Tuesday, December 24, 2013

Save Your Worry

In his latest book, The Map and the Territory, Alan Greenspan argues the U.S. personal savings rate is too low -- and that government spending on social insurance is to blame. A one-dollar increase in these transfers causes a one-dollar decrease in personal savings, Greenspan writes, and the cumulative increase since the 1960s has so undermined savings and investment that it has knocked 10 percent off real potential GDP.

I'll leave it to Robert Solow and Steven Pearlstein to evaluate those claims. What I want to point out in this post is that most economic commentators, Greenspan included, vastly misunderstand the situation of U.S. saving -- and that, since I've actually looked at the data thoroughly, I see things very differently.

The conventional story is that the U.S. has undersaved and overconsumed for decades. The storytellers show graphs like this one below and make scary noises.

Why is that story wrong? It ignores the fact that households and institutions make up only about a third of U.S. gross saving.

Domestic businesses, which do the other two thirds of U.S. saving and are not reflected in that personal savings rate, have been saving far more than they have in the past. That has offset the decline in personal saving. We can see that in a graph of gross private saving over gross domestic income below.

The U.S. saves about one fifth of gross domestic income -- it saved a little more than that in the 1970s and over the last few years, a little less than that in the 1950s and the 1990s. The apocalyptic trend towards zero savings is simply not there. What appears to be a long-term decline in the savings rate is in fact a hand-off between households and businesses in who does the saving.

That savings hand-off could be for a number of reasons. Changes in tax policy may have made it more favorable for businesses, rather than households, to do the saving. Changes in trade policy may have made it more advantageous for businesses to have savings so that they can deploy that capital abroad. Changes in the income shares of labor and capital may have shifted the place where that saved income ends up.

Yet, whatever the reason, it's simply not true that the U.S. faces some growing problem of private saving. The savings rate that is economically relevant is gross private savings, not gross personal savings -- and we're doing fine by that measure. The economy does not care where its savings come from.

One could argue that the location of saving matters. It is important for households to have savings of their own, no matter how much everybody else is saving. Households, institutions, and businesses all exist in a financial network, also and huge savings imbalances among them may make that network vulnerable to shocks. Those are reasonable arguments -- but they are claims about the distribution, not the amount, of U.S. private saving.

So save your worry. The U.S. will be fine.


  1. If you own stock and the company is retaining earnings and investing at a high rate, that could substitute for your personal saving. Or, if you have a defined benefit plan, the company is doing your saving for you. Do 401-Ks count as the company saving for you too since it's a company plan? Then indeed it's probably a big form of personal savings that's undercounted.

    But, if you don't own stock or have one of those company plans, their saving doesn't help you in retirement or any financial shock. You're going to be in pretty bad shape when social security, as a form of enforced savings and safety net, is 'reformed'.

  2. Where is your data on business savings from?

  3. Granting the plausible assumption that the US will continue with a significant current account deficit into the foreseeable future, a continuing move of the public finances toward surplus would (as in the late Clinton years) entail that the domestic non-government sector in aggregate moves into deficit. This would not be fine if it continued for a prolonged period.

    And the political consensus in the US seems to be that the public finances need to move into surplus in order to shrink the public debt.

    I don't predict "fine",

  4. Granting the plausible assumption that the US will continue to have a substantial current account deficit into the future, aggregate domestic non-government savings will only remain as high as they now are if the public finances continue in significant deficit. If the public finances move toward surplus (as they did in the late Clinton years), the private sector will in aggregate necessarily move into deficit (as it did in the late Clinton years).

    The present policy consensus among our rulers on both left and right seems to be that the public finances need to move into surplus in order to shrink the absolute level of the public debt.

    Substantial current account deficit and in-surplus public finances is not compatible with aggregate private sector net saving.

    I don't think we will be "fine" if this policy aspiration is fulfilled. Perhaps internal devaluation, Euro-periphery style, is in our future.