Is There A Savings Gap?

BY THE CONVENTIONAL WISDOM, WE AMERICANS ARE A slothful lot. We overconsume, undersave and underinvest. Compared with the frugal Germans and Japanese, we are ruinously self-indulgent. They invest; we shop at the mall. They build factories; we buy videogames. Legions of economists and their political patrons, across the political spectrum, have preached this gospel and promoted various ""pro-saving-and-investment'' plans as cures. Well, the sermon stinks: the ""savings gap'' is mostly make-believe.

Americans invest their savings so much more efficiently than the Germans and Japanese that the lower U.S. savings rate is mostly offset. German and Japanese investment efficiency -- the ""capital productivity'' of factories, machinery, airplanes, buildings and the like -- is only two thirds the U.S. level, reports a new study by the McKinsey Global Institute (an arm of the consulting firm). As a result, we can spend more of our current incomes on consumption without jeopardizing future living standards through stunted investment. In 1993 we saved about 15 percent of our gross domestic product compared with Japan's 33 percent for much the same result.

To see why, consider the proverbial widget factory. Suppose it costs $1 million for a factory in Germany or Japan that makes a million widgets a year. In the United States, a comparable factory would cost about $600,000. The remaining $400,000 -- which otherwise would have been channeled into investment through bank deposits, stock or bond issues or retained profits -- can be spent on anything from clothes to health care.

The U.S. advantage will shock anyone who thinks that the Japanese and Germans are bound to overtake American living standards. That hasn't happened yet. In 1993 average incomes in Japan and Germany, measured as GDP per person, were 83 and 85 percent of the U.S. level. For many decades after World War II, Japan and Germany closed the gap between their living standards and ours. But the gap is no longer narrowing, and many earlier gains reflected the ""catch-up'' of adopting known technologies and management practices.

Societies generally get richer by working hard (or long), investing and being productive in these activities. The McKinsey study compared the United States, Germany and Japan. Here's what it found. On a per-person basis, Germany has about 13 percent more invested capital (plants, offices, stores) than the United States, and Japan has about 22 percent more. But their capital productivity is only 65 and 63 percent of U.S. levels. Work patterns vary more. The Japanese -- with short vacations, long work hours and low unemployment -- work about 40 percent more per person than Americans; but their labor productivity is only 55 percent as high. German labor productivity is 90 percent of the U.S. level, but the Germans -- with short work hours, long vacations and high unemployment -- work only 82 percent as much.

Of course, such comparisons need qualification. They don't, for example, reflect different national tastes. Germans prefer extra leisure. The Japanese value solicitious clerks in their stores. Both differences depress reported output (GDP) and productivity. Still, the gaps are too big to be statistical flukes. How can they be squared with, say, Japan's success in industries like autos?

Easy. ""Japan has a dual economy,'' says Bill Lewis of McKinsey. ""About 40 percent of their manufacturing sector is truly world class,'' but much of the rest is dreadful. In food processing, capital productivity is only 64 percent of the U.S. level. And non-manufacturing, about 70 percent of the economy, is worse. For electric utilities, capital productivity is 49 percent of the U.S. level. The same is also, to some extent, true of Germany. In telecommunications, its capital productivity is 38 percent of the American level.

One obvious conclusion is that neither the Japanese nor the Germans have perfected an ""economic model'' that outperforms the American. Both countries have tried to control economic growth through regulations, cartels, subsidies and protections. The American system is more open and chaotic, with sharper ambitions and insecurities. Though often wasteful, it's less so than the alternatives, because mistakes are more rapidly punished by the market than by bureaucrats, politicians or cartels.

The U.S. stock and bond markets -- ruthlessly and relentlessly pressuring managers to be profitable -- compel better use of capital than German and Japanese banks, which play a pivotal role in allocating those societies' investment funds. Extra competition generally spurs higher U.S. productivity. In Germany, informal quotas have shielded automakers from Japanese competition. But the capital productivity of the German auto industry is 65 percent of that of American carmakers.

As for the ""savings gap,'' it mostly reflects economists' and politicians' quest for relevance. Saving is made to seem scarce by the use of misleading concepts like ""net savings.'' This reduces total saving by depreciation: obsolescence. The idea is that we're just replacing stuff that's worn out and not increasing the investment base. This has a textbookish appeal that ignores the fact that new investment -- a CT scan for an X-ray machine -- is often totally unlike the old. U.S. investment is made to seem trivial, when in 1995 it exceeded $1 trillion. (Indeed, some economists think that investment has increased too rapidly and that the excess, resulting in surplus capacity, may trigger the next recession.)

All sorts of policies are promoted as tonics for our alleged ""undersaving.'' Some, such as balancing the budget or simplifying the tax code, are desirable. But all are oversold as quick ways to raise economic growth and incomes. Similar arguments, incidentally, are made for increased government spending for education and research, also areas of supposed ""underinvestment.'' There's a seductive simplicity to these pitches marred only by the fact that they overlook the common-sense lesson of Germany and Japan: it's not just how much, but also how well, we invest that counts.