How Americans Save Is, Indeed, Affected by the Huge Trade Gap

It has been said for some time that the United States lacks savings and that Americans must save more. America’s huge trade deficit is most frequently given as the prima facie evidence of “overconsumption” in the United States, where people are said to be living beyond their means by consuming more than they produce.

The Japanese trade negotiators who find themselves at loggerheads today with the United States, their sabers drawn for a duel at the World Trade Organization in Geneva, have capitalized on this argument.

The Japanese have been arguing that the U.S. trade deficit with Japan is largely due to problems in the United States and has little to do with the trade barriers in Japan. They even have complained that American politicians are using the Japanese as a scapegoat.

Many American economists have agreed with this line of thinking, and a number of measures to increase savings in the United States have been put in place, starting with the now-forgotten “all-savers accounts” of the early 1980s. In spite of such attempts, however, savings in the United States failed to increase.

Although saving is an enormously complex issue, one of the reasons for that failure may be the fact that, deep down, most Americans do not feel that they are living beyond their means. Quite the contrary, most households are working hard everyday, trying to live within their modest means.

Indeed, many Japanese who have had a chance to live in the United States readily agree that Americans are anything but extravagant--especially when compared to the supposedly frugal Japanese. By Japanese standards, Americans are extremely stingy and cost-conscious; by American standards, Japanese seem to spend money like water. And this was true even before the yen began skyrocketing in the mid-1980s.

There is a big gap, therefore, between the macro and micro economies. Even though most Americans individually are not living beyond their means, as a group they are.

One reason for this discrepancy may be the government budget deficit; if there is someone in the United States living well beyond his means, it’s Uncle Sam. Recently, however, the Japanese government’s budget deficit also has exploded. As a percentage of GNP, it is now bigger than that of the United States. Indeed, as a percentage of GNP, the U.S. budget deficit is now one of the smallest among the industrialized countries.

So what really is going on? Contrary to popular belief, the real reason for the apparent lack of savings in the United States may be the U.S. trade balance itself.

When an American consumer sees a new, competitively priced import and buys it, the last thing that comes to his mind is that he may be reducing his--or his nation’s--savings. Instead, he probably feels that his real income has gone up, because he can now buy the same product for less. Thus, at the micro level, the cost-conscious American consumer would feel he was able to save money by buying imports.

For the macro picture, however, the story does not end here.

The competing domestic producer now faces a decline in revenue and profit. Some of the workers in the industry may face layoffs. Falling worker incomes mean a reduction in their ability to save. Some may have to raid their savings to keep up house payments and other bills. Although laid-off workers will find jobs eventually, chances are high that they will have to take a significant pay cut. With depressed incomes, their savings also will remain depressed.

The exact opposite happens in the exporting countries. Japan did not become a major exporter of so many products because the Japanese people suddenly decided one day to increase their savings. Instead, Japan became an exporter because its manufacturers worked hard to produce quality products at competitive prices. Growth in exports brought in more income, and that in turn increased savings.

It should be noted, though, that the extent of export success depends critically on the openness of the importing markets.

The fact that the U.S. market was wide open to Japanese products during the last half a century helped Japan export to the United States in no small way. It has frequently been cheaper to buy Japanese products in the United States than in Japan. This suggests that, if the U.S. market had been less open, income levels and subsequent savings levels in Japan would have been much lower, while the opposite would have been the case in the United States.

In other words--contrary to the claims of Japan’s trade negotiators--trade barriers do affect income and savings.

The United States is experiencing savings problems because the income growth of the average American household during the last decade has been so dismal. It is pointless to demand that these people save more when many of them do not make enough to save.

And one of the key reasons for the weak income growth has been the debilitating trade deficit. Even though American households are not living beyond their means, their purchases of imports--in excess of what foreigners have purchased from the United States--has ended up reducing income and savings at the national level.

If this analysis is correct, the savings problem in the United States can be resolved only by increasing income. A number of remedies are available.

First, policies can be directed toward raising the educational level of workers so they can be more competitive in the global market. Second, policies can be directed to open foreign markets for U.S. exports. Third, policies can be directed to reduce the attractiveness of imports to U.S. consumers.

Education is a serious matter requiring immediate national attention. As to the other options, given the high prices and limited choices faced by Japanese consumers, it makes vastly more sense to increase the choices available to Japanese consumers than to reduce those available to U.S. consumers.

Unfortunately, what is reasonable does not always prevail in trade negotiations.

In Whistler, Canada, last weekend, the Japanese side refused any concrete measures to increase access to its markets by U.S. auto and auto parts manufacturers--the sectors that account for 60% of the U.S.-Japan trade imbalance.

If the Japanese side continues to resist market opening, both the foreign exchange market and the U.S. government will have no choice but to be pushed into the third and least-desirable option, in order to safeguard American income and savings.

In terms of exchange rates, that means a stronger yen and a weaker dollar. In terms of government policy, it means trade sanctions of the most unpleasant variety.

Over the last half a century, Japan and the United States have been able to shape one of the most successful alliances in the world. Perhaps a better understanding of the nature of the “U.S. savings problem” on both sides will allow the two governments to avoid unnecessary confrontation and reaffirm that alliance, which will remain indispensable for peace in the Pacific well into the next century.