If you think of the exports as the first link in the causal chain, the resulting pile of Chinese savings is the second. Much of this savings has been by the corporate sector, which is subsidized by the government in all sorts of ways (an undervalued currency, low interest rates, cheap energy). The economic boom brought big profits, and companies held on to much of them. The government has also increased its savings in this decade by collecting more taxes and, until the financial crisis, running a budget surplus. And households increased their own savings in the 1990s, in reaction to the dismantling of many bloated state-run companies and the cradle-to-grave benefits, known as the ”iron rice bowl,” they once provided to their workers. When a Chinese citizen is rushed to the hospital after a car accident today, the first stop for the victim’s family is often the cashier’s window. Many hospitals won’t admit patients until they have paid, and many families have no health insurance. Instead, they insure themselves, by saving. [Will China still bankroll us? David Leonhardt. New York Times. May 13 2009]

Leonhardt’s article suggests that lack of social safety net encourages saving. It makes sense.

The reversed relation is interesting: does availability of safety net discourage savings?

Indirectly, this asks how does that affect consumption? Does it increase consumption?

Implicitly, this may suggest that people may be less judicious with their consumption and more happily go into debt to spend with the presence of safety net. This is so when one contrasts the situations without social safety net in China and the availability of one in the United States as described by Leonhardt; massive savings in the former and large debt in the former on individual level, on average.

I really think I want to explore this when I finally get back to school. Ah, approximately 72 days before school begins. I just cannot wait.

5 Responses to “[1984] Of inverse relations between safety net and savings”

  1. on 17 May 2009 at 00:09 moo_t

    The money just goes somewhere. Ironically, when the medical cost too much, it can wipe out the saving for good, worst, fall into heavy debt.

    Ironically, so call social-safety EU medical is cheaper compare to USA counterpart, that run into “market capitalism”. There is another crisis build up in US health system.

  2. on 17 May 2009 at 17:29 Jian

    Solution: mandatory savings in a fully-funded individual retirement savings fund. However, in a developing state, that will exclude many people in the informal sector.

    I suspect that it’s going to be relatively inelastic, especially at the lower brackets of society. In the short to medium term, and at lower levels of income, people tend to save to invest in capital goods like purchasing a vehicle, upgrading their home (especially in makeshift homes), purchasing goods to sell, rather than saving for a contigency measures.

    I would think that at the upper levels of society as well it wouldn’t have a good impact on savings/consumption since they have plenty of assets that they can easily liquidate, that their savings already exceed their ‘natural consumption’. I can’t rememeber what law that is, damn.

  3. on 17 May 2009 at 19:44 Hafiz Noor Shams

    It would be a solution if there is a problem. Is there a problem?

    Forced saving ignores individual consumption. Take me personally. I need my money to fund my tuition. I could better manage fluctuation in my consumption function if I was not forced to save into EPF.

    I’d prefer people to save based on their own consumption function. Forced saving only disenfranchised the poor that need their money to live today. Saving for tomorrow is a misguided act if one faces hunger today.

    Anyway, the law you referring actually says that the poor spends proportionately more of the income than the rich. It’s called Engel’s law.

  4. on 18 May 2009 at 13:59 hishamh

    One thing the article missed (understandable since it concentrates on the China-US imbalance) is the desire for national insurance against foreign exchange liquidity crises after 1998. While China is the most egregarious example of reserve accumulation, you can see this trend across the entire region, even for countries with much less direct exposure to US comsumption.

    As to your hypothesis, it certainly is an interesting question. I can’t remember any references off-hand, but just a quick comparison between US and Europe suggests that the relationship between consumption and social security is by no means simple or linear – Europe has a much stronger social safety net, has national savings above 20%, but a private consumption share of just over 50% of GDP.

    Of course that may be due to structural differences between the two economies such as the much more rigid labour market in Europe, but you get my point.

    Lastly, I believe EPF allows for withdrawal of funds in Account II for paying tuition fees.

  5. on 18 May 2009 at 16:09 hishamh

    Dani Rodrik doesn’t agree with Leonhardt:

    http://rodrik.typepad.com/dani_rodriks_weblog/2009/05/how-to-square-th e-us-china-circle.html

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