One way to deal with the current global economic uncertainty is to search for consistent and reliable indicators to help you navigate the chaos. Another way is to focus on some time-honored verities about savings and human capital. In an era of pandemic and financial crisis — which mobilized many Keynesian-style rescues — these old truths of economics are often forgotten.
First, countries that have high rates of saving will reap compound returns. If they can maintain those high saving rates, eventually they will come to own substantial parts of the world economy. Singapore and Norway are examples of this phenomenon, with some of Norway’s wealth coming from the good fortune of its oil.
Germany is another nation with a historically high saving rate (though it has not had the investing success of Singapore). Yes, Germany faces serious problems: a fraying educational system, iffy infrastructure performance, and the risk of deindustrialization from Chinese competition, to name a few. Nonetheless, Germany’s relatively sober savings and spending patterns, including from its public sector, give it a certain robustness.
The United Kingdom lies at the opposite end of this spectrum. Compared to the other Group of Seven nations, the UK has low rates of domestic gross savings and investment. That means a relatively high percentage of its economic activity is financed by foreigners, who reap a high share of the compounding returns from that investment. That is why London and some other parts of southern England can look so splendid while living standards for the population are less than impressive.
The Netherlands is a close cultural cousin to the UK, but it does a better job saving and maintaining a net positive foreign asset position. The net international position of the UK is far less positive, and that will become a significant factor in the more distant future, above and beyond the currently higher per capita income in the Netherlands. You can debate which are the causes and which are the effects, but I find it noteworthy that in my travels I see far fewer run-down towns or cities in the Netherlands than in the UK.
Another close relative to the UK is Ireland, and here the contrast is also instructive: Although quite dependent on foreign capital, Ireland is taking great care to boost its performance in higher education, and gross household savings are satisfactory. That will help Ireland reduce its dependence on foreign capital and capture gains for domestic workers. Its economic prospects are looking good.
Human capital is another form of saving and storing wealth — and one country that does very well in the human capital department is the US, albeit with a high variance of outcomes. Americans work hard and are relatively well educated in the top half of the distribution. The US also embraces a culture of creativity and has a very good record of attracting and assimilating immigrants.
All of those features help the US overcome its low measured rate of household savings.1 A lot of Americans store their wealth in the form of their human capital, making it harder for foreign investors to capture the US’s productive surplus.
Canada, meanwhile, has made a decision to increase the value of its human capital by taking in many more immigrants and using a points system to select more educated and higher-earning people. Canada’s net foreign asset position is also strong and improving. Both of these factors are reasons to be bullish about the Canadian economy.
These are all straightforward facts about the wealth of nations, with reasoning that would not have surprised Adam Smith. Amid the short-run political squabbles over inflation and economic stimulus, these fundamentals are often overlooked. If you want a clearer sense of where the world economy is headed, start with some simple questions about what kind of resources a nation has and how it is deploying them.
1. Although, as I have noted, the US has a low household savings rate but a high corporate savings rate, which adds up to a pretty normal rate of gross savings. A lot of US corporations are quite robust, but a lot of US households aren’t.
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