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Why Is U.S. National Saving So Low?

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Why Is U.S. National Saving So Low? LAWRENCE SUMMERS Harvard University CHRIS CARROLL Massachusetts Institute of Technology WhyIs U.S. National Saving So Low? THE LOWAmerican national saving rate has long been a serious concern to economic policymakers. Increasingnational saving and investment was a principalobjective of the Economic Recovery Tax Act of 1981 and of the supply-sideeconomic policies that accompaniedit. Yet the nationalsaving rate, at least as measuredin the National Income and ProductAccounts, has declined sharplyduring the 1980s.Over the past five years, nationalsaving has averagedonly 2.3 percentof full-employ- ment GNP, comparedwith 7.4 percent during1960-80. In 1986,Ameri- can net nationalsaving was below 2 percent of GNP, less than half the rate in Britain,less than 30 percent of the rate in France and Germany, and only 10 percentof the rate in Japan. The unprecedentedU.S. governmentbudget deficits of recent years are often singledout for blame. Governmentdissaving as a share of full- employmentGNP indeed increased by 2.5 percentage points between 1960-81and 1982-86.Still, risingdeficits can accountfor only abouthalf of the decline in the national saving rate between the two periods. The remainderis attributableto a roughlyequal decline in the private saving rate. Much of that decline is in turn traceable to a fall in the personal savingrate. Low personaland private saving rates are especially striking given the widespreadhope that the tax incentives enacted in 1981would increasepersonal and private saving. The economiceffects of the low U. S. savingrate depend on the ability of the United States to sustain large capital inflows from abroad. Over the past several years, more than half of net domestic investment has Weare grateful to DavidCutler for research assistance and to membersof the Brookings Panelfor manyuseful comments. 607 608 Brookings Papers on Economic Activity, 2:1987 been financedby internationalcapital flows. If nationalsaving remains low, either these capital flows, with the attendantdislocations in the economy's traded goods sector, will continue, or investment will drop off precipitously. What finallyhappens will depend in large part on the response of foreign investors and governmentsto chronic capital out- flows. Neither outcome would improveAmerican international compet- itiveness. This report examines several issues raised by the currently low Americannational saving rate. Are the declines in nationalsaving real, or are they insteadthe resultof faultymeasurement that ignores the huge capitalgains generatedin the stock marketfrom 1982to the fall of 1987? Does recent experience contradictthe Ricardianequivalence idea that governmentdeficits call forth increased private saving or the supply- side idea that tax incentives can spur private saving? What forces lie behindthe apparentsecular downtrend in privatesaving? To what extent can capitalflows from abroadsubstitute for domestic saving? We concludethat the low nationalsaving rate duringthe 1980scannot be attributedto measurementproblems. It is traceableto a combination of federal deficits and a continuationof a long-termdownward trend in private and personal saving. Private saving would probablyhave been still lower duringthe 1980sif the federalgovernment had not encouraged saving with new tax incentives. However, the most reliableway for the federal government to increase national saving is to reduce its own borrowing.Without an increasein nationalsaving, andgiven the increas- ing reluctanceof foreigninvestors to hold Americanassets, it is unlikely that even currentlevels of investmentcan be maintained. Trends in Saving Table 1 presents saving data from the National Income and Product Accounts, measuredon both a standardand an inflation-adjustedbasis. The inflationadjustment is necessary because in an inflationaryenviron- ment interest received (or paid) reflects in part compensationfor the erosion in the value of nominalassets and so is not properlytreated as income.1 The table also presents measures of the ratio of private 1. For a careful discussion of inflationadjustment and a numberof other possible adjustmentsto standardmeasures of saving, see Derek W. Blades and Peter H. Sturm, Lawrence Summers and Chris Carroll 609 consumption to "private GNP," defined as GNP less government outlays. If depreciationis mistakenlyoverstated in the nationalincome accounts, measurednet savingwill be understated.However, this error would not affect the ratio of consumptionto GNP, so the consumption ratio provides a useful check on the robustness of conclusions reached using the savingrate data. The table shows the dramaticdecline in the nationalsaving rate in the 1980s, to less than 2 percent of full-employmentGNP in 1986and less than 3 percent during 1981-86-less than half the rate during any preceding five-year