Why Do Spaniards Save So Little?

This answer leads to obvious conclusions about the global crisis. If only Spaniards and Americans could become just a little more dour and disciplined, the global crisis would be more easily resolved. The trouble with this explanation is that it’s completely wrong. National savings rates have varied so much over such short periods of time that unless national culture changes radically from one decade to another, it is hard to see how it can determine the savings rate.

After all, in the 1990s Germans saved so little that they ran huge trade deficits, whereas in the past decade their savings have soared and they have run huge trade surpluses. And for over 1,000 years it was widely accepted, especially early in the history of the Chinese Communist Party, that Confucians were lazy and spendthrift. Until the 1960s this was one of the most common explanations of East Asian poverty.

In fact, national savings rates have very little to do with national culture and are instead driven almost wholly by policies both at home and abroad. The key point to remember is that the total savings of a country are defined as the total amount of goods and services it produces, also known as gross domestic product (GDP), less the total amount it consumes. In other words, everything you earn, you either consume or save. And to say that a country saves a lot is to say that it consumes very little.

So why do some countries consume more of what they produce and other countries consume less? Three conditions determine how much of what they produce is consumed. The first and most important is the share of national income that households retain. In countries like the United States and Spain, households keep a large share of what they produce, so unsurprisingly their consumption rates tend to be high relative to GDP. In China and Germany, businesses and the government keep such a large share of what they produce that household consumption is necessarily low.

In China, for example, households retain only 50 percent of all that the country produces, which is probably the lowest share ever recorded in times of peace. This is the main reason China has the highest savings rate in the world—Chinese households retain too low a share of GDP to consume much of it. In Germany, agreements made by the government, big businesses, and labor unions ten years ago ensured that ordinary Germans saw their wealth grow more slowly than the increase in what they produced. As a result, German savings rates automatically rose in the late 1990s and early 2000s.

The second condition that determines the national savings rate is income inequality. The rich save more of their income than the poor, and as inequality rises, a country’s consumption rate will fall as its savings rate rises. This, according to Karl Marx, was precisely why capitalism was unsustainable and is, ironically, especially evident in China.

The third condition is the willingness of households to borrow to increase their consumption. What usually drives households to borrow for consumption is the perception that their wealth is increasing. In both Spain and the United States in the past decade, the value of stocks, bonds, and real estate have soared. Americans and Spaniards increasingly took advantage of this to raise consumption.

There is nothing wrong with increasing consumption as wealth increases, but in both Spain and the United States the rising real estate market turned out to be a mirage caused by too low interest rates. As a result both countries spent many years increasing their consumption in an unsustainable way.

But this isn’t the whole story. This increase in Spanish and American consumption was itself determined partly by policies in Germany and China. As these countries forced up their savings rates, they were also forced to run large trade surpluses by exporting to countries like Spain and the United States, which had to run corresponding large deficits.

As the deficit countries saw their imports surge, they could respond in one of three ways. First, they could refuse to accept the deficits by intervening in trade. Second, they could let unemployment rise as local producers went bankrupt. As workers are fired, of course, their savings rates decline, which allows the excess savings of the surplus countries to be absorbed. Third, they could borrow the excess savings of the surplus countries and significantly increase their domestic consumption and investment.

As we now know, Spain was unable to choose the first option and, not surprisingly, refused the second option, so it was left with the third option. Spaniards borrowed and consumed. This increase in consumption went on until 2007 to 2008, when debt levels and trade deficits became so high that it could no longer continue. Spain has now been forced to accept the second option: high unemployment.

The global crisis is the result of the strains caused by policies that led to excessively high savings in some countries and excessively low savings in others. These savings rates have nothing to do with culture or national preferences and everything to do with policy distortions at home and abroad.

This means that the crisis cannot be resolved if only low-savings countries adjust, because their low savings rates may themselves have been caused partly by high savings abroad. Spain and the United States, in other words, cannot resolve their domestic problems without causing great damage to Europe and the world unless Germany and China resolve their own savings distortions just as quickly.