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September 28, 2005
Why Savings is Overrated
Mark Thoma, whom I like, is quoting from the Economist on the virtues of saving.
But just how big are those virtues? Not as big as you think.
Let's do the calculations. Over the past 10 years, the U.S. has run up an accumulated goods and services trade deficit of roughly $3 trillion. Sounds like a lot of money, doesn't it?
Now let's suppose those dollars had been used for good rather than evil. That is, rather than buying imported cars, toys, and handbags, thrifty Americans would have saved their money. It's reasonable to believe that about half of that $3 trillion would have gone into financing productive purchases here in the U.S.--new factories, power plants, office computers and the like--$1.5 trillion worth.
So what would be the payoff from all that thriftiness? A reasonable rate of return on investment, after depreciation, is roughly 7%. So $1.5 trillion in extra assets would have a return of about $100 billion a year.
That $100 billion is roughly 1% of an $11 trillion economy. Over ten years, then, complete elimination of the trade deficit might--might--have added a tenth of a percentage point to growth.
That's a good measure of the size of the virtues of savings--roughly a tenth of a percentage point on growth. That's 0.1 percentage points.
To put that in perspective, the estimates of long-term productivity growth have risen roughly a full percentage point over the past decade. The effects of technology more than swamp the effects of savings.
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Your analysis only makes sense if you assume that 1.5 trillion dollars in investments (which can be not only for computers and factories like you pointed out but also eductation, R&D, and healthcare)over ten years will depreciate to zero dollars at the end of those ten years.
Posted by: Jay at September 30, 2005 12:58 AM
I don't think I need to assume that the depreciated value of the $1.5 trillion goes to zero after ten years.
Posted by: Mike Mandel at September 30, 2005 05:51 PM
You forgot that some of that $3 trillion DID come back to the U.S. economy as foreign investment. The U.S. has run a trade surplus in the capital account for years. So the economic effect of the current accounts deficit in terms of investment is even smaller than you supposed.
Posted by: Fred_D at October 17, 2005 09:03 AM