s dynamics open to significant question.
An alternate narrative to explain the same facts is that financial reform has had the effect of promoting financialization and discouraging productive investment. What we are experiencing is in fact an investment famine due to the fundamental dysfunction of our financial system. The focus on the savings glut as a causal factor is therefore misleading – because in fact the savings glut exists, because we have broken our financial system.
In practice, most likely there is some truth to both causal narratives. But no one should be surprised when a causal narrative that appears to have convincing evidence is challenged by an alternate causal narrative. This duality exists at the very heart of economic analysis (cf Vincent Grossman-Wirth).
2 thoughts on “The savings glut or the death of Schumpeterian growth”
Most interesting, Carolyn. I think you’re onto something very important.
Much as I enjoy Michael Pettis, it’s long seemed to me his “model” is deterministic to the point where it effectively denies agency to external deficit countries. Like you, I think the main avenue through which that agency expresses itself is bank lending. Particularly when combined with very large macro changes (like the convergence that surrounded the initial years of the Euro), countries like Spain weren’t in my view just passive accident victims but rather active collaborators in creating the external imbalances. It’s always, in other words, a pas de deux. Doesn’t mean their influence is equal, of course, but nor is it 0:100.
Anyway, if I’ve read you rightly, it seems you see things at least somewhat similarly.
Your papers and articles always give me a new insight. I’ve never liked the phrase “savings glut”, which implies that because the East Asian economies are choosing to save, they now have “too much” savings. But saving is a residual, and global saving is always equal to global investment expenditure. Increased savings in one country must be matched by either increased investment expenditure or dissaving elsewhere in the global economy. At present, East Asian saving is matched by US debt (and to an extent UK and other European debt). The real issue is lack of investment expenditure – as you call it, a “corporate investment famine” – which, as you state, is because the financial system is failing to direct funding to productive investment. Hence, one thing I take from this article that a more precise phrase to describe this dynamic in the global economy is “corporate investment famine” rather than “savings glut”. Would you agree that this is probably a more accurate term, or am I just being pedantic?