Many movies have been made on the US financial crisis; of those I have seen, the ones I like the most are I.O.U.S.A. and The Inside Job. The latter is much more interesting and informative; but here I shall talk about the former; for it focuses on a specific problem of US economy – the deficit. On the face of it this may appear very narrow appraisal of US crisis; particularly as the film begins with a counter of mounting US public debt. But the movie goes beyond the budget deficit or the public debt, to reveal what lies at the heart of the US crisis.
The movie talks about four deficits that US economy faces : the budget deficit, the savings deficit, the trade deficit and the leadership deficit.
Let me leave out the first and the last; the first is obvious and widely discussed; the last is more political than economic. I find the middle two more interesting, and more valuable to draw econmic lessons from.
The savings deficit simply means lack of savings. This lack arises from the tendency to save less. Sounds elementary; but has profound significance. The failure to save (or, worse still, to dis-save, that is to consume more than you earn or produce) saps an economy of its ability to grow. Only what is saved can be invested, and can create capital or capacity to produce more, and more efficiently; this is true both in pure financial term as well as in real terms; only those resources that are saved from being used for producing consumption goods can be used for production of capital goods.
Trade deficit is an indication of a lack of an economy’s competitiveness. From its peak in the post-WWII period to the turn of the millenium, US economy has lost its comparative cost advantage in global markets. This is partly related to what we have said earlier about the savings deficit – slow down in capital formation, slower growth of technology and rapid rise in cost of human resources is what has led to this loss of competitiveness.
Is India listening ?