interval. Abnormally low national saving is also evidenced by the high ratio of consumptionto private GNP in recent years. The shareof total consumptionoutlays in privateGNP reached a postwarhigh in 1986after increasing sharply following the 1981tax cut. As a furthercheck on the robustnessof our conclusions, figure1 plots the NIPA saving rate along with two further variants-the national savingrate inferredfrom flow-of-fundsdata and the nationalsaving rate measuredinclusive of net additionsto the stock of consumerdurables.2 The flow-of-fundsdata provide an independentmeasure of saving by tallying increases in asset stocks rather than estimating a residual between income and spending. The consumer-durablesadjustment recognizes that purchases of consumer durables provide for future consumptionservices and so are a form of saving. Both adjustments confirmthat nationalsaving has declined dramaticallyin the 1980s. The 5 percentagepoint decline in the NIPA saving rate from 1960-81 to 1982-86may be apportionedevenly, as table 1 shows, between a 2.5 point increasein governmentdissaving and a 2.5 point decline in private saving. On an inflation-adjustedbasis, the results are similar, with 2.9 percentagepoints attributableto the public sector and 1.9 points, to the private sector. For 1986, a somewhat larger share of the decline in national saving may be traced to the private sector. By contrast, extending the interval back to the 1950s suggests a somewhat greater "The Conceptand Measurementof Savings:The United States and OtherIndustrialized Countries,"in FederalReserve Bank of Boston, Saving and GovernmentPolicy (Boston: FRBB, 1982),pp. 1-30; or PatricH. Hendershottand Joe Peek, "PrivateSaving in the United States, 1950-85," WorkingPaper 2294 (NationalBureau of EconomicResearch, June 1987). 2. For a discussionof the flow-of-fundssaving data, see Frankde Leeuw, "Conflicting Measuresof PrivateSavings," Surveyof CurrentBusiness, vol. 64 (November1984), pp. 17-23. 610 Brookings Papers on Economic Activity, 2:1987 Table 1. National Income and Product Accounts (NIPA) Saving and Consumption Measures, 1950-86 Percent of full-employment GNP unless otherwise indicated Consumption Feder al plus (percent of full- state anzdlocal employment NIPA Private savinzg governmnentsaving private GNP)b national Inflatiotn- Inflation All Except Year saving Reported adjusteda Reported adjusteda goods durables 1950 10.4 7.5 ... 2.9 ... 77.0 64.7 1951 10.1 8.2 ... 2.0 ... 76.2 65.3 1952 7.0 8.1 6.5 - 1.1 0.3 79.4 68.8 1953 5.7 7.7 7.2 -2.0 -1.6 80.5 69.2 1954 5.1 7.0 6.8 -1.9 -1.7 80.9 70.1 1955 8.6 7.8 6.8 0.8 1.7 78.0 66.2 1956 9.3 8.1 6.4 1.2 2.8 77.6 66.7 1957 8.0 7.8 6.4 0.2 1.5 78.4 67.5 1958 4.6 7.3 6.6 -2.7 -2.0 81.5 71.2 1959 7.2 7.5 6.2 -0.3 1.0 79.5 68.7 1960 7.2 6.6 5.7 0.6 1.5 79.7 69.2 1961 6.3 7.1 6.5 -0.8 -0.2 80.2 70.3 1962 7.3 7.9 7.0 -0.6 0.2 79.3 69.0 1963 7.8 7.6 6.8 0.1 0.9 79.0 68.3 1964 8.5 8.9 8.3 -0.4 0.1 78.7 67.8 1965 9.7 9.7 8.6 0.1 1.0 77.8 66.6 1966 9.3 9.5 7.9 -0.2 1.2 77.8 66.6 1967 7.9 9.7 8.7 - 1.8 -0.9 79.1 68.0 1968 7.7 8.4 6.5 -0.7 1.0 79.5 67.8 1969 8.3 7.3 5.6 1.1 2.6 79.0 67.6 1970 6.5 7.4 5.8 - 1.0 0.5 80.3 69.5 1971 6.7 8.4 6.7 - 1.7 -0.1 79.5 68.2 1972 7.7 8.0 6.8 -0.3 0.9 78.7 67.1 1973 10.1 9.5 7.2 0.6 2.9 76.6 65.2 1974 7.4 7.9 5.0 -0.3 2.7 78.1 67.5 role for governmentdeficits in accountingfor the low level of national saving. It seems fair to conclude that in an arithmeticsense the low nationalsaving rate in the 1980sis a reflectionof declines in both public and private saving. National Saving and the Ricardian Equivalence Proposition The premisethat nationalsaving can be analyzedfruitfully as the sum of independentprivate and public components has been challengedby Lawrence Summers and Chris Carroll 611 Table 1. (continued) Percentof full-employmentGNP unless otherwise indicated Conlsuimptioni Federal plus (percenit offull- state and local employment NIPA Private saving governmenit saving private GNP)b national Inflation- Ilifjation All Except Year saving Repor ted adjuisteda Repor ted adjusteda goods durables 1975 4.6 8.4 6.2 - 3.9 - 1.6 80.2 69.4 1976 5.6 7.7 6.1 -2.1 -0.5 79.2 67.9 1977 6.6 7.6 5.6 -0.9 1.1 78.4 66.9 1978 7.9 7.9 5.8 0.0 2.2 76.9 65.7 1979 7.7 7.2 4.6 0.5 3.1 76.8 66.1 1980 5.0 6.2 3.5 - 1.2 1.7 78.7 68.7 1981 5.5 6.4 4.4 -0.9 1.2 77.7 68.0 1982 1.8 5.0 3.7 -3.2 - 1.7 81.2 71.2 1983 1.8 5.3 4.2 -3.5 -2.2 81.8 71.2 1984 3.9 6.6 5.6 -2.6 - 1.3 80.1 69.2 1985 2.3 5.5 4.4 - 3.3 - 1.9 81.7 70.4 1986 1.7 5.1 4.6 - 3.2 -2.6 82.7 71.1 Averages 1951-55c 7.3 7.8 6.8 -0.4 -0.3 79.0 67.9 1956-60 7.3 7.5 6.2 -0.2 1.0 79.3 68.7 1961-65 7.9 8.2 7.5 -0.3 0.4 79.0 68.4 1966-70 7.9 8.5 6.9 -0.5 0.9 79.1 67.9 1971-75 7.3 8.4 6.4 - 1.1 1.0 78.6 67.5 1976-80 6.6 7.3 5.1 -0.8 1.5 78.0 67.1 1981-86 2.8 5.6 4.5 -2.8 - 1.4 81.0 70.2 1950-86 6.7 7.6 6.1 -0.8 0.4 79.1 68.2 Source: Actual saving, consumption, and price data are from the National Income and Product Accounts.
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