A recent blog posting on Cafe Hayek, from the chair of the George Mason University (GMU) Economics Department, asserts that it does not matter whether those who live in the U.S. are saving enough money as long as foreign capital inflows are sufficient to allow U.S. businesses to borrow and expand.
I could not disagree more.
True, to the business looking to expand it does not matter whether the money they need to borrow is coming from the U.S. or China. Either one will work just fine. But that is only one of several reasons I should worry about whether or not the savings rate in the U.S. is low. Let me give you another very concrete reason — one that money from China will not solve. If many people in the U.S. are short of funds upon retirement they will pressure the federal government, through organizations such as the AARP, to pass new taxes and increase current taxes designed to transfer wealth from those who have saved responsibly to those who have not. Older Americans vote in large numbers, and if this historic voting pattern persists who could doubt they will be successful in their petitions. A strict economic analysis of capital flows is by itself not capable of capturing the political implications of this phenomenon.
Even in this world of global capital flows, it still matters who is saving and who is not. The political power of countries as well as the domestic policies they will pursue depends in no small measure on it.