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One way to deal with the current global economic uncertainty is to look for consistent and reliable indicators to help you navigate the chaos. Another option is to focus on some time-honored truths about savings and human capital. In a time of pandemic and financial crisis that mobilized many Keynesian-style bailouts, these old truths of economics are often forgotten.
First, countries with high savings rates will generate higher returns. Eventually, if they can sustain these high savings rates, they will own substantial parts of the world economy. Singapore and Norway are examples of this phenomenon, with part of Norway’s wealth owing to the fortunes of its oil.
Germany is another country with a historically high savings rate (although it hasn’t had the investing success of Singapore). Yes, Germany is facing serious problems: an ailing education system, dubious infrastructure, the risk of deindustrialization from Chinese competition, to name just a few. Nevertheless, Germany’s relatively sober saving and spending behavior, including in the public sector, gives the country a certain robustness.
The UK is at the other end of this spectrum. Compared to the other countries in the Group of Seven, the UK has low gross domestic saving and investment rates. This means that a relatively high percentage of its economic activity is funded by foreigners, who reap a large share of the returns on that investment. This is why London and some other parts of southern England can look so grand while the standard of living of the population is far from impressive.
The Netherlands is culturally closely related to the UK, but they do a better job of saving and maintaining a positive net international investment position. The UK’s international net position is far less positive, and this will be an important factor in the more distant future, over and above the currently higher per capita income in the Netherlands. It’s debatable what the causes are and what the effects are, but I find it remarkable that I see far fewer run-down towns in the Netherlands than I do in the UK when I travel.
Another close relative of the UK is Ireland, and here too the contrast is telling: although Ireland is heavily dependent on foreign capital, it places great emphasis on improving its academic performance and gross household savings are satisfactory. This will help Ireland reduce its reliance on foreign capital and generate gains for local workers. The economic prospects are good.
Human capital is another form of saving and storing wealth – and one country that does very well on the human capital department is the US, albeit with wide disparities in scores. Americans work hard and are relatively well educated in the top half of the population. The US also fosters a culture of creativity and has a very good track record of attracting and assimilating immigrants.
All of these characteristics are helping the US to overcome its measuredly low household saving rate.(1) Many Americans store their wealth in the form of their human capital, making it more difficult for foreign investors to secure the US output surplus.
Canada, meanwhile, has decided to increase the value of its human capital by accepting many more immigrants and using a points system to select better educated and higher paid people. Canada’s net international investment position is also strong and improving. Both factors are reasons to be optimistic about Canada’s economy.
These are all clear facts about the wealth of nations, for reasons that would not have surprised Adam Smith. Amid the near-term policy battles over inflation and stimulus, these fundamentals are often overlooked. If you want a clearer picture of where the world economy is going, start with some simple questions about what resources a country has and how it is using them.
(1) As I mentioned earlier, while the US household saving rate is low, the corporate saving rate is high, which add up to a fairly normal gross saving rate. Many US companies are quite resilient, but many US households are not.
This column does not necessarily reflect the opinion of the editors or of Bloomberg LP and its owners.
Tyler Cowen is a columnist for Bloomberg Opinion. He is Professor of Economics at George Mason University and writes for the blog Marginal Revolution. He is co-author of Talent: How to Identify Energizers, Creatives, and Winners Around the World.
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