The Penalty for Saving

Remember the fable of the hardworking ant and the irresponsible, fun-loving grasshopper? The fable ends with the grasshopper starving, while the industrious ant has saved enough to survive the winter snug and well fed. The moral of the global recession, however, is that real life does not reward savers the way Aesop did. The U.S. and other grasshopper economies may be hurting, but the high-saving ant economies like Japan and Germany are on life support. The OECD expects the U.S. to contract by 2.8 percent this year and Britain by 4.3 percent. Shocking performances—until you compare them with Japan, which is expected to shrink by 6.8 percent this year, and Germany, which is expected to shrink by 6.1 percent.

What happened? In simple terms, if U.S. consumers don't go to the mall, Japanese and German factory workers don't go to work. Trade imbalances have been an ever-present feature of the global economy since the early 1980s, growing to eye-popping proportions during this decade. But it takes two sides to make an imbalance. The grasshopper economies have been living beyond their means—persistently consuming more than they can produce. Meanwhile, the ants have been too thrifty, producing more than they can consume.

So far the adjustment has been less wrenching for the grasshoppers. They must consume less and invest more, which can be accomplished fairly quickly, as the sharp rise in the U.S. savings rate shows. The ants, on the other hand, must produce less, triggering a brutal plunge in their industrial output.

The damage has gone way beyond the experience of postwar recessions. Japan and Germany thought they were being conservative, but in fact they were taking a great deal of risk. Their entire national strategy is in need of reassessment.

This is both more urgent and more feasible for Japan. Germany is locked into the euro, which removes discretion over monetary, fiscal, and currency policy but provides an economic buffer zone. Japan, without an economic bloc to constrain and support it, can set policy to match its goals.

What should those goals be? First, second, and last, they should be strengthening the domestic economy. Japan is a rich country, with a relatively small exposure to exports (17 percent of GDP, versus 35 percent for Britain and 28 percent for France). Yet such is the feebleness of domestic demand that this last cycle was more than ever before dependent on exports and export-related business investment. Nominal wages are no higher now than in 1992, and households have been ravaged by the post-1990 decline of 70 percent in housing prices.

For much of this decade, the problems were masked by the political dominance of Junichiro Koizumi, Japan's equivalent of Tony Blair. Koizumi's exceptional charisma enabled him to sell a program that combined Thatcher-Reagan supply-side reforms with fiscal austerity and the weak yen favored by financial bureaucrats and big business.

Many of Koizumi's reforms were useful, but the effect on average wage earners was to make their tax and social-security burden higher, their jobs less secure, and their yen savings worth less than Japan's true competitiveness merited.

Now Koizumi's Liberal Democratic Party is in seemingly irreversible decline. The leaders of the opposition Democratic Party of Japan suffer from a serious charisma deficit, but they appear to understand some of the deeper issues. Their plan to introduce generous French-style child benefits of 26,000 yen per child per month is aimed at boosting the fertility rate (it worked in France, which now has the highest fertility rate in Europe). It's a good idea, as Japan's miserable demographic profile casts a pall on the long-term outlook for housing prices and general economic confidence.

The key point is that the DPJ's program marks a break with the priorities of the past 10 years. It needs to go further. The next administration must bring the Bank of Japan onboard, set an inflation target, and turn on the monetary spigots, Bernanke style. It must emphasize what government bond yields under 2 percent have been signaling for years: that the public deficit is not a problem since it is comfortably covered by private-sector savings. It must shift the tax burden to companies from households, the main victims of the fiscal squeeze, and tackle economic insecurity by providing a credible safety net.

Can Japan finally emerge from its post-bubble doldrums? The truth is, so far it hasn't really tried. But if the shock of the crisis forces the Japanese ant to learn a few grasshopper tricks, it would be a good thing for ordinary Japanese, and for the world.