Savings And Investment Policy In China And America

It’s conventional in American politics to say that if you increase the financial returns to savings and investment, that you’ll get more savings and investment. That’s the rationale for capital gains tax cuts and so forth. Meanwhile, it’s also conventional in American politics to write articles about China which note that “[u]nder an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation” and that this helps explain why the Chinese economy is so investment-biased and Chinese household consumption is so low.

These are both plausible economic models. One says that the amount of savings people do is driven by their likely return on investment — higher return, more investment. The other says that the amount of savings people do is driven by their desire to hit certain savings targets — lower return, higher contribution because that’s the only way to hit the target. We apply one model to the United States where it’s used to justify policies that are friendly to the financial interests of rich people. We apply the other model to China, where the selection of the appropriate explanatory framework has no particularly implications for the US income distribution. I wonder which one is more accurate?