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.