F red 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.
Trying to prove that the national savings rate has not really fallen below the 1970s level, Block and Heilbroner begin with corporate saving, which they say is five times as large as household saving. Their claim that "corporate saving shows no downward trend" as percent of GNP during the 1980s depends entirely on their postulated definition of corporate saving as "profits plus depreciation." Yet they should recognize that corporate profits cannot be treated as entirely savings: the portion paid out as dividends, or as below-the-line bonuses, becomes income to the stockholders and executives respectively. These persons may consume or save as they wish, but those dividends and bonuses have already been included in "personal savings." If we are to avoid double counting, the only part of corporate profits that is directly saved by the corporations is "retained savings"--and this item declined sharply in the 1980s.
Furthermore, the postulated sum of "profits and depreciation" stayed so high during the 1980s because most of that sum was the depreciation element. This cannot fall unless the stock of plant and equipment is actually reduced. It is not a matter of "saving" policy or practice.
Turning to household saving, Block and Heilbroner would make three big additions to the admittedly low rate as reported by the Department of Commerce. The first of these three is "realized capital gains," which certainly rose during the 1980s, and which they dump entirely into their concept of "the financial surplus available for investment." Here again the authors fail to distinguish, in a given flow of funds, the portion that individuals save from the portion they consume. It may well be that the marginal propensity to save out of capital gains is relatively high, but it is surely not 100 percent and may be well under 50 percent. In any event, the capital gainers' consumption has already been counted by the Commerce Department statisticians, in arriving at savings as a residual.
When Block and Heilbroner get to their next addition, namely pensions, they can't complain about the Commerce Department's treatment of private pension accumulations, which are clearly included in the official savings figures. So they fasten on public pension systems, saying that in estimating national savings, "the Department of Commerce ignores contributions to public pension funds on the grounds that they are spent to finance 'deficits,' not 'investments.'" It is hard to take this proposition seriously. At the least, I can testify that, like all pensioners of a public (state or municipal) university system, I made my annual contributions out of my gross income -- so they were saved -- and now I receive pension outpayments, which I am free to consume or save as I wish.
The authors' third addition is "housing inflation," where they deplore the rising depreciation that the Commerce Department assesses each year as a form of consumption in owner-occupied housing; that is, the inflated depreciation diminishes computed savings. Here they fail to take notice of the attendant rise in the imputed rental value of the inflated housing--a factor that increases the owners' imputed income and makes room for the increased depreciation.
When Block and Heilbroner put all the alleged additions together with the Commerce Department savings figures and arrive at a sustained high savings rate throughout the 1980s, they never stop to allow for all the heavy new dissaving in our economy nowadays: the sharp rise of federal deficit spending (that is, the rise of public debt); the sharp rise of consumer debt; and the drawdown of asset accumulations by seniors and others. To be sure, the Commerce Department calculation takes account of these items because Commerce statisticians deal in real consumption, whatever the source of its financing, when they subtract consumption from total income to arrive at estimated saving. Block and Heilbroner, however, in choosing to add in financial flows, must allow for all forms of financial dissaving.
Another unsettling factor is unreported income and consumption, especially the sale/purchase of illegal goods and services and various surreptitious transactions in cash ("payments under the counter"). These seem to have increased during the 1980s--largely through the drug trade--but with unknown effects on total saving.
After all these dubieties, Block and Heilbroner can't leave bad enough alone. On the final page of their article, they offer a second major argument about the role of savings. While their first argument claimed that there is no shortage of savings -- so that our economy today would not be improved by an increase in thrift--now they also assert that any fall in savings, if it did occur, is really irrelevant. They say: "Even if the savings rate had fallen. . . .[we could always] start up the engine of public investment, fueled with private savings"; and in parallel they say that private investment in plant and equipment is "in underemployed times . . . limited only by the willingness and ability of banks to lend [and] that ability, in turn, is solely determined by the Federal Reserve Board."
This line of argument, which is, of course, simple Keynesianism, supposes that public initiative and private stimulation will be vigorous in a time of recession and gloom (the celebrated hope of "pushing on a string"). Furthermore, it completely undercuts Block and Heilbroner's preceding argument, which assumed that the level of saving does matter. After all, if a low rate of saving can always be offset easily by fiscal and monetary policy, who cares whether saving is low or high? Thus the first five of their six pages become superfluous.
