Is Piketty’s ‘Second Law of Capitalism’ fundamental?
Per Krusell, Tony Smith, 1 June 2014
Thomas Piketty’s new book has been widely praised for its empirical contribution, but his prediction of rising inequality rests on economic theory. This column argues that Piketty’s pessimistic forecast is based on an extreme – and unrealistic – assumption about households’ saving behaviour. According to standard theory, the wealth–income ratio would increase only modestly as growth falls, so declining growth would not be a powerful force for generating high inequality.
Over the last several weeks, we have thought quite a bit about the main message in Thomas Piketty’s now world-famous book, Capital in the Twenty-First Century (Piketty 2014). We have also discussed it at great length with colleagues.
Topics: Poverty and income inequality
Tags: growth, Inequality, saving, savings, wealth
Why are savings so high among the young in urban China?
Mark R. Rosenzweig, Junsen Zhang, 21 May 2014
Household savings in China are high by international standards, and the young save as much or more than the middle-aged – a fact at odds with the standard life-cycle savings model. This column argues that neither old-age support by the middle-aged nor the one-child policy can satisfactorily explain this phenomenon. Rather, currently high housing costs and the prevalence of inter-generational shared housing are key reasons for the higher savings rates of the urban young in China.
A well-known phenomenon in contemporary China is the high personal savings rates of households compared with those in developed countries and many low-income countries. A less-studied aspect of this is the elevated savings rates of the young relative to the middle-aged, first shown by Chamon and Prasad (2010) based on urban household data covering the years 1986–2005 for ten provinces.
Topics: Frontiers of economic research, Global economy
Tags: China, family, housing, one-child policy, savings
Why Asian firms hold cash
Charles Yuji Horioka, Akiko Terada-Hagiwara, 25 January 2014
Corporate saving has sharply increased over the last two decades, but there has been relatively little research on its determinants. This column presents recent work that estimates Asian firms’ cash flow sensitivity of cash. The impact of cash flow on the increase in firms’ cash holdings is positive and statistically significant, and larger and more highly significant for smaller firms. Since smaller firms are more likely to be financially constrained, these results suggest that Asian firms – especially smaller ones – save more when their cash flow increases in order to finance future investments
In many, if not most, economies, sharp declines in household saving rates have been offset by sharp increases in corporate saving rates for the past two decades (see, for example, Karabarbounis and Neiman 2012). Even so, relatively little research has been done on the determinants of corporate saving.
Topics: Financial markets
Tags: Asia, borrowing constraints, corporate saving, financial frictions, investment, saving, savings
China’s one-child policy and saving puzzle
Taha Choukhmane, Nicolas Coeurdacier , Keyu Jin, 22 January 2014
Since China is growing rapidly, one might expect Chinese households to borrow against their future income. In fact, Chinese households save 30.5% of their income – compared to about 5% in OECD countries. This column discusses recent research linking the Chinese saving puzzle to China’s one-child policy. The savings rate of households with twins is about 6–7 percentage points lower than that of households with an only child. Demographic factors can explain an estimated 35–45% of the 20 percentage-point rise in China’s household saving rate between 1983 and 2011.
The Chinese household saving rate is high and has been rising sharply. Between 1983 and 2011, the average urban household saving rate rose by about 20 percentage points – from 10.4% to a staggeringly high level of 30.5%. This stands in sharp contrast with the low household savings rate in developed countries (about 5% in OECD economies).
Topics: Education, Gender, Microeconomic regulation
Tags: China, demographics, fertility, one-child policy, savings
Save more to improve infrastructure in Latin America and the Caribbean
Eduardo Cavallo, 3 April 2013
Latin America and the Caribbean have less infrastructure than the rest of the world. What they have is also of much poorer quality. This column argues that to reap the rewards of good infrastructure, Latin American and Caribbean countries must increase both investment and saving over the long-term by creating institutional capacity, strengthening the rule of law, and building stable macroeconomic-policy frameworks. It won’t be easy.
Saving and investment, like the chicken and the egg, involve circular causality. But regardless of causality, there is no doubt that Latin America and the Caribbean need more of both.
That the region has an infrastructure problem hardly requires an explanation:
Tags: Caribbean, investment, Latin America, savings
Oil exporters’ dilemma: How much to save and how much to invest
Reda Cherif, Fuad Hasanov, 10 November 2012
Policymakers in many commodity-exporting countries confront the question of how much to consume, save, and invest out of revenues from commodity exports. This column says policy should focus on improving productivity in the tradeable sector and reducing volatility through diversifying this sector. This would lower precautionary saving needs, increase investment, raise consumption, and improve welfare.
Policymakers in many commodity-exporting countries confront the question of how much to consume, save, and invest out of revenues from commodity exports (see van der Ploeg and Venables 2008). In the face of highly volatile commodity revenues (especially from oil), governments have to balance several objectives at the same time.
Topics: Energy, Macroeconomic policy
Tags: investment, oil exports, savings
Precautionary savings in the Great Recession
Ashoka Mody, Damiano Sandri, Franziska Ohnsorge, 22 February 2012
Uncertainty rose sharply during the Great Recession, as did saving rates. This column shows that these two developments were related. Using a panel of OECD countries, it estimates that at least two-fifths of the increase in households’ saving rates between 2007 and 2009 was due to increased uncertainty about labour-income prospects. It adds that restoring higher levels of consumption and aggregate demand will require employment-friendly social insurance and reduced policy-induced uncertainty.
A key feature of the Great Recession was a striking increase in uncertainty. The volatility of real GDP increased (left chart in Figure 1) and, at the same time, the higher unemployment rate raised the risks of job losses, longer unemployment durations, and, hence, of severe reductions in income (see Carroll 1992 for a similar interpretation of unemployment rates).
Topics: Macroeconomic policy
Tags: crises, OECD, savings