Everyone knows the stereotypes. Germans save for the future, while Spaniards spend everything they earn. So it’s not surprising that Germany has survived the recent crisis in decent shape, while Spain is a mess, with unemployment at roughly 27 percent. If only the Spaniards had been as thrifty as the Germans, this never would have happened, right?
Wrong. The spending patterns of Spanish households did not cause the euro crisis, but were a response to the imbalances created by excess savings in Germany. Furthermore, these excess savings were not caused by the thriftiness of German households, but by policies that forced up German savings rates to levels that Europe could not absorb without creating serious imbalances.
National savings and household savings are often assumed to be the same thing, but are actually very different. The household savings rate is the share of household income — mainly wages, investment income, and social transfers like welfare payments and pensions — that households do not spend on consumption.
The national savings rate, on the other hand, includes not just household savings, but also the savings of governments and businesses. It is defined simply as a country’s GDP minus its total consumption. While the household savings rate is determined primarily by the cultural and demographic preferences of ordinary households, the national savings rate is not. Indeed in some cases, such as China and Germany, the household share of all the goods and services a country produces, which is primarily a function of policies and economic institutions, is the main factor affecting the national savings rate.
National savings, in other words, have very little to do with household preferences and a lot to do with policy. Take China, which has by far the highest national savings rate in the world at roughly 50 percent. This is in part because Chinese households, like those of many poor countries lacking a robust social safety net, save a high proportion of their income.
But while China’s savings rate is extraordinary, Chinese household savings rates are merely on the high side, and on par with other East Asian nations. Chinese households, it turns out, are not nearly as thrifty as their exceptionally high national savings rate implies. Why, then, is China’s savings rate unprecedented? The main reason is the very low household income share of GDP. Chinese households retain a lower share of all the goods and services the country produces – around 50 percent — than households in any other country in the world.
This is a consequence of policies Beijing put into place over the past two decades that goose GDP growth by constraining growth in household income. These include low wage growth, an undervalued currency, and extremely low interest rates, all of which reduce household income while subsidizing growth. As a result, the household share of China’s total production of goods and services has been falling for 30 years, from 60-70 percent in the 1980s to 50 percent today. Consequently, as households earn a declining share of what China produces, they also consume a declining share. China’s high savings rate, in other words, has little to do with Chinese thrift, and much more to do with policies that reduced the share of Chinese household income relative to GDP. This is also true in Germany.
In the 1990s, Germany saved too little. It ran current account deficits for much of the decade, which means it imported capital to fund domestic investment. A country’s current account deficit is the difference between how much it invests and how much it saves, and Germans in the 1990s did not save enough to fund local investment.