Appreciating U.S. saving and investment - includes reply - Transcript

Business Economics, Jan, 1992 by William G. Dewald, Michael Ulan, Dennis K. Hoover

In this paper, the authors challenge the

validity of some standard national saving

and investment statistics. By using

alternative measures, they conclude that U.S.

saving and investment held up reasonably

well in the 1980s relative to past U.S.

experience and that of other developed

countries.

THE OBJECTIVE of this paper is to question the validity of some standard national saving and investment statistics, including those discussed in the accompanying article.(1)

STANDARD EVIDENCE OF INADEQUATE SAVING AND INVESTMENT

Figure 1 presents, in current-dollar terms, gross and net private saving and domestic investment, government saving and net foreign investment -- all relative to net national product.(2) The figure shows a decline in net private saving in the 1980s, more or less matched by a decline in net private investment, and a decline in government saving, more or less matched by a net inflow of foreign investment. There statistics are generally cited to support the argument that U.S. saving and investment are inadequate.

According to these figures, net private saving was 8.9 percent of NNP on the average in the 1960s and 1970s but only 6.2 percent in the 1980s. Because government dissaved, net national saving fell from 8.6 percent of NNP in the 1960s to 7.9 percent in the 1970s to 3.4 percent in the 1980s, at which rate even greatly reduced private domestic investment growth was associated with a substantial net inflow of foreign investment from the rest of the world.

To say the least, such statistics have raised concerns about the adequacy of U.S. public and private saving and investment and suggested that future U.S. growth is at risk.

All of these nominal NIPA statistics are suspect.

1. Saving is calculated as a residual, so that errors

in measuring exports, capital consumption,

etc. cumulate in net saving.

2. Investment data are flows not adjusted for

changes in the price level, relative prices, or

market values of outstanding asset positions.

3. Investment data are based on a definition of

capital formation that excludes government

investment, consumer durables, research and

development, and education and

training -- all of which enhance future consumption

prospects, which is what capital does.

GROSS SAVING AND INVESTMENT HELD UP IN THE 1980S

Theoretically, economic growth would be expected to be linked to net saving and investment, yet, empirically, gross, rather than net, saving and investment are more closely associated with growth.(3) This finding may reflect a variety of measurement errors.

Net private saving is not measured independently but as a residual. It is what is left of GNP after subtracting consumption, including consumer durables, government spending net of taxes, and net foreign investment. Errors in measuring any of these elements are reflected in net private saving. For example, net exports, and hence net foreign investment, may be understated because customs authorities are less able to keep track of exports than imports. Moreover, conceptually, net private saving and investment are defined to exclude net accumulations of consumer durables, which are assets that enhance future consumption and, as such, are part of the private capital stock.(4)

Net investment may also be mismeasured because of errors in estimating capital consumption allowances. In addition, replacement capital is often superior to what it replaces, thereby effectively increasing the capital stock. Capital consumption allowances rose from less than 10 percent of NNP in earlier decades to 12 percent in the 1980s, an increase about equal to the swing from outward net foreign investment from the United States in the 1970s to the net inflow of the 1980s.

Figure 1 shows that gross private investment held up much more than net private investment in the 1980s, averaging 17.6 percent of NNP, down marginally from 18.2 percent in the 1970s, but up from 17.0 percent in the 1960s. Comparably, gross private saving was 18.7 percent in the 1980s, down from 19.5 percent in the 1970s, but up from 18.1 percent in the 1960s. Gross private saving including consumer durables totaled 28.6 percent of NNP in the 1980s, gross private domestic investment including consumer durables, 27.6 percent of NNP, the former up, the latter down slightly from the 1970s, but both up from the 1960s. Thus, even nominal statistics such as these offer no clear indication of deteriorating gross private saving and investment in the 1980s.(5) Moreover, because nominal statistics net or gross are not adjusted for relative price changes, they greatly understate real national saving and investment in the 1980s.

REAL SAVING AND INVESTMENT HIGHER THAN NOMINAL IN THE 1980S

The nominal net and gross saving and investment statistics such as those plotted in Figure 1 are comparable to the figures typically cited in discussions about saving and investment patterns in the 1980s, yet such figures do not take into account that the large decline in the relative price of investment goods that occurred in the 1980s substantially increased the quantity of goods that investment spending purchased. Surprisingly, this point is often overlooked in discussions of U.S. saving and investment in the 1980s, including Hoover's accompanying article.