we have a savings glut – it’s on the demand side for capital, not the supply side. The savings rate in the US really hasn’t moved all that much, but there are fewer profitable places to invest the same amount of savings, so to clear the market, rates fall in the competition for yield.
Again, the point is that normal labor market forces gradually reallocate the labor force from higher-labor-productivity-growth industries to lower-labor-productivity growth sectors.
The NCH sectors are exactly those places, which for whatever reason, we can observe very low rates of labor productivity growth over time, and the reason is because they are dependent on human factors which cannot be easily sped up to any significant degree.
So, we have a lot of labor now working in sectors where the reduction in labor (or increase in output) that you get from an additional unit of capital is low. I can see where that would make the return on capital low. I think you still need to tell a story to explain why savers are willing to accept those low returns. And you have to explain why saving and investment does not gravitate toward India and other places where the opportunities to produce much more with less labor ought to still be there.
Finally, even if the story holds up, it is a story of supply-side stagnation, is it not? I suppose that you can say that with low investment you get a Keynesian demand-side shortfall, but that is just hand-waving, right? Or have I been into PSST so long that all Keynesian macro seems like hand-waving to me?
Then you get into waves of innovation, extensive, intensive, followed by lapses where current innovations have been exhausted and next innovations haven’t been developed and perfected enough to absorb large scale investment and technology based Kondratieff cycles.
Capital flows to where it’s owners think they can get an actual return. Places perceived to have dubious institutions or social structure don’t attract capital.
In other words, savers don’t search the whole wide world for the best net return, they search the parts of the world where they feel reasonably comfortable and which they can practically reach.
It is thus perfectly possible to have an excess of capital in the first world and a great shortage of it in the developing world.
Note too that while we often talk about hazards in the destination for the capital, there are source hazards as well. For example a US investor who fails to disclose signing authority on an ordinary bank account abroad can face horrendous fines – simply for failure to file a form. It’s a kind of financial repression.
The biggest savings glut we have is in labor. Plenty of it is being saved but unfortunaely labor saved is labor unused.
The reason capital doesn’t flow to India or anywhere else is because of low IQ, and being a mess in general. Lots of people tried, but it doesn’t work. China was the last frontier of industrialization. You may not be able to write this in an academic paper.
This is a really lazy use of HBD arguments. There are more than enough smart people in India, it’s a country of 1.3 billion. The reason investment in India is low is because of underdeveloped capital markets and insufficient legal protections. Look at what happened to Enron when it built a large natural gas plant in India, the state power company refused to honor its contracts. That’s the basic problem, not IQ.
File that under being a mess in general.
The modal saver cannot choose whether or not to “accept” a low return. He is (for various good reasons) underinsured against a drop in the value of his human capital (“job loss”) and must therefore be somewhat risk-averse. His savings are not large enough to diversify directly (transaction costs would murder him if he tried to put $100 here and $100 there). So he must invest in an vehicle which (in theory at least) diversifies investments on his behalf. That means chiefly bank accounts or mutual funds. Banks are supposed to aggregate funds from savers and invest them (lend them out). In theory mutual funds act in a similar fashion.
However, at this time the crony captalists and their government have decided to pay modal savers nothing. There are various mechanisms, but that is the goal and result. Banks get all their funds from the Federal Reserve and various government-directed entities. The Fed’s ZIRP means that rates banks offer to savers are also (within epsilon of) zero. Any saver who doesn’t want to “accept a low return” is welcome to pound sand. As for mutual funds, the public markets are completely rigged and all “good investments” are reserved for insiders and big players. One can, of course, gamble on swirls in the public markets’ froth, but moderately risk-averse savers cannot refuse to “accept low returns” there.
Savers can’t even ask for returns on government bonds. The Fed has that market rigged: it (sometimes acting through agents) is the marginal buyer in every auction and simply prints money to purchase any bonds which would otherwise have to return much more than zero. Many of the other bids come from entities like banks and insurance companies which must buy bonds to satisfy regulations, so they cannot take their money anywhere else and modal savers who ask for bonds are told to “take it or leave it” on returns.
Some folks argue that the Fed, the ECB, etc. only control a small portion of the funds in the markets so their actions can’t be responsible for low returns. In today’s crony-capitalist economy, stiff “regulation” of other players ensures that none of them will rock the boat and the Fed and friends need only maintain their role as the marginal “investor” (really, marginal debt-monetizer) to keep rates & returns low across the map.
Another problem has to do with the way today’s players exclude new entrants. It is effectively illegal for anyone to offer modal savers a better deal than incumbents do. No one is allowed to start a bank or investment company unless he agrees to join the cartel, which makes the effort pointless. Modal savers can’t even access the outsized profits of incumbents like Goldman Sachs by buying shares in them thanks to principal-agent problems.
The first domino does seem to be a lack of technologies and/or sustainable patterns available for growth, unless we are talking about something like Baby Boomers wanting more safe assets.
Why abandon PSST now? Savers don’t “accept those low returns” because the only alternative is (for someone) to *develop* new investments, i.e. new patterns of specialization and trade.
You said:
To the first point:
1. I’m a bit confused by what you mean by ‘accept’. I would think that savers are price-takers, not price-makers. Low interest rates are like high prices for bonds. Why are people ‘willing to accept’ high prices for anything? Because they either pay high prices or do without. If you want to increase your marginal savings, you have to accept the market spot rate.
2. The fundamental question – that PSST must address as well – is where do savings come from, and what motivates people to save.
There is the basic time-preference story in which there is a kind of fixed, personality-based preference for the trade-off between current and future consumption. In this story, higher real rates would incentivize deferment of current consumption and more current savings in exchange for more future consumption.
