Samuelson's One-Sided Scissors

Robert Samuelson, in his Washington Post column today, excused the U.S. from any responsibility for the current account deficit. He says:

Washington Post, The Global Savings Glut, By Robert J. Samuelson, April 27, 2005

We are all taught that saving is good … But what if the problem of today's global economy is that people elsewhere … are saving too much and spending too little? Former Princeton University economist Ben Bernanke argues that this is precisely the case. He calls it "the global savings glut."

… Bernanke's global savings glut is just such a notion. It helps explain (a) the huge U.S. trade deficits; (b) the weakness of the current economic recovery (now 3 1/2 years old); and (c) the difficulty of doing anything about (a) and (b).

… the flow of surplus global savings to the United States has caused Americans to spend more and save less. In recent speeches, Bernanke … has shown how. In the 1990s, some of the savings surplus went into the hot U.S. stock market, boosting prices further. Feeling wealthier -- because their stock portfolios had fattened -- Americans decided they could save less and shop more.

…Americans' low saving and high consumption offset foreigners' high saving and low consumption. The huge U.S. trade deficits result …

… Foreigners may tire of investing in the United States; the dollar may drop on foreign exchange markets, as it already has against some currencies. But if countries with savings surpluses didn't consume or invest more at home, world growth would suffer. Or the U.S. recovery could falter. Trade deficits certainly help explain its precariousness. There's a constant drag on job creation, as rising imports divert production abroad.

Like others, Bernanke warns that these trade imbalances -- our huge deficits, their huge surpluses -- seem dangerous. His contribution is to show that their main causes lie outside the United States. To say a country has surplus saving is simply another way of saying that it lacks good investment opportunities at home …

Whatever the problems, Americans can't fix them. The common view that our budget deficits (which Bernanke correctly thinks should be reduced) cause our trade deficits is simply wrong. The two are only loosely connected. That unconventional conclusion is also inconvenient, because it measures our powerlessness.

The argument is that high foreign saving caused low U.S. saving. Quoting Samuelson “… the flow of surplus global savings to the United States has caused Americans to spend more and save less.” High foreign saving caused low domestic saving? But isn’t it equally logical (which is to say it isn't logical at all) to argue the reverse, that the low saving rate, particularly public saving (the deficit) in the U.S. caused funds to flow in from abroad? Would that then mean, under Samuelson's definition, that the main cause lies within the U.S.? Does that mean, playing off Samuelson't conclusion, that whatever the problems, America can fix them?

The supply of funds is not enough. There must be a demand as well. As Marshall reminded us long ago in a slightly different context, “We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper ...”

Yes, the high foreign saving rate played a role, but that is only one side of the scissors. The U.S. public and private saving rates played a role as well.