What is the 'right' amount of saving: is our national savings rate a national disaster?

Is our national savings rate a national disaster? Only, says Professor Friedman, if you believe government knows more about

what individuals want than they know themselves.

Seven eminent economists and businessmen express a wide range of agreement and demurral.

THE U.S. IS SAVING too little." That has become the battle cry of the doom-and-gloomers of all shades of opinion-left, right, and center. Low saving, we are told, condemns the U.S. to becoming a second-rate nation, or even a banana republic. It threatens our future standard of living, and imposes unjustified burdens on future generations.

How fashions change! By chance, I recently came across notes of a course on business cycles that I taught nearly half a century ago (in 1940). Glancing through the notes, I was struck by how much attention I paid to what was then the favorite battle cry: We're saving too much. Class period after class period was devoted to describing and criticizing the now nearly forgotten under-consumption theories of the business cycle.

Then as now, the concern was with maintaining economic growth. However, the perceived threat was not too little saving to finance investment, but too little consumption to provide an incentive to invest. Unless consumers spent more lavishly, we were doomed-or so we were told-to secular stagnation. The railroad revolution had come and gone, the automobile and electric-power revolutions had come and gone, and no comparable new industries were in sight to absorb the potential savings of a fully employed economy-so spake the prophets, Alvin Hansen and John Maynard Keynes. Only a sharp rise in the propensity to consume or large doses of government deficit spending could fill the gap left by the exhaustion of investment opportunities.

In fact, the alleged "oversaving" of the 1930s did not condemn us to "secular stagnation" and permanent high levels of unemployment. No more will the alleged "undersaving" of the 1980s condemn us to low growth and a declining standard of living. That may be our fate but, if so, for very different reasons.

A "shortage of investment opportunities," if it had existed, would have produced a market reaction in the form of lower interest rates, which would have encouraged investment in lower-yielding projects-including investment abroad-and discouraged savings. Similarly, the currently much deplored reduction in the propensity to save, if it exists, combined with ample investment opportunities, is working its own cure by keeping interest rates high enough to moderate any reduction in saving, to attract capital from abroad, and to discourage investment in low-yielding projects. These and related market reactions are adequate to avoid the dire consequences that are the stock in trade of the doom-and-gloomers who are always in our midst.

AS PRESCRIPTIONS FOR POLICY, both the earlier and the current battle cries rest on an unstated, and I believe fallacious, assumption: that it is a proper function of government to determine the level of saving. The proponents of this view seldom attempt to justify it except by citing the dire consequences that are alleged to follow from failure to achieve the "right" level of saving. And they never specify what they regard as the "right" level of saving-just calling for less and less, or more and more-nor do they even discuss the criteria that can be used to decide what the "right" level is.

Currently, net saving in the United States is about 1.5 per cent of the national income. This is the excess of private net saving of 3.5 per cent of the national income over, government dissaving of about 2 per cent. (These figures are all rough estimates and, in my view, seriously understate the actual value of the addition to the nation's physical wealth correctly measured, but that is not relevant to my present purpose so I shall here regard these figures as correct.*) If 1.5 per cent is too low, what is the right level? Is it the roughly 15 per cent reported as saved by the Japanese? Or the roughly 10 per cent reported as saved by the West Germans? Or the roughly 4 per cent reported as saved by the British? How are we to judge?

As a classical liberal, my answer is straightforward. The right level-at least to a first approximation-is the level that would emerge if all the separate households were ftee to divide their income between current and future consumption in accordance with their own values, provided only that the terms on which they could do so were not distorted and did not impose uncompensated costs or benefits on other households-in economic jargon, if there were no external effects.

Suppose, to take an extreme case for the sake of argument, the end result was zero saving: that is, given the rate of return on capital, the members of the community on the average did not regard the reward from saving as sufficient to justify sacrificing current consumption in order that they or their progeny could have still higher consumption in the future. Some households might be spending on consumption more than they were currently earning, for example, those composed of older persons or of young persons with young children; other households might be spending on consumption less than they were currently earning, for example, those composed of persons at their peak earnings with few dependents. But dissaving and saving would just offset one another. Would there be anything wrong with that outcome?

The critics will say, But that would mean no growth. Perhaps so, but what is wrong with that? If the members of the community are satisfied on the average with their present level of living and do not wish to economize in order that they or their progeny can have a still higher level tomorrow, whom are they harming? Not themselves, since any household that disagrees with the consensus is ftee to save and to provide a higher future level of living for itself or its heirs. But, we shall be told, that means other nations may catch up to our current high level of living and indeed may surpass us. Again, on individualistic grounds, what of it? If keeping up with the Joneses is less than admirable for individuals, why is it different for nations?

