Conservatives and deficit hawks who see government spending as a drain on the economy imagine that economic growth in the United States has stemmed only from private investment and innovation. But from the earliest days of the Republic, government at all levels has played a critical role in expanding the economy. The development of transportation -- from lighthouses, harbors, inland waterways, canals, and railroads to highways and airports -- has been the most obvious contribution. The government's role in technological innovation, often for military purposes, has also been central. In the 19th century, federal armories pioneered mass production based on interchangeable parts. During World War I, public investment laid the basis for the radio and aerospace industries.
Fred Block and Robert Heilbroner, in "The Myth of a Savings Shortage" (TAP, Spring 1992), want to persuade us that, contrary to the conventional wisdom, there is no scarcity of savings in the U.S. economy today. They say that the present national savings rate is as high as ever; that it plays no depressing role in our prolonged recession and sluggish growth, not to mention our lagging productivity and our weakness in international competition; and therefore increased saving would be no remedy for these problems.If their argument were valid, it would entail a revolution in public policy. But alas it is a muddle of misconstrued flows, confusion of categories, and reckless double counting.
The United States is being held hostage by a dubious statistic and a serious misapprehension. The statistic shows that household saving in the U.S. economy dropped precipitously during the 1980s. The serious misapprehension is that this drop has impaired economic growth and that the economy cannot revive until the savings rate increases. In the standard view, without savings there can be no investment, and without investment, no growth -- whence comes the deceptively simple but misleading idea that the path to recovery lies in a revival of household savings.