Monday, December 28, 2009

Does Sustainable Growth Depend On A Low Savings Rate?

Marketwatch published a really strange column by Jeffrey Korzenik. He claims that a sustainable recovery depends on a relatively high level of female participation in the work force. Not because the labor supply is needed (which perhaps would be a more valid argument), but because it lowers savings and because lower savings is supposed to be essential for a sustainable recovery.

The argument is that given a certain level of labor supply, a more even distribution of work outside the home between the sexes will lower savings. The reason for this is that in one income households, the probability is higher that the income will go lost because of unemployment than in two income households. This means that one income households will have stronger reasons to save for "rainy days" than two income households.

This argument is more or less true, though the effect is probably not as big as he thinks because two income families have a higher probability of losing half of their paychecks. Other factors, mainly Fed monetary policy play a greater role in lowering the savings rate.

His second argument is however completely false. A sustainable recovery does not depend on lower savings. Quite to the contrary, a sustainable recovery requires higher savings. Higher savings would enable higher investments (or a lower trade deficit), something which would help expand productive capacity and increase long term growth.

If lower savings had really been beneficial, we would have seen weak growth in China and a big increase in U.S. growth from the 1960s to the 2000s. In reality, China's economy is booming while growth slowed sharply in the U.S. from the 1960s to the 2000s.