A rational answer must call on external effects: unintended results of the separate individual actions. And indeed there are some that may need to be considered. The most obvious is national security. If we fall behind other nations, and those nations are our enemies, we may be unable to finance a large enough defense effort. In principle, this is a valid argument. However, in current circumstances, there are two obvious answers. First, as it happens, our leading competitors-Japan and the Common Market countries-are our allies, not our enemies. If they get richer, that benefits us through the widening range of international trade, and enables us to improve our defenses, while at the same time it enhances the defensive capacities of these allies as well. Second, we now spend only about 6 per cent of our income on defense. Surely, if necessary, we could increase that substantially out of our current level of income.

Other effects of this kind are vaguer, and I find myself hard put to identify any for which I can readily make a persuasive case. For what other purpose are some of us justified in forcing others of us to save?

And that is especially true if we shift from the extreme case that I posed to the real world. In that world, housebolds are not free to choose between current and future consumption on terms that are technically possible. The terms are distorted, and distorted in such a way as to discourage savings. Out of every dollar of income earned in the United States, a substantial fraction goes to finance government spending. The households that have earned the income cannot use that fraction for either current or future consumption. Further, the taxes imposed are not neutral but tend to be biased against saving. Nonetheless, net saving in the United States has been consistently positive for the past two centuries, except only during deep depressions, and is positive today, though lower than it has generally been in the past. That is a remarkable phenomenon, attributable, I believe, to the high rate of return on capital that a free private-market economy-even one hobbled as ours has been by unwise government spending and intervention-can generate.

The policy implications of the classical liberal viewpoint are clear. We jointly decide to transfer part of our income to government to spend on our behalf Whether that decision be made wisely or not, it is desirable that government finance its spending in such a way as to minimize the distortion in the incentive for us to save the rest of our income or spend it on consumption. It is not easy to specify precisely the method of taxation that would have that effect, but the objective is clear: to avoid interfering with our freedom to choose how much we want to save out of the income that is left to us after financing government spending so long as we do not interfere with the ability of our fellows to do likewise.

The government has no business meddling in our family planning: whether about how many heirs we have or how much wealth we choose to leave them.

Herbert Stein 

I APPRECIATE Professor Friedman's position on the amount of saving. I used to take that position myself, but I now have many questions about it.

The policy significance of the question about the right amount of saving is whether the effect on total national saving should be considered in decisions about the character of taxation, about Social Security, and about the size of the federal budget surplus or deficit. The current issue is mainly about the size of the surplus or deficit. People who say we need more saving are saying that we need to eliminate the deficit and get to a surplus.

I will start with Friedman's proposition that the right amount of saving is what would emerge from the sum of the decisions of all individual households if these decisions were not distorted, presumably by government actions, and if there were no externalities. I agree with that. But, as he says, there are distortions, from the tax system and from Social Security.

These distortions are not all accidents or mistakes, in my opinion. They result in part from an attempt to achieve equity and express compassion. To say that these distortions should be removed in order to achieve the "right" amount of saving implies a decision about the relative importance of saving as compared with these other values. That is, it already implies some notion of the right amount of national saving.

In any case, these distortions of the private savings decisions do exist and probably will continue to do so for some time. What then? Is the right amount of saving the amount that emerges from private decisions in the presence of these distortions? I don't see any reason to think that, and Friedman does not say it is.

Some people have suggested that government should take steps to achieve the total amount of national saving that would emerge if there were no distortions. It is proposed that we should have a budget surplus big enough to offset the effects of taxes and Social Security in depressing private investment. Congressman Bill Gradison, for example, has calculated that that would require a budget surplus equal to 3.5 per cent of GNP. This suggestion has some appeal, but it is not entirely logical. The classical liberal argument about the supply of saving, to which Friedman refers, is that private choices will generate the right amount of saving for each household, which will add up to the right national total. But this argument does not say that the same total of saving would be optimum if it were not distributed among households in the way that would result from undistorted private choices.

So I do not think we can escape consideration, implicit or explicit, of the right amount of national saving. In the end we come to the question of externalities. Professor Friedman recognizes that there might be a case for more saving to promote growth on national-security grounds-the elemental example of an externality. He says that the case does not apply to the United States in the 1980s, and I agree with him, but that is an ad-hoc argument, not one of principle.

The question is whether, if there could be a case for more saving and more growth on national-security grounds, there could be such a case on other grounds. The national-security argument is that if 51 per cent of the people are violently opposed to living under the Soviets, they are entitled to tax the other 49 per cent to pay for defense, even though the 49 per cent may not mind or may even prefer Soviet rule. Suppose 51 per cent of the people want very much for their grandchildren to live in a country where not only are they rich and getting richer but everyone else is also rich and getting richer. It seems to me that if the 51 per cent have this preference, if they understand the costs of satisfying it in terms of forgoing present consumption or in other terms, there is no reason in principle to reject their claim.

One can argue that this claim would not be sensible in the United States in the 1980s-we are already rich, we have every expectation that our grandchildren will be richer, and anyway, rich isn't everything. But that would be an ad-hoc argument, like the one about national security, and it alreadyaccepts that we have a collective decision to make. I am disagreeing with Professor Friedman's point that we, collectively, have no business even thinking about whether national saving should be greater or smaller.

Robert M. Solow

EVERYTHING PROFESSOR FRIEDMAN says at the beginning, about how those who disagreed with him in 1940 claimed there was too much saving for the country's good while those who disagree with him now claim there is too little saving for the country's good, thus revealing themselves as a bunch of flibbertigibbets who share only a belief in government interference in our lives -all that is an unworthy debating trick.

In 1940 the country had just been through a decade of tragically high unemployment and low production. Real investment in plant and equipment had all but vanished. The unemployment rate was still nearly 15 per cent in 1940. It was not a great advertisement for the automatic adjustment process on which Professor Friedman rests his optimism. A reasonable person might have concluded that more spending on goods and services, whether from the private sector or from agencies of government, would help to increase production and employment by improving the market prospects of business firms.

That is not our problem today. The economy is prosperous. But the national saving rate is quite low by historical standards, and investment has been maintained by borrowing abroad. This does not look much like the considered carrying out of Americans' intertemporal preferences. It looks more like the result of the irresponsible fiscal policy of the Reagan Administration.

To have thought that the danger was oversaving in 1940 and undersaving now is no more paradoxical than to have heard from your doctor when you were twenty that you were exercising too much and to hear from her now, at seventy, that you are exercising too little.

Professor Friedman's real argument appears to be that he does not think there is any such thing as "civil society," having interests other than military interests in which a free people might acquiesce even if those interests are not identical with their own private wishes as individuals. It does not seem so strange to me that people, thinking as citizens, might say to themselves and to each other: We are mortals with a lifespan of seventy to eighty years, but we are also the temporary trustees of a society that may go on for centuries. We care about our children and grandchildren, of course. But it is possible that, in our private actions, we give inadequate weight to the needs of still more remote generations who are hardly real to us as persons. In this light, one might vote for a higher national saving and investment rate much as one might, in a national emergency, vote to conscript everyone, including oneself, though one would not volunteer if there were no conscription.

Nor does it seem relevant that it is so difficult to define and estimate a "best" national saving rate. Of course it is difficult; nothing could be more complex. It would be silly to hold that 1.5 per cent is too low, and that the figure should be 1.6 per cent. But it is not silly at all to suggest that 1.5 per cent is too low and we could use something much higher. We could try it and see if we like it. Parents bringing up children have to choose a policy somewhere between absolute permissiveness and absolute authoritarianism. I don't suppose they can ever know the "best" policy, especially since it may differ ftom child to child. Most of them do not on that account give up, let alone go to one extreme or the other. They talk it over, observe the experience of others, and make a change if that seems appropriate.

It is true, of course, that you can provide for your own descendants by making bequests, though I wish Professor Friedman cared more for the grandchildren of those who have little to leave, or even for the grandchildren of the well-off but improvident. I did not know that it was a tenet of "classical liberalism" that grandparents are fully entitled to dispose of their grandchildren's future. But there is more to be said. The earning capacity of my grandchildren and great-grandchildren, when they enter the Labor market, will depend on their productivity and therefore on the aggregate amount of investment that their whole generation inherits. I cannot affect that as an individual. It does not seem an unworthy consideration for a citizen.

Evan G. Galbraith 

MILTON FRIEDMAN is quite right to ridicule those with a hidden agenda who use "saving" to divert attention from the success of Ronald Reagan's economic policy. Mr. Friedman could have cut even deeper: not only is it difficult to measure personal saving or to determine the amount individuals should save, the ratio of personal saving to personal income is simply the wrong way to judge saving.

Saving is important because it is the basis for investment, and investment plus work produces growth and improved standards of living. The Department of Commerce's national income accounts divides gross private saving into gross business saving and personal saving with only 20 per cent being personal saving, the balance being the undistributed cash flow of businesses. Thus to argue about personal saving is to ignore the most important element in saving and the most important source for what is called gross private domestic investment (GPDI).

What we ultimately must look at is the mirror image of gross savings, i.e., gross investment (GI). Has GI diminished because a shortage of savings has made the cost of capital too high? The answer is no. As is pointed out in the Economic Report to the President 1989, GPDI grew at an average rate of 10.5 per cent per annum during the Reagan expansion, more than a full percentage point faster than the average growth in previous expansions, and GPDI has maintained its average postwar ratio to gross national product,

Moreover, we cannot ignore foreign saving. In the national income accounts, GI consists of GPDI and net foreign investment. All types of foreign investors are anxious to invest in the United States. The doom-and-gloomers Mr. Friedman refers to would have it that foreigners invest here only because they are forced to by our trade deficit. The fact is that the American economy is much admired, and the policies that created our record-breaking economic expansion are being copied around the world. Our trade deficit is a creature of our economic strength, and we are fortunate that the dollar savings pool dedicated to investments in the United States is worldwide.

There are no short-cuts to growth. We must work and invest capital. Government obstacles-taxes, regulation, etc. -to these two components of growth have diminished in the last eight years, and as a consequence more people are working and more capital is being invested than ever before in our history. Job creation will continue and capital will keep being invested in the United States so long as our government does not revert to the old ways advocated by the doom-and-gloomers.

Peter G. Peterson

EVER SINCE I was fortunate enough to be one of Milton Friedman's students at the University of Chicago, I have always held his wisdom in highest regard. So naturally, when I differ from his viewpoint-as I do here -I cannot help bringing to bear some of his insights.

Milton assumes that our current rate of net national savings (scarcely one-third of the rate for the rest of the industrial world during the 1980s) reflects the aggregate sum of free choices by private households, and that the outcome is therefore socially optimal. Milton once taught me to start out by examining assumptions. Examining his, I find them impossible to accept given the massive public policies that depress our savings below what free and informed private choice might dictate.

There is, of course, the 2 to 3 per cent of our GNP in public-sector deficits-negative savings-which already offsets about half of our private savings. But public-sector deficits are only the tip of the iceberg. To an extent unequaled anywhere else in the industrial world, our tax structure penalizes savings and rewards borrowing, especially with regard to housing. Further, our system of unfunded public transfer payments between generations weakens one of the strongest of all incentives for private saving: retirement. Our Federal Government currently tabors under some $10 trillion in unfunded pension, Social Security, and health-care-benefit liabilities to future retirees-a sum about five times as large as our official national debt. Private working households act as if their Social Security and other old-age benefits in fact are savings, and thus reduce their own savings, even though the "pay-as-you-go" funding of these programs means that no corresponding public saving takes place.

Given this formidable public involvement in our national savings behavior, is it fair to assume with Milton that our current national savings rate represents any sort of "private" choice, let alone one that is "optimal"? I think not. I doubt that we would privately choose to save so little, just as I doubt that our public sector (with a two-year electoral cycle) devotes anywhere near the same attention to the future as private households (with a child-raising time horizon of twenty to thirty years).

It could be argued, of course, that we get, through the voting booth, precisely what we want. As voters free to choose, maybe we like to dissave publicly much of what we try to save privately. But that implies that voters, like buyers, are making truly informed choices. Most Americans, deceived by opportunistic politicians and dishonest accounting, don't even know about our massive unfunded liabilities and wrongly still believe, for example, that Social Security is a fully funded insurance system from which the participants just get back what they put in plus interest. Nor does the "you can have it all" supply-side orthodoxy inform them that less saving today necessarily translates into a lower standard of living tomorrow.

We must not fool ourselves. Lower domestic saving means lower investment, lower productivity, lower growth, and a lower standard of living-unless we borrow from abroad to invest. The more in hock we are to Tokyo and Bonn, of course, the more of our production and real assets we must ship to them as debt service, and the more our interest rates and economy are hostage to the psychology of foreign investors and central bankers. And we are piling up all the costs and vulnerabilities of foreign borrowing without even its potential benefits, since we mainly borrow from abroad to finance consumption, not investment.

It is questionable at best that Americans are making "an informed choice" to substitute, at the margin, an additional $100 of consumption today at the cost of $15 less income in every future year for themselves and their children. It is far more likely-as Milton himself has pointed out with regard to so many other government policies, from tariffs to regulation-that such an outcome victimizes a large number of the invisible and unorganized (namely, our children and the unborn) for the benefit of a smaller number who are both visible and organized. We cannot guess what challenges they may face. All we can do is decide whether they will face them with or without the assistance of our savings endowment.

Our Founding Fathers may have had such thoughts in mind when they explicitly framed a government "for ourselves and our posterity." Possibly, they intended special public provision for "posterity" beyond what private households would choose. Without a doubt, they intended a public sector that would at least refrain from actively undermining what private households are struggling to do on their own.

Antonio Martino 

PROFESSOR FRIEDMAN'S brilliant analysis brought back memories of the not-so-distant past, when the intellectual climate in many countries was dominated by Keynesian prophecies of doom. Twenty-five years ago I wrote my dissertation under the supervision of a Keynesian economist, and I distinctly remember the common wisdom ofthe time.

The consensus was that market economies were inevitably headed toward a disastrous recession, for the reasons spelled out by Keynes in the General .Theory: "For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment." This was, however, unlikely: "Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive." Nothing less than an inexorable law of historical destiny was leading us toward disaster: "there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. Tbe weakness of the inducement to invest has been at all times the key to the economic problem. . . . The desire of the individual to augment his personal wealth by abstaining from consumption has usually been stronger than the inducement to the entrepreneur to augment the national wealth by employing labor on the construction of durable assets."

In other words, according to Keynes and his numerous followers, savings were destined to exceed investments at a "full employment" level of income, so that, unless the government adopted an "active fiscal policy" (i.e., deficit spending), disaster would inevitably occur. This kind of doomsaying was, understandably, very popular with politicians, who could use it as a theoretical justification for their propensity to spend and spend without the need to tax. The dramatic growth of government during, the last decades in the Western world is due more to Keynes than to Marx.

The hypotheses of the "secular stagnationists" have been demolished by the evidence. First of all, the percentage of income saved does not increase with income. Secondly, the demand for saving, contrary to what Keynes seemed to believe, increases with income. As a result, the problem in some countries now is not "too much," but "too little" saving. The alleged problem of a shortage of saving, not surprisingly, leads some to advocate the same old, infallible remedy: government intervention.

The fears of too little saving, however, have a real advantage over the previous fears: whereas the preoccupation with excess saving made government growth easier, the present, opposite apprehension poses a problem to statists. If one is convinced that the private sector is doomed to spend too little and save too much, one is led to advocate government spending and budget deficits. This can easily be accomplished, as we all know. On the other hand, the therapy for a lack of saving should be a reduction of government spending and/or budget surpluses. Neither option is very attractive to politicians. In other words, from the point of view of individual liberty and the need to contain the growth of government, current preoccupations are far less dangerous than the previous catastrophic predictions, and they may even prove to be a blessing.

That's why, in a sense, I wish my countrymen were not as parsimonious and would save less: if Italy's saving ratio were "low," I wonder how our government could finance a budget deficit in excess of 11 per cent of GDP. In some cases, private prudence makes public folly possible.

Benjamin M. Friedman 

AH, YES. If only the government were staying out of our collective decision about how much America should save.

There is much merit in Milton Friedman's argument that we, as a nation, as a society, should be free to save whatever share of our incomes we choose. If we decide to put aside large amounts to provide for our retirement, or for our children's education, so be it. If instead we decide to consume most of our income as we earn it, that choice should likewise be ours to make.

As Professor Friedman recognizes, of course, leaving such societal decisions entirely to privatecitizens' individual actions is not exactly optimal when private actions have external effects. I believe that a higher saving rate does have positive external effects. The openness of opportunity, the social mobility, the continuous striving for excellence, and other characteristics that have traditionally distinguished America has been able to sustain the ideal of forward progress for over two centuries is that Americans' standard of America has been able to sustain the ideal of forward progress for over two centuries is that Americans' standard of living has, in fact, doubled roughly once per generation throughout this time. Without the fact of forward progress, our willingness to work to make reality correspond to our democratic ideals would probably wither, and America would succumb to the social rigidity and acceptance of mediocrity that are characteristic of economically stagnant societies elsewhere.

For this reason, there probably is a case to be made for a public policy that encourages saving by private citizens.

By contrast, many students of U.S. saving behavior have concluded that our government, through its tax system and its insurance and transfer-payment programs, systematically discourages private saving.

But the case for encouraging more private saving pales compared to the need to stop the government from absorbing the bulk of what we already do save. Thus far during the 1980s, net private saving by all American families and all American businesses combined has averaged 5.6 per cent of our national income. The Federal Government's borrowing during this period has averaged 4.1 per cent of our national income. Hence nearly three-fourths of what we have saved has not been available to finance business investment in productive new plant and machinery. Nor has it been available to finance the building of new homes to house our growing population. It has simply gone to fund the government's record excess of money spent over revenues coming in.

As a result, we have not only slowed our rate of business investment, compared to prior experience, but had to borrow ever larger sums from abroad just to finance what little investing we have done. On average during 1951-80 we devoted 3.3 per cent of our national income to net investment in business plant and equipment, a smaller share than in many other countries but still enough to fuel continuing growth in our standard of living (although that growth did slow in the 1970s). Since 1980 our net business investment rate has fallen to 2.2 per cent on average. Measured instead on a gross basis-that is, including new plants and new machines that merely replace old ones as they wear out or become obsolete-our investment rate has been high but declining in the 1980s. Last year we devoted 10.0 per cent of our national income to gross investment in business plant and equipment, down from 12.1 per cent in 1981.

Either way, gross or net, if we had merely devoted to private investment one-half of the saving that the Federal Government has absorbed during this period we would not have seen the erosion of our capital formation that has actually occurred. And if historical experience is any guide, our economy's rate of productivity growth-just 1.4 per cent last year and 0.8 per cent the year before-would have been the better for it.

One might respond (and some have responded) that in the end all this government borrowing does not matter because private citizens, seeing how much of their saving the government is absorbing, will simply save all the more. Intriguing as this idea may be, not to mention reassuring, the experience of the 1980s does not support it. Instead of rising to finance the usual amount of investment plus the new record-size federal deficits, since 1980 our private saving rate has fallen.

Milton Friedman is right. The first order of business for American economic policy today should be to allow the saving done by private citizens to determine our country's level of investment, and hence its economic growth. That means gettingrid of the government's budget deficit, so that what we save will once again be free to flow into private investment. And that, in turn, means either cutting government spending or raising taxes, or-more likelysome of both.

James M. Buchanan 

THE EDITOR'S SOLICITATION of this response was waiting for me when I returned from an American Enterprise Institute conference on the emerging Social Security surplus. Elementary public-choice theory predicted what Congress is doing, and will do, with the current excess of payroll-tax receipts over Social Security payments. Congress uses this surplus to finance ordinary federal spending; the surplus has become the means through which the Gramm-Rudman-Hollings budgetary targets will be proximately met. Residually, the Social Security account will accumulate claims against the Treasury, but there will be no increase in net saving, which seems to have been the intent of some proponents of the 1983 reforms.

The interesting part of the conference discussion involved claims that the national saving rate is "too low." Participants advanced various arguments for policy steps designed to increase the national saving rate.

My initial reaction to these arguments at the conference was similar to Milton Friedman's position in his article. There is no optimal rate of saving "out there" somewhere, to be discovered by economists and imposed on the body politic. Surely the government has no business deciding how much we, collectively, should save. And, as the current Social Security mess indicates, any well-meant attempt to increase saving via political channels would be converted into expanded governmental outlay.

As Milton Friedman indicates, we can say that the rate of saving is "too low" if we can identify institutions that distort private consumption/saving choices. The existence of institutional elements that work to discourage saving is acknowledged. The tax structure is important in this respect. Indeed, there may be ways to work out changes upon which everyone could agree, changes that would result in a higher saving rate.

Beyond these institutional changes that would remove distortions in private consumption/saving choices, are there other changes that might make everyone better off? At this point I part company with Milton Friedman. I am less classically liberal in that I do not accept the orthodox neoclassical theory's presumption that there are no external economies in the pure consumption/saving (or leisure/ work) choices of persons. I suggest that we have internalized these external economies through the transmission of the "Puritan ethic," which makes saving (and work) virtuous. And as this ethic has eroded, we are all made worse off. This conclusion-which is, admittedly, based on a strong intuitive sense rather than rigorous proof-does not imply that there is a role for politicized interference. It does imply that we cannot be quiescent as pre-Keynesian ethical