“Savings Glut” Fables and International Trade Theory: An Autopsy

Lance Taylor in INET Economics:

The structure of the US economy began to shift markedly 40 or 50 years ago. The profit share of income grew across business cycles at 0.4% per year, or by more than 20% (that is, by eight percentage points) over five decades. Driven by rising profits, the size distribution of income shifted strongly toward households in the top one percent. The economy became increasingly dualistic, with big employment increases in low wage/low productivity sectors (Taylor with Ömer, 2020).

Foreign trade was part of this transformation. On the world stage Japan, Germany, and more recently, China exported far more than they import, creating gluts of traded goods and services. They accordingly built up stocks of “saving” which took the form of newly acquired liabilities (bonds and even money) from the rest of the world. For the USA, the process worked in reverse. The economy became an international sump with imports exceeding exports, financed by issuing liabilities such as Treasury bonds or dissaving, thus turning the country into a large net debtor.

Two decades after the process started, former Federal Reserve Governor Ben Bernanke was a canary in the world trade coal mine when he announced the presence of a “global saving glut.” The glut had already led to the 1985 Plaza Accord to devalue the dollar. By the turn of this century it was scarcely a surprise.

Bernanke (2015) is a recent reassessment, one of several shambolic mainstream explanations for the foreign trade situation. A new INET working paper (Taylor, 2020) describes their incoherence, employing Keynesian open economy macroeconomics.

More here.