Exactly. The paradox is that if instead you repress domestic wages and use your earnings to subsidize, say, manufacturing, you will grow more quickly. The problem is that your production will grow faster than your demand. And because in a closed system you can’t sustainably produce more than you demand, you end up running a trade surplus. At some point you will have to cut back on production and allow unemployment to go up. But in an open system like the globalized economy, you can run a trade surplus.
Robinson argued that it was a bad thing — but that’s not necessarily true. You can export your excess savings to developing countries who can use it to increase domestic investment. Because they have high investment needs and typically insufficient domestic savings, the reduction in your domestic consumption will be matched by an increase in investment elsewhere. And the world is still fine. Demand continues to grow, and businesses have to respond to that growing demand by expanding production and expanding productivity.
The problem arises from exporting the savings imbalance to advanced economies that aren’t suffering from saving constraints. In other words, if you export your excess savings to England or Canada or the United States — which together account for two-thirds to three-quarters of all of the export of excess savings — your domestic imbalance is being absorbed by countries that don’t have saving constraints. In that case, investment doesn’t go up.
If savings go up in, say, Germany, then that is relative to German investment. If, say, Spain was a developing country whose investment was constrained by lack of Spanish savings, then, driven by German capital flows, Spanish investment could go up, and the world would be in a better place, right? More investment in a country that needed it and growth as a result. But if Spain isn’t savings-constrained, investment won’t go up. And because everything has to balance, something must happen to allow higher German savings to be matched by lower savings in Spain. So something else has to adjust, and there are various ways they can adjust.
Robinson argues that Spanish savings adjust through higher unemployment in Spain. When you increase your manufacturing growth by repressing wages, then an increase in exports earnings isn’t recycled back to workers in the form of higher income, and so consumption doesn’t go up and imports don’t go up. So Germany runs a persistent trade surplus with Spain. [In an ideal trading system which didn’t allow for “beggar thy neighbor”–style export growth, trade imbalances are more likely to equilibrate if a rise in German export earnings translated into a rise in domestic consumption to the point that demand for Spanish goods and services rises.]
Robinson was writing during the gold standard, a time in which credit growth was constrained. But of course, we live in a different world where you can expand credit. So Spain has an alternative to a rise in unemployment: a rise in debt by way of the fiscal deficit. This would raise domestic demand in Spain. So now we don’t have a rise in unemployment, but we have a rise in Spanish debt. In addition, the increase in demand caused by the increase in debt gets redirected away from the tradable goods sector to the service sector, causing inflation and a rise in asset prices.
This is the basic problem: if Germany runs an export surplus because of distortions in the way domestic income is distributed and exports the excess savings to Spain, and if Spain does not invest those excess savings because there’s no saving constraint on investment, then Spain must respond either with a rise in unemployment or with a rise in debt.
This is pretty much what happened. After the German labor reforms in the early 2000s, Germany became a surplus country. That money poured into Spain, and Spanish household credit expanded very rapidly, and Spain went into a fiscal deficit from a fiscal surplus. Once Spanish debt could no longer rise after the 2008 crisis, Spain still had to adjust. But then it adjusted in the form of a rise in unemployment.
The same holds true for South Korea or Japan: if they implement policies that lead to persistent surpluses, specifically surpluses driven by the repression of domestic wages, and if they then invest the proceeds from those surpluses in the United States, Canada, and the UK, then what we should see is that those countries run persistent deficits backed either by rising unemployment or, much more likely, by rising household or fiscal debt. This is exactly what happened.