Look first at the thrifty German housewife, who plans her budget to cover the month’s expenses; then see the Japanese housewife, who cleverly economizes. Now compare them with the extravagant American, enticed by a culture of consumerism into spending more than he earns. Cultural stereotypes can be clichéd and are best to be avoided but can be true when it comes to cross-national differences towards savings.
In terms of savings, modern-day Americans don’t set a good example. Consumption, fuelled by a culture of instant gratification and excessive consumer finance has surpassed families’ incomes and decimated savings, says
Sheldon Garon, Nissan Professor of History and East Asian Studies at Princeton University and author of Saving rates fell below 3% in the United States for the first four months of 2013. Many Americans currently contend with massive credit card debt, collapsed housing prices, and insufficient savings. Beyond our Means: Why America Spends While the World Saves.
“A whole generation of people is reaching retirement in the US with low or zero savings and are probably going to live for a long time without savings,” says Garon in a recent interview with PROJECT M. In contrast, Germany, France, Singapore, and Hong Kong are all high-saving economies and India has recently joined the fold. China, meanwhile, boasts a household saving rate of 26%.
So why do most Americans seem born to shop while Asians and Continental Europeans appear born to save? History plays an influential role in shaping saving behavior, Garon explains. “Americans used to be great savers, attracted to saving during World War II by government savings bonds and after the war by small saver institutions known as Savings and Loan Associations, which promoted a culture of thrift. And people certainly save more when they can trust that their money is secure in a nearby institution.”
However, many of these institutions collapsed in the 1980s, following competition from Money Market Funds and the advent of financial deregulation. At the same time the credit card industry started to expand, discovering that it could charge high rates of interest to relatively poor customers who couldn’t pay off their credit card bill at the end of the month.
The explosion of the home equity loan and subprime mortgages finally eroded the remnants of America’s savings culture. “Households thought why bother saving when you can get what seems like free money? Housing prices boomed as banks encouraged customers to borrow 110% of their home equity,” continues the professor.
The British made a similar shift from thrift to spendthrift after financial deregulation in the 1980s and 1990s, which made it more attractive to borrow than save.
Asian economies, meanwhile, fall back on a long-standing history of endorsing prudent economical behavior. In Japan, strands of Buddhism promoted thrift as early as the 1700s. High-saving Asian countries, such as Japan, encouraged their people to economize, believing that a working person with savings would be less likely to turn to crime or become a public nuisance. Confucianism likewise promotes frugality, simplicity and thrift.
Saving levels may yet slip, however, in growing Asian economies, such as China, he warns. “China is following a pattern for a rising economy, where growth accelerates and consumption continues to lag. Eventually saving rates will fall if that economy becomes more advanced, with a growing middle-class, who realizes that their lives are secure after all and they can spend more.”
But the Chinese are still likely to continue to save, even if at lower levels than currently, if you examine the Japanese example. “Household incomes in Japan have dropped since the bubble collapsed in 1990 and savings have been reduced but the Japanese haven’t become like Americans in their saving behavior,” says Garon. The Japanese not only work incredibly hard, they continue to economize and avoid excessive borrowing and that’s not likely to change.
Like their Asian counterparts, most Europeans love to save. “You only have to look at the number of
Sparkassen (savings banks) in Germany – there’s one on every street corner. Or look at the number of French bank savings accounts, such as Livret A or Livret Populaire, which are free of French income tax and offer high interest rates,” Garon says.
Unlike the Americans and the British, Europeans also shun generous credit. Even the euro crisis hasn’t caused people in the northern tier of Europe to cut back on saving – families there still save around 10% to 12% of household income. Savings are admittedly starting to collapse in southern Europe but this is because “people there simply don’t have money right now,” Garon explains.
It’s not simply a case of the “Protestant work ethic” either. Catholic-dominated societies in Europe save as much as Protestants. Catholic parts of Germany save as much as Protestant regions. Catholic France has even higher saving rates than several protestant countries.
FOOTING THE BILL
Interestingly, contrary to prevailing economic theory, welfare states don’t seem to dis-incentivize saving. Germans and other continental Europeans save at high rates despite generous national pensions and comprehensive welfare programs, says Garon. Americans don’t.
“Americans live in a less secure, free-market economy. The general populace receives few social protections against unemployment or home repossession, while paying much more out of pocket for health care and higher education. Rationally, they should be saving.”
Can Americans remain a nation of consumers? Clearly, the world wants Americans to spend and remain addicted to credit, says Garon. “We don’t know what is going to happen but remember exporting countries like China and Japan are heavily dependent on American consumption.”
A strong consumer appetite might be good news for the rest of the world but maybe not for US society, he concludes. “Many Americans don’t have any health insurance so something like a medical complication could wipe them out financially. These people are meant to have their own savings and company pensions, as well as relying on social security from the government. Now though the government is going to have to do all the work and the rest of US society is going to have to foot the bill for those who don’t save.