In reality, of course, as regards our heavy economic problems today, the crucial variable is our feeble investment. This would surely be facilitated by stronger saving-- even though not all incremental private saving goes into additional real investment. Accordingly, public investment is still vitally needed, financed if necessary by additional deficit spending.
FRED BLOCK AND ROBERT HEILBRONER REPLY:
P rofessor Reubens, like many other economists, knows our argument about the decline in personal saving must be wrong, but he is not sure precisely why. He assumes that the government statisticians know exactly what they are doing, but when he gets down to the details, he shows little familiarity with how they make their calculations. This is precisely the problem: fundamental issues of public policy hinge on numbers that have not been rigorously examined by economists or anybody else.
But before looking at the specifics, it is important to see what is at stake. Many economists insist that the low rate of household saving in the U.S. makes it dangerous or counterproductive to increase public sector investment spending or to increase the federal budget deficit to stimulate the economy. We reject this logic for two reasons. First, the empirical claim that household saving declined during the 1980s is wrong. Second, we think the argument is theoretically mistaken; in an economy with substantial unused resources, the supply of private saving need not constrain the level of investment.
Here our view is unapologetically Keynesian, but even readers who reject our Keynesian theoretical inclinations must recognize that the empirical argument is sufficient. If private saving actually rose during the 1980s, then the conventional argument against increased government spending collapses. It would then be obvious that the failure of the private economy to make productive use of that growing household surplus means that we must channel private saving into increased public sector investment if we want the economy to grow.
R eubens states that we are simply wrong in claiming that business saving showed no downward trend in the 1980s. But our measure of business saving is "Gross Business Saving," which equals undistributed corporate profits plus depreciation (with inventory valuation and capital consumption adjustments). This measure remained at about 13 percentof GDP from 1980 to 1988.
Reubens then claims that depreciation doesn't really count as savings, but depreciation is the major element in corporate investment. Firms are allowed to put aside a share of their income that is supposed to correspond to the wear and tear on their plant and equipment over the past year, and this portion of income is not subject to taxation. These depreciation funds are then available for expenditures on new plant and equipment, which--as in the case of computers--are often far more cost-effective than the old equipment taken out of service. A corporation whose investment spending was limited to this kind of replacement would, in fact, significantly increase its productive capacity. In recent years, the depreciation allowances have been large enough to fund three-quarters of all new capital expenditures by corporations. Despite the explosion of corporate debt in the 1980s, the fact is that virtually all new capital investment by corporations was financed by their own internally generated savings--undistributed profits and depreciation.
Reubens' first objection to our calculation of household savings is that we fail to distinguish that portion of realized capital gains that has been consumed. Our point, however, is that income from realized capital gains is not included in the Commerce Department definition of personal income, though the consumption that has been financed by realized capital gains has already been measured. We are not quarreling with the residual method for calculating saving; we simply propose to subtract all consumption from all income--both ordinary income as well as realized capital gains.
Reubens then objects to our claim that public pension funds are treated differently than private pension funds in the national income accounts. However, our point has been clearly made by Thomas Holloway, a statistician who worked for the Bureau of Economic Analysis ("Present NIPA Saving Measures: Their Characteristics and Limitations" in Robert E. Lipsey and Helen Stone Tice's The Measurement of Saving, Investment, and Wealth). The Commerce Department procedures do not measure the contribution of private pension plans to savings in the way that Reubens imagines--private pension benefits are not included in the Commerce Department concept of personal income. Rather, the contributions by employers and the interest and dividends earned on pension fund assets are included in the measure of personal income. We simply argue that if the identical procedure were used for public pension funds, there would be a significant increase in the saving rate.
F inally, Reubens questions our point about housing depreciation. Here again his argument is plausible but wrong. The government's estimates of depreciation on owner-occupied housing have been so high that they overwhelm the imputed rental income from the housing. The income flow that owner-occupiers are assumed to earn from their housing has been negative in the 1980s.
Our point was not to criticize the government's statisticians but to show that their figures have been misused. If the question is whether households are generating a growing surplus that is available for productive investment, then an accurate answer requires that the official savings rate has to be adjusted in the way that we proposed. These adjustments involve using a broader concept of income and avoiding the artificial subtraction of depreciation on owner-occupied housing. These adjustments are consistent with the Commerce Department methodology, and they do not involve adding in financial flows or double counting.
The Clinton administration will have an unprecedented opportunity to revitalize the U.S. economy. It would be tragic if that opportunity were not seized because influential economists and businesspeople continue to operate on the unexamined and incorrect assumption that private saving declined in the 1980s.
