Low U.S. saving: increase it by reducing the federal deficit

Business Economics, Jan, 1992 by Dennis K. Hoover

In spite of the federal deficit-reduction

package enacted October 1990, the deficit

remains huge and national saving is still

very low. In reconsidering the issue of U.S.

saving, this article concludes: (1) Low

national saving continues to be a major U.S.

problem; (2) demographic developments in

the 1990s will not raise the saving rate

significantly; (3) new tax incentives aimed at

raising household saving would be

ineffective; and (4) the surest and most direct way

to raise national saving is still to reduce the

federal deficit, by either cutting spending

and/or increasing taxes.

TWO YEARS AGO, Thomas E. Swanstrom concluded that the only assured way to increase national saving was to reduce the federal budget deficit ("The Savings Solution," Business Economics, July 1989). However, he also concluded that the U.S. saving problem had been exaggerated and that demographic changes would raise saving markedly in the 1990s. Since that article appeared, considerable research has been devoted to the saving issue, and the undeniable conclusion from that research is that low saving remains a major U.S. economic problem.

The U.S. national saving rate -- already among the lowest in the industrialized world in the 1970s -- declined significantly in the 1980s. It averaged 16.6 percent of GNP in the 1980-88 period, trailing the average of 23.1 percent for twenty-two other countries in the Organization for Economic Cooperation and Development (OECD) by 6.5 percentage points, according to U.N. measurements. As shown in Table 1, that saving gap between the U.S. and the OECD average about equally reflected relatively large government dissaving and lower private saving (by both businesses and households) in the U.S.

U.S. saving looks rather sorry on a time-series basis, too. As shown in Table 2, the U.S. national saving rate fell 3.5 percentage points from its average of 16.9 percent of GNP in 1972-81 to 13.4 percent in 1982-89. That decline about equally reflected an increase in the federal deficit and a decline in household saving. In contrast, other saving (both business saving and state and local government surpluses) rose slightly. In comparison with the 1952-71 period, the U.S. national saving rate was also down in the 1980s, but the U.S. private saving rate was about the same in both periods. (In 1990 the national saving rate, at 12.0 percent, was even lower than its average level of the 1980s.)

LOW SAVING HURTS LIVING STANDARDS

Low saving is an important U.S. economic problem. According to a study by economists at the Federal Reserve Bank of New York, low U.S. saving "has caused a steady erosion of the nation's growth potential" and "has contributed significantly to the worsening of the nation's trade and investment position."(1)

First, low saving hurts growth. A strong historical relationship exists between domestic saving and capital investment.(2) Moreover, because slower investment retards economic growth, a low rate of national saving retards advancement in a nation's standard of living. Thus, it should not be surprising that the U.S. standard of living has grown very slowly in recent decades. For example, real GNP per worker grew at an average annual rate of 1.7 percent in the 1952-71 period, but at only a 0.7 percent rate in 1972-89.

Second, a decline in national saving can hurt a nation's international payments position. In the U.S. in the 1980s, rising government deficits stimulated consumer spending (and hence imports) and contributed to a rise in the value of the dollar (hurting U.S. exports and boosting U.S. imports). Partly as a result, an essentially balanced U.S. foreign trade position in the early 1980s mushroomed into a large trade deficit by the mid-1980s, and the U.S. shifted from being the world's largest creditor to the world's largest debtor nation. That new debtor position leaves the U.S. uncomfortably dependent on foreign capital.(3)

DEFINITIONAL PROBLEMS

All of the above saving concepts refer to "gross" saving, i.e., total saving, i.e., after depreciation deductions. "Net" saving, i.e., after depreciation deductions, is particularly difficult to measure and to compare with confidence on an across-country basis. Nevertheless, using OECD calculations, net national saving in the U.S. has fallen even more sharply than gross saving, from 9 percent of GNP in 1971-80 to 4 percent in 1981-87, while the OECD average fell from 13.5 percent to 8.7 percent.

To be sure, numerous problems also exist in the calculation of gross saving. As a result, the question of how to calculate saving is somewhat controversial. Nevertheless, adjusting for those problems would not alter the basic conclusion that U.S. national saving declined significantly in the 1980s.(4) However, adjusting for those problems could slightly reduce the reported saving gap between the U.S. and other countries, depending on which adjustments were made.(5)

WHY THE DECLINE?

As noted in Table 2, the decline in U.S. national saving between 1972-81 and 1982-89 reflects two developments: a 2.2 percentage point increase in the federal deficit and a 2.0 percentage point decline in the household saving rate.