America Is Saving More Now, Not Less If You Count It RightRobert Kuttner
One of the articles of faith concerning Americas economic distress in recent years is the belief that the U.S. has suffered from a savings shortage. Insufficient savings means the U.S. does not have enough funds to invest. A scarcity of capitalrelative to demandin turn requires users of capital to pay higher rates for it or to borrow money from abroad. In the usual analysis, the large federal budget deficit figures as an additional source of dissavings, since borrowing by the government soaks up a private savings supply that is meager to begin with. This analysis is virtually bipartisan: Democrats tend to attribute the problem to the deficits generated by faulty supply-side economics. And Republicans blame it on Democratic spending programs and the absence of more incentives to save and invest.
According to the Commerce Dept., the savings rate dropped from 7.5% of disposable personal income in 1981 to just 2.9% in 1987. It turns out, however, that the apparently low rate may be just an erroneous statistical artifact. As Fred Block of the University of California at Davis has pointed out in a series of papers, Commerce calculates the savings rate by subtracting total consumption from total measured consumer income. That seems logical enough. But, as Block observes, it omits three of the most important sources of actual savings: realized capital gains, net additions to Social Security trust funds, and savings accumulated in the form of equity buildup in owner-occupied homes.
LARGER SLICE. As everybody knows, rich people own a disproportionate share of the nations total savings supplysince the poor consume most of what they earn. Only the well-off save and invest a large fraction of their incomes: Thats the justification for supply-side tax incentives, which are often criticized as rewarding the wealthy. Everybody also agrees that the 1980s were a period when capital-gains income increased significantly and when the rich gained an even larger slice of the national income pie. As Block observes in his most recent article, written with Robert L. Heilbroner and published in this springs issue of The American Prospect (which I co-edit), capital gains rose from $21.3 billion, or 3% of disposable income in 1970, to a 1986 peak of $295.8 billion, or 9.8% of personal income. As Block and Heilbroner comment: No plausible measure of the national saving rate should ignore this immense addition to the financial investment power of households, or more accurately, to the households at the apex of the income pyramid.
Since the well-off save disproportionately, total national savings could hardly have dropped during a period when the well-to-do reaped enormous capital-gains windfalls. During the 1980s, middle-class incomes stagnated, and saving by the middle class probably did drop. But the decline in the relatively modest savings of the middle class was more than offset by the increase in the capital-gains income (and savings) of the well-to-do.
During the 1980s, the accumulation of surpluses in Social Security accounts was a major contribution to collective national savings. However, Social Security savings and home-equity buildup are both omitted from the official Commerce Dept. calculations. In 1980, increases to Social Security funds equaled about 1% of personal income. By 1988, they were more than 3%. The concept of housing savings is somewhat controversial, since equity in your home is not in a financially liquid formalthough in the 1980s, it became rather more liquid through the device of home-equity loans. (These loans, incidentally, show up on the national balance sheet as a charge against measured household savings, when in reality they are a charge against unmeasured housing savings.)
YAWNING DEFICIT. Even when the figures are adjusted only for capital gains, Block and Heilbroner find that total savings for the years 1984-88 were significantly higher than during the early 1980s, despite Commerce statistics that show savings plummeting. If capital gains are counted, they more than double the official measure of savings. For example, the 1988 supply of savings would be $300 billion rather than the paltry $145 billion that was reported. With this revised measurement, savings went up in the 1980s.
But what of the monstrous federal deficit? One can hardly open a newspaper without reading that the deficit consumed most of the available savings supply. So didnt the net savings rate still fall? Wrong again, say Block and Heilbroner. As Heilbroner observes, federal spending is not a source of savings or dissavings. Instead, it is a use of savings, just as the private-sector decision to invest savings in a new factory or to spend it on 10,000 vacations is a use of savings. And, Heilbroner adds, since the federal government lacks a capital budget, we really dont know what fraction of federal spending went for investment and what fraction for consumption: National accounts arbitrarily treat all of it as consumption. The implication of these findings for national policy is profound, since they shatter a core assumption about what afflicts the economy. This will be the subject of my next column.