Chinese Underconsumption Did Not Cause The Recession

One of the more commonly cited reasons for the Great Recession has been an unexpectedly high savings rate among the Asian countries. The logic implies that by over-saving the Asians financed cheap consumption in the rest of the world. Frankly, it never made much sense to me and now the some Asian officials are pushing back.

From the WSJ:

“Asians financed cheap consumption in the rest of the world, this is what they say. This is something I just cannot understand,” Supachai Panitchpakdi, the head of the United Nations Conference on Trade and Development, and a former Thai government official, told a conference Friday. “This is another theory we have to debunk. Asians have not been over-saving and under-consuming.”

The real difference between Asians and Americans, Mr. Supachai argued, is that American consumers borrowed heavily to finance their spending while those in Asian nations mostly didn’t. He said that consumption levels in Asia are “normal,” averaging about 40% of gross domestic product. He acknowledged that household consumption in China is relatively low, at 36% of GDP. But he said that’s because growth in investment and exports have been very strong, not because consumption has been weak.

The idea of a “savings glut” – an excess of cash in Asian countries and oil exporters that pushed down global interest rates – was first popularized by Ben Bernanke in 2005, before he was governor of the Federal Reserve. Economic officials in the Bush administration later endorsed the idea that it was a contributing factor to the financial crisis.

Critics of the savings glut thesis have often argued that it simply pushes responsibility for U.S. policy mistakes onto other countries. Supporters reply that China’s huge trade surpluses clearly had real effects on the global economy.

The Chinese made us do it argument was probably always less about reality then it was about constructing a defense for policy failures in our government. It’s cover for the Fed, Congress and the Bush administration. Unfortunately by hewing to these sorts of dodges we put off facing the reality of what went wrong, and when you do that you usually don’t end up with good fixes.

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