Start Saving or Get Ready for U.S. Decline: Laurence Kotlikoff
America has a terrible saving problem and a slumping economy. But our national mantra, underscored by last week’s payroll-tax cut, is spend, spend, spend.
Yet, countries can’t spend their way to prosperity. This demand-side voodoo-economics approach is driving us further into hock. The right mantra should be save, save, save.
Consider a bifurcated economy. In one part, workers are fully employed, producing and getting paid 1,000 kernels of corn, which can be consumed or saved. Workers are allergic to the corn that their company produces. So they make one type of corn, get paid, and buy different corn from other companies.
If the workers collectively consume, say, 600 kernels now and save 400, they will have produced 600 of consumption goods and 400 of investment goods. If they consume, say, 800 kernels, 800 will have been produced for consumption and only 200 for saving or investment. Having the workers consume more changes the consumption-investment production mix, but it doesn’t increase gross domestic product or employment.
Moreover, regardless of how much the workers spend, the unemployed in the economy’s other part are still miserable. In that part, which produces and consumes only beans, firms aren’t hiring because they think no one else is doing so and that they won’t be able to sell the beans they produce. This failure requires coordinated hiring, not having the employed overspend and underprovide for retirement.
That brings us to last week’s extension of the payroll-tax cut, which is supposed to increase spending by workers. Never mind that the real reason the two political parties reached the deal was to secure the votes of those already working. As for the unemployed, it’s “Sorry, no job, no taxes, no tax cut.”
Facts reinforce the idea that spending is no cure-all for what ails America. Most countries experiencing full employment and rapid growth do so while saving at very high rates. China (CNGDPYOY) is growing like crazy with a saving rate of more than 30 percent. Japan also saved at very high rates when it was booming. Since then, both rates have plummeted.
The U.S. has also done better when saving was high. In the 1950s and 1960s, saving averaged 14 percent of national income, which grew at 4.4 percent a year in real terms. In the 1990s and 2000s, saving averaged 5.1 percent and national income increased only 2.4 percent.
The connection between saving and growth runs through domestic investment. Countries that save invest not only by building inventory for tomorrow; they also invest in physical capital that makes workers more productive.
U.S. saving is highly correlated with domestic investment; when we save, we primarily invest here at home in starting businesses, buying equipment, and building factories.
Yes, causation can reverse and run from growth to saving. When recessions hit, national income falls by more than consumption as households try to maintain their living standards. Hence, lower growth coincides with lower saving.
But slumps can’t explain our secular decline in saving and investment. We’ve been spending larger shares of national income in good and bad times.
Our country is now saving nothing and, consequently, investing next to nothing and growing slowly. Last year’s net national saving rate was 0.1 percent. In 2009, it was negative 1.7 percent. This year, we’ll be lucky to hit 0.5 percent. You have to go back to the 1930s to find saving rates this low.
Our net domestic investment rate in 2009 was a measly 2.1 percent. Last year, it was a paltry 4.4 percent, and this year it may reach 5 percent. These, too, are historic lows.
What explains the saving decline? It’s not government consumption, whose share of national income was slightly smaller in the last decade than in mid-century. It’s households.
In the ‘50s and ‘60s, households spent, on average, 83 percent of each year’s available national income after government consumption. In the 1970s, this household spending rate rose to 86 percent and kept rising, reaching almost 96 in the past decade. In 2009, the rate was 102 percent (we spent down assets), and last year, after the recession formally ended, it was about 100 percent.
Which households are responsible for all the extra spending?
Older households are the big spenders, economists Ronald Lee and Andrew Mason wrote in their book “Population Aging and the Generational Economy,” published in August. In 1960, the average consumption expenditure of people in their 70s was 86 percent of the amount for people in their 30s. In 1981, it was 114 percent. By 2007, the rate was up to 144 percent.
This pattern shows up in other ways. In 1960, those over age 60 accounted for 13 percent of the population and 14 percent of household consumption. By 2007, they accounted for 17 percent of the population, but 24 percent of total consumption. So their population share rose by 31 percent, while their consumption share rose by 71 percent.
How come? Because of transfer programs. In 1960, Medicare and Medicaid didn’t exist and Social Security benefits per oldster were small. Today, these benefits per oldster total 72 percent of per-capita GDP and will reach roughly 85 percent in 20 years when all 78 million baby boomers are fully retired. We will be lucky if our national saving rate remains at zero.
The bottom line is, we’re taking from young savers and giving to old spenders. We need to reverse course and raise national saving and, thus, domestic investment with generationally fair policies. The alternative is an early economic grave.
(Laurence Kotlikoff, a professor of economics at Boston University, is a Bloomberg View columnist. The opinions expressed are his own.)
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