Simply put, the Japanese have been investing in their future while we've been mortgaging ours. They made farsighted choices while we blithely assumed that tomorrow would take care of itself.
--Former Commerce Secretary Peter G. Peterson, quoted in Harvard Business Review, May, 1984
Remember those jeremiads about the low U.S. savings rate? Thrifty Japan would trounce the overspending U.S. Americans weren't saving enough to fund investment. We could borrow from abroad, but eventually those I.O.U.s would come due. Then we'd have to jack our interest rates up to the stratosphere to keep foreign funds flowing in and choke consumption so we could generate a trade surplus and pay our debts.
It was the conventional wisdom of the past 20 years--a retelling of the old fable of the industrious ant and the devil-may-care grasshopper.
BUSINESS WEEK and many other business publications helped pull the bandwagon.
Funny thing, though: The predictions of doom and gloom were dead wrong. The U.S. has grown faster than Germany and Japan in the 1990s despite a national savings rate that's about one-half Germany's and one-third of Japan's. And what about those predictions of stratospheric U.S. interest rates? Hah! Rates on long-term bonds are the lowest they have been since the early 1970s. Global capital isn't fleeing the U.S.; it's banging on the door to get in.
The first mistake we doomsayers made was to believe there is a "correct" level of national savings. It's true that if Americans save less, they will have to import more foreign capital, thus building up I.O.U.s to foreign creditors. But so what? If the imported capital is used wisely, it should earn such a high return that Americans will be wealthier for it even after paying interest abroad.
You could still argue that the U.S. would be better off in 50 years if we saved enough today to finance our investment without foreign borrowing. Then, the future interest payments would go to us instead of foreigners. That's true. But it appears that Americans won't forgo much current consumption for the sake of future generations--say, by embracing a tax on consumption instead of income. Selfish, perhaps, but that's democracy. Those who feel otherwise are free to sock away income in a trust for their great-grandchildren.
NO STIMULUS. Meanwhile, as the U.S. props up the world economy with its spending, Japan's national obsession with savings has left it in a liquidity trap. Despite near-zero interest rates, the economy is floundering because businesses don't detect any domestic demand for their products. And the Japanese government is loath to apply fiscal stimulus because it could lead to a trade deficit that would erode the giant balance-of-payments surplus planned as a cushion for the aging nation in the 21st century. That's dumb. The U.S. is aging, too. But as America's experience shows, the wealth generated by more growth outweighs any disadvantages of a trade deficit.
Undersaving? Underinvestment? Those are hardly the world's biggest problems these days. Asia's financial crisis is the hangover from massive, often government-orchestrated overinvestment--in steel mills, hotels, auto plants, and so on. The U.S., with its efficient and mostly corruption-free method of allocating capital, tends to make a sensible amount of investment without guidance from ex-government officials, journalists, or anyone else.
The pro-savings argument isn't all wrong. The U.S. does unduly discourage savings by double-taxing much of investment income while permitting tax deductions for interest expenses. And the problems of slow-growing countries aren't entirely the result of Keynesian underconsumption--Japan and Germany also suffer from overregulation and labor-force rigidities. But it's also true that Japan and Germany still don't grasp that consumption is acceptable. Even good. In the real-life version of the old fable, the ants lose.