This story makes more sense with your use of ‘accept’, because there in an implicit negative-feedback that helps keeps rates high. “If rates are too low, I don’t have much incentive to save, and so I won’t ‘accept’ lower present consumption, so I’ll consume instead, which lowers the supply of savings supplied relative to demand, which keeps rates high.”
But there is the other ‘consumption smoothing’ story in which people save and make decisions to adjust other behaviors trying to stabilize their lifestyle over the course of their retirements, when they gradually wind down their accumulated capital to compensate for lack of income.
In this story, according to the basic solution to the smoothing problem, lower rates can mean more, not less demand for saving, which is something that Michael Pettis constantly reemphasizes regarding the nature of the Chinese economy. This phenomenon is exacerbated by the kinds of risks people can take at different times in their lives to optimize their results, and if one is planning for smooth consumption near one’s year of peak income closest to retirement, then one has to ‘accept’ the low yields that accompany low-risk investments. Because of consumption smoothing, the interest rate is a ‘price’ like no other.
Actually, I take the ‘Greg Mankiw’ view of things that both of these stories are ‘true’, but for different people, and that society is composed of a bifurcated mix of ‘spenders and savers’ who respond to prevailing interest rates in opposite ways, and that the distribution is probably so bimodal that any analysis using an aggregative measure like a mean or median is likely to go astray.
It’s also worth pointing out that under this ‘synthesis’ approach, it is by no means clear a priori whether the savings supply curve points up or down at any particular time. For instance, it’s completely plausible that it could have pointed up before the GFC, but after people discovered that they were not as rich as they thought they were, they realized they had to make up for lost time, and now it points down.
You can add other stories too, like bequest motives, or perhaps the distinct and class-specific investment behavioral tendencies of the ultra-rich.
That all being said, I think the saving as consumption-smoothing-for-retirement story is the dominant contributing factor, which implies that these people are price-takers, they will ‘accept’ whatever rates they can get, the supply of savings is relatively price inelastic to the real interest rate, and that the supply curve may even point upwards for the people who own most of the capital and are doing most of the saving.
I’d like to see a rigorous empirical inquiry into this question, but my hunch is based on the anecdotal and personal experience of myself and many of my friends and family. We’re not much interested in using credit to consumer more, we are trying to find a low-to-moderate-risk way to save for future consumption, and lower real interest rates makes that harder not easier, and so we find ourselves saving more and desperately seeking yield. But all that means is that we are all competing with each other for the same set of investment opportunities, which just pushes those yields even further downward.
To the second point, you ask, “Why isn’t all the savings going to, say, India?”
The unfortunate answer is that the additional arbitrage opportunities aren’t there, which is why some people are already talking about ‘peak globalization’. It doesn’t pay to try and take advantage of lower Indian labor costs for more manufacturing capacity, because labor-productivity is already so high where it is already occurring and continuing to grow, and expected cost-reduction gains in reducing wages aren’t really that impressive.
In effect, China won the race to be the world’s workshop and capture a lot of global manufacturing market share at a critical moment in technological history when the total labor force employed in the manufacturing sector peaked and began to decline, just like in agriculture.
The ‘Economic Geography’ and industrial hubs they have set up there are already so well integrated and entrenched, and already so easily and cheaply scalable to meet any increase in demand, and also increasingly automated, that it doesn’t make much sense to look elsewhere. A factory that is mostly robots could be built anywhere on Earth, and if global shipping is trivially cheap, you might as well build it in an existing hub.
Remember that like agriculture, manufacturing also hits certain input bottlenecks that are very difficult or expensive to overcome when they are hit. With agriculture, it is the availability of arable land. Hybrids and chemicals and irrigation can increase yields and expand the use of marginal land, but these improvement eventually peter out and stagnate too, and you run into the hard wall.
With manufacturing, the hard wall appears to be related to energy. Consider one data point from British Petroleum, which is in the ten years from 2003 to 2013, despite all the new fracking and unconventional-petroleum-source activity and limited OPEC solidarity, and despite a good amount of global economic growth and increased demand from newly-affluent people in the developing world, total global production of oil only increased by a measly 12%, about 1% a year.
Coal and Gas have grown faster, but they are inadequate substitutes for petroleum for many uses, such as the chemical and plastics industries, or transportation fuel, for which they are no comparably affordable alternative inputs at present.
Put it all together, and the image should be of a few factories in China which can pump out all the socks and zippers and cement and iPhones that the whole world may need, at prices that are competitive with any alternative place, because the wage contribution is decreasing, and the prices are already mainly composed of the costs of capital and the commodity inputs.
The bottom line is that the availability of labor, or the rate of their wages (so long as they aren’t at first-world high levels), is no longer the bottleneck impeding the expansion of production at lower prices, which it used to be in the past.
Putting it all together, there is now little obviously profitable use for additional capital investments, because agriculture and manufacturing have all the need to hit hard-to-overcome walls, and employ a steadily decreasing portion of the labor force. At such, the demand for capital has declined, and increases in labor productivity have declined because people are increasingly employed in non-augmentable stagnant-productivity services, which has caused real growth to decline. The demand for savings in the face of low real growth has probably gone up slightly (that consumption-smoothing story above), and combined with a lower demand for capital, results in low real interest rates.
And those low real interest rates have caused reactive central banks to lower nominal interest rates to zero, but with no effect, which they perceive as a great mystery. That’s because while they think they are the dog wagging the tail, whereas in fact they are the tail being wagged by the dog of fundamental changes in the real underlying economy which are – ahem – quite under-recognized and under-appreciated. At least, so far.