- The Washington Times - Saturday, June 17, 2006

America’s net national savings rate has come about as close to hitting rock bottom as arithmetically possible. In an alarming analysis — “Pander-nomics,” which appears in the current issue of the National Interest — Morgan Stanley chief economist Stephen S. Roach observes that America’s “overall savings rate” is not only a “record low,” but is also “unprecedented for any leading nation in the modern history of the world economy.”

According to the latest data crunched by Morgan Stanley, net national savings, which represents the combined savings of households, businesses and the government sector adjusted for depreciation, fell to 0.06 percent of gross domestic product (GDP) during the second half of 2005. Mr. Roach rightly characterizes this worrisome development as “an unfortunate by-product of ongoing federal budget deficits in conjunction with the worst shortfall in consumer savings since 1933.”

As America’s savings rate has plunged in recent years, the United States has been compelled to borrow increasingly large sums of money from abroad to finance its business investment and its overconsumption. These capital inflows, given minuscule domestic savings, are indispensable to the growth of the U.S. economy. The financial inflows are reflected in America’s soaring financial-account surpluses, which have exceeded $2.4 trillion over the past four years. These financial-account surpluses are essentially the mirror images of current-account deficits, whose biggest component by far (91 percent in 2005) is the trade deficit. “The United States has the largest external deficit in the history of the world,” Mr. Roach matter-of-factly observes.

Given America’s dependence upon the inflow of foreign savings, Mr. Roach worries that several protectionist bills, which are working their way through Congress, could provide major disincentives to foreign investors who provide America with this indispensable financial capital. The “currency-equalization tariff” sponsored Democratic Sen. Chuck Schumer and Republican Sen. Lindsey Graham would levy a 27.5 percent tariff on all Chinese imports into the United States in order to compensate for the Chinese-manipulated undervaluation of its currency. Although Messrs. Schumer and Graham told Mr. Roach in Beijing that they had 80 votes for their tariff bill, Mr. Roach believes it is more likely that the Senate will first consider “a less contentious but very hard-hitting” bill, the U.S. Trade Enhancement Act of 2006 (USTEA). The bill is sponsored by Republican Sen. Charles Grassley and Democratic Sen. Max Baucus, respectively the chairman and ranking member of the Senate Finance Committee.

USTEA, Mr. Roach explains, would seek to “correct for trade imbalances that are created or maintained when a country intervenes in foreign exchange markets in an effort to prevent its currency from adjusting to market forces.” Though purportedly not aimed explicitly at China, in contrast to the Schumer-Graham tariff, China would become USTEA’s principal target, given its $202 billion trade surplus with the United States last year. Acknowledging that the United States has legitimate trade disputes with China, including its misaligned currency, Mr. Roach persuasively argues that both the Schumer-Graham tariff and USTEA would make a serious mistake in their efforts to isolate the “China problem” from the macroeconomic imbalances brought about by America’s failure to save. After all, the trade deficit with China represents little more than 25 percent of America’s total trade deficit. In the absence of addressing its savings problem, passing anti-China protectionist legislation will merely shift the Chinese portion of the trade deficit to other countries. Mr. Roach calls this the “water-balloon effect.”

Another protectionist bill — the Foreign Investment and National Security Act of 2006, which is sponsored by Senate Banking Committee Chairman Richard Shelby — would add “new sources of friction” to cross-border mergers and acquisitions transactions. Through foreign direct investment, whereby foreign firms acquire ownership and operating control of U.S.-based business assets, mergers and acquisitions represent an important source of foreign financial capital coming to the United States.

While we are sympathetic to legitimate national-security concerns, including the Dubai Ports World dispute, we nonetheless agree with Mr. Roach’s assertion that “politically driven constraints on trade and capital flows run very much against the grain of the foreign-funding imperatives of a savings-short U.S. economy.” Limitations placed on foreign direct investment could encourage “increasingly nervous” foreign investors to demand financing concessions, such as a very burdensome increase in inflation-adjusted interest rates, as the price for providing the foreign savings that the American economy desperately needs.

The protectionist political fix is at odds with the necessary macroeconomic fix. Implementing the political fix — hence, the title “Pander-nomics” — could “spell serious trouble for the U.S. economy.” Again, by failing to address the root cause of America’s external imbalance — an unprecedented shortfall in domestic savings — Washington could be blindsided by the unintended consequences of the water-balloon effect,? he adds. Mr. Roach is right: This problem is made in America.


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