The Penalty for Saving

Remember the fable of the hardworking ant and the irresponsible, fun-loving grasshopper? The fable ends with the grasshopper starving, while the industrious ant has saved enough to survive the winter snug and well fed. The moral of the global recession, however, is that real life does not reward savers the way Aesop did. The U.S. and other grasshopper economies may be hurting, but the high-saving ant economies like Japan and Germany are on life support. The OECD expects the U.S. to contract by 2.8 percent this year and Britain by 4.3 percent. Shocking performances—until you compare them with Japan, which is expected to shrink by 6.8 percent this year, and Germany, which is expected to shrink by 6.1 percent.

What happened? In simple terms, if U.S. consumers don't go to the mall, Japanese and German factory workers don't go to work. Trade imbalances have been an ever-present feature of the global economy since the early 1980s, growing to eye-popping proportions during this decade. But it takes two sides to make an imbalance. The grasshopper economies have been living beyond their means—persistently consuming more than they can produce. Meanwhile, the ants have been too thrifty, producing more than they can consume.

So far the adjustment has been less wrenching for the grasshoppers. They must consume less and invest more, which can be accomplished fairly quickly, as the sharp rise in the U.S. savings rate shows. The ants, on the other hand, must produce less, triggering a brutal plunge in their industrial output.

The damage has gone way beyond the experience of postwar recessions. Japan and Germany thought they were being conservative, but in fact they were taking a great deal of risk. Their entire national strategy is in need of reassessment.

This is both more urgent and more feasible for Japan. Germany is locked into the euro, which removes discretion over monetary, fiscal, and currency policy but provides an economic buffer zone. Japan, without an economic bloc to constrain and support it, can set policy to match its goals.

What should those goals be? First, second, and last, they should be strengthening the domestic economy. Japan is a rich country, with a relatively small exposure to exports (17 percent of GDP, versus 35 percent for Britain and 28 percent for France). Yet such is the feebleness of domestic demand that this last cycle was more than ever before dependent on exports and export-related business investment. Nominal wages are no higher now than in 1992, and households have been ravaged by the post-1990 decline of 70 percent in housing prices.