Growth Strategies: 3 - AMERICANS DON'T SAVE! (BUT AMERICA DOES)

At least once a year, it seems, some major media outlet does a piece on Americans' abysmally low saving rates. This year it's the Boston Globe, where author Drake Bennett has taken his fellow countrymen to task:

Last year, after 25 years of decline, Americans' household savings rate stood at less than 1% of after-tax income. Japanese households, by comparison, saved 7.7%, while the French socked away 16%. Our national savings, which takes into account government and corporate savings, isn't impressive either. We save 13.6% of gross domestic product, compared with Japan's 25% and China's 50%.

Both as individuals and as a nation, it seems, Americans are gambling with their future. And low savings exposes the country as a whole to the risk of financial crisis. How is it, after all, that the nation of Ben Franklin, apostle of frugality, has become a nation of spendthrifts?

But as we have been pointing out in these pages for over 10 years, the US savings crisis is non-existent. For one thing, it's not measured correctly (much investment is counted as consumption, and when subtracted from income appears to leave little savings). For another, it doesn't account for increases in the value of assets (like equity holdings and housing stock), which have added substantially to net worth. More importantly, perhaps, is that US capital productivity - the return the American economy produces on those investments - is 30% to 50% higher than anywhere else in the world (including Germany, France, Japan and China).

As we explained in "Our Savings Grace," Growth Strategies #849 (July 1996), the higher returns you earn on capital, the less you need to save for the future, and the more you can consume today. The American economy's high productivity, low entry barriers, intense competition, ruthless capital markets and high company turnover (frequent startups and bankruptcies) all lead to higher returns on savings. This allows Americans to create more new wealth while saving less and consuming more.

These unconventional views are starting to find their way into more conventional outlets. And in a recent issue of BusinessWeek, economist Michael Mandel adds the following insight:

The savings rate is a misleading measure of future economic performance. In today's economy, education and innovation are the main engines of wealth-producing growth, not physical capital. Yet the official statistics count spending on education and research and development as consumption, rather than as an investment.

According to the latest data, the US devotes 9.6% of its GDP to education and R&D. The next closest major countries are France and Canada, at 7.8% and 7.5% respectively, followed by Germany and Japan. So while other countries chide the US for being profligate, Americans are putting more money into the things that matter over the long run. That's reflected in US economic performance, among the strongest in the world.

An editorial in the same issue of Business Week expounds on the point that the concept of savings as being about the ability to add physical capacity has become outdated. The concept of savings should also be about the ability to add intellectual capacity. In an economy driven by human capital and innovation, money spent on education, R&D and innovation should be perceived as investing for the future.

Additionally, the internationalization of financial markets means a vast and growing global pool of savings, which flows to where investment opportunities are most favorable. As long as the US remains a favorable place to invest, it will attract savings from around the world.

Growth Strategies Implications

The editorial concludes with a warning about the forthcoming debate over Social Security privatization. The danger, it cautions, is that in striving to increase a savings rate that isn't measured properly and matters less and less, the country borrows huge new sums, deepens the budget deficit, and undermines the confidence of global investors. We agree that more fruitful would be an approach that increases education and innovation in America, the true drivers of growth and prosperity.