Mervyn King, the head of the United Kingdom's central bank, is best known for allowing the UK's housing bubble to expand to a level that was even greater than the bubble in the U.S. At its peak in 2007, house prices in the UK were on average about 10 percent higher than the bubble-inflated prices in the U.S., even though the per capita GDP in the UK is about 10 percent lower. As a result of his failure to check the growth of the bubble, the UK has fallen into a severe downturn, with questionable prospects for a rebound any time soon. However, the Washington Post's columnist David Ignatius doesn't want King to be known as just an incompetent central banker, he also wants readers to know that he is an inept teacher. Ignatius tells us that King told him economics in grad school. He then goes on to give an account from King of the world's basic problems which stem from high saving Asian countries and low-saving Europe and the United States. There are two problems with this story. First, Europe is not exactly low-saving. While some countries like Spain and the U.K. have had substantial current account deficits in recent years (meaning that they are net borrowers from abroad), others like Germany, the Netherlands, and Sweden have had very large surpluses. France comes in the middle, maintaining a very small current account deficit in recent years, although it did hit 2.3 percent of GDP in 2008. This is an inconvenient fact for Mr. Ignatius because he wants to tie low savings to excessively generous welfare states. However, the countries with the most generous welfare states were among the high savers in Europe. The low-savers tended to be the countries with less generous welfare states. The other major problem with Ignatius's piece is that he never once mentions currency values. Currency valuations are what determines a country's trade balance. No one buys an imported good rather than a domestically produced good at Wal-Mart because the government has a large deficit, they buy the imported good because it is cheaper. And, the reason it is cheaper is because the dollar is over-valued against other currencies, most importantly the East Asian currencies. Any serious discussion of inadequate savings in the U.S. must focus on the over-valuation of the dollar, there is no other plausible mechanism for restoring normal saving rates in the United States. Of course macho politicians want to talk about the "strong dollar" as though it is indicative of a healthy economy. Serious economists know better, but apparently not Mr. Ignatius or his teacher Mr. King.
--Dean Baker
