The Low US Savings Rate? No (Immediate) Problem

For years, Americans have heard the lament: "The nation is not saving enough. Business hasn't enough capital to invest to make productivity rise faster. Woe, woe! Our living standard is suffering." Usually, odious comparisons are made with thrifty Japanese, or South Koreans, or others - though less so now with the Asia crisis.

Well, economists agree that the United States savings rate has fallen quite sharply over the past 20 years. And most would say that the growth in productivity - output per hour worked - has been disappointing in the 1980s and 1990s.

But investment is another story.

Business investment "is not so much a problem as it is made out to be," says Lynn Browne, chief economist at the Federal Reserve Bank of Boston. "I'm not convinced we would get the payoff in productivity we would hope for doing more of what we are doing now." In other words, the level of investment in new plants, computers, machines, equipment, and offices may be about right.

Gordon Richards, chief economist of the National Association of Manufacturers, agrees "more or less." Productivity in the US, he adds, may have turned up in the mid-1990s. Productivity growth ran on average about 1 percent a year in the '80s. Mr. Richard's model of the economy sees productivity growing 1.65 percent a year through 2005. One key reason is an upturn since the mid-80s in measures of technological advance, like new patents.

A rise in productivity would make an enormous difference to Americans. The economy and wages could grow faster without boosting inflation. Workers should be more prosperous. The Federal Reserve, Richards argues, wouldn't need to raise interest rates to deter inflation.

If savings are low, how did business find the money to keep up its investment? After all, total savings (personal, business, and government) amounted to 20 percent of the nation's gross domestic product, its output of goods and services, in the 1960s and 1970s. It fell to roughly 15 percent of GDP in the 1990s.

One factor, Ms. Browne says, is foreign savings have made up for domestic savings. The government ran a huge budget deficit in the '80s and much of the '90s. But foreigners were buying US Treasury securities, setting up plants and offices, and taking over US companies in grand style. Those investments pay a return to their owners abroad. The US has become a bigger debtor nation as its international balance of payments runs in the red each year.

Nonetheless, Americans have benefited from the jobs, technologies, or other skills introduced by foreign companies. Toyota built not only new car plants in the US, it introduced management techniques that spread to US carmakers.

Other factors limiting the damage to productivity from low savings has been a decline in spending on defense equipment and housing, Browne and a colleague, Rebecca Hellerstein, argue in a Boston Fed publication.

That's made more money available for business investment in nonresidential durable equipment. Such investment in tools, equipment, computers, etc., remained as high or higher than it was in the 1960s and '70s, though down from the early '80s. It is what gives American workers and their bosses a relatively high living standard.

The after-inflation values of both investment in equipment and total investment are larger relative to GDP than at any time in the past 40 years, the two economists say. Or, a smaller investment effort is yielding more actual investment.

That's not what politicians in Washington have been saying. They pushed through Congress a tax bill last summer with more tax breaks for retirement savings and capital gains, arguing that the nation needs more investment. Senate Finance Committee chairman William Roth Jr. wants to ease taxes on capital gains even more by allowing short-term investments favorable tax treatment.

Browne and Hellerstein say their points don't argue "against policies that would correct tax biases against savings and investment. The cost of capital will not always be as low as it is now." But they do lessen any urgency in the issue.

There can, after all, be too much investment. New Englanders and Southern Californians invested too much in office buildings in the 1980s. And something similar has happened in Japan, Thailand, Indonesia, and South Korea.

For now anyway, Americans probably shouldn't feel quite so guilty about their low personal savings habits.

* Since the 1960s, David Francis has covered the economic scene for the Monitor.