Saving and Investment: Global Economy's Marshmallow Test

Hindustan Times (New Delhi, India), January 28, 2016 | Go to article overview

Saving and Investment: Global Economy's Marshmallow Test


New York, Jan. 28 -- The world economy is experiencing a turbulent start to 2016. Stock markets are plummeting; emerging economies are reeling in response to the sharp decline in commodities prices; refugee inflows are further destabilising Europe; China's growth has slowed markedly in response to a capital-flow reversal and an overvalued currency; and the US is in political paralysis. A few central bankers struggle to keep the world economy upright.

To escape this mess, four principles should guide the way.

First, global economic progress depends on high global saving and investment. Second, saving and investment flows should be viewed as global, not national. Third, full employment depends on high investment rates that match high saving rates. Fourth, high private investments by business depend on high public investments in infrastructure and human capital. Let's consider each.

First, our global goal should be economic progress, meaning better living conditions worldwide. Indeed, that goal has been enshrined in the new Sustainable Development Goals adopted last September by all 193 members of the United Nations. Progress depends on a high rate of global investment -- building the skills, technology, and physical capital stock to propel standards of living higher.

In economic development, as in life, there's no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards.

High investment rates in turn depend on high saving rates. A famous psychological experiment found that young children who could resist the immediate temptation to eat a marshmallow, and thereby gain two marshmallows in the future, were likelier to thrive as adults than those who couldn't. Likewise, societies that defer instant consumption in order to save and invest for the future will enjoy higher future incomes and greater retirement security. (When American economists advise China to boost consumption and cut saving, they are merely peddling the bad habits of American culture, which saves and invests far too little for America's future.)

Second, saving and investment flows are global. A country such as China, with a high saving rate that exceeds local investment needs, can support investment in other parts of the world that save less, notably low-income Africa and Asia. China's population is aging rapidly, and Chinese households are saving for retirement. The Chinese know that their household financial assets, rather than numerous children or government social security, will be the main source of their financial security.

Low-income Africa and Asia, on the other hand, are both capital-poor and very young. They can borrow from China's high savers to finance a massive and rapid build-up of education, skills, and infrastructure to underpin their own future economic prosperity.

Third, a high global saving rate does not automatically translate into a high investment rate; unless properly directed, it can cause underspending and unemployment instead. Money put into banks and other financial intermediaries (such as pension and insurance funds) can finance productive activities or short-term speculation (for example, consumer loans and real estate). Great bankers of the past like J.

P. Morgan built industries like rail and steel. Today's money managers, by contrast, tend to resemble gamblers or even fraudsters like Charles Ponzi.

Fourth, today's investments with high social returns - such as low-carbon energy, smart power grids for cities, and information-based health systems - depend on public-private partnerships, in which public investment and public policies help to spur private investment. …

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