BOSTON — Wouldn't it be nice to spend almost all your money, save just a little bit, and end up getting rich anyway?
That's essentially what the United States economy has been doing, according to a new study by McKinsey Global Institute in Washington, a research group affiliated with the McKinsey & Co. consulting firm.
Compared with the Japanese, Germans, and other Europeans, Americans save relatively little. Since savings, converted to investments, are necessary to generate wealth, how then has the US managed to maintain a standard of living as high or higher than these other industrial nations?
The short answer: Money works harder in America than in Japan or Germany, largely because of good management in US industry, the study finds. In fact, "capital productivity" - the effectiveness of investment by businesses - is only about two-thirds as high in Germany and Japan as in the US. The study looked at five industries in all three nations - automotive, food, retailing, telecommunications, and electric utilities - over a one-year period.
"It is still unclear in which areas US business should invest more for further productivity gains," says Bill Lewis, director of the institute. "We can't learn about this from other countries, and until we get a solid statistical base on productivity growth in the US, we face uncertainty about where to direct investments."
"Surprisingly," the study states, "we found that managers in Japan and Germany could achieve performance close to US levels if they ran their companies differently, which they appear to be free to do." In other words, it is practices, not laws, that hold back productivity in Germany and Japan.
Overengineering and "goldplating" were found common in Germany. Phone cables of Deutsche Telekom must be able to withstand being run over by a tank, for example. In other words, the Germans invest too much capital to achieve certain tasks, relative to US businesses, in the view of the authors of this study.
Japanese utilities, in another example, do not use time-of-use pricing to reduce peak loads; thus they use power plants inefficiently and need more of them. Also, German and Japanese managers tend to buy their equipment locally, while US managers are more prone to shop globally. In telecommunications, this may cut US supply costs in half.
Overall, intense price competition and relative ease of entry by new businesses foster an environment of dynamic innovation in the US.
The US capital market, demanding financial performance by companies, thereby encourages productivity of both labor and capital. This higher productivity translates into higher financial returns for US savers. Annualized average return on debt and equity for the years 1974 to 1993 is 9.1 percent in the US, versus 7.4 percent in Germany and 7.1 percent in Japan. So $1,000 invested in 1974 would have returned $5,666 by 1993 in the US, $4,139 in Germany, and $3,597 in Japan.
The study disputes the "conventional wisdom" that US firms are forced by the capital market to be too focused on short-term results.
Many experts have charged that US business is much too prone to lay off workers in order to achieve higher productivity. Certainly jobs have tended to be more secure in Japan and Germany than in the US. But the US has produced far more new jobs than it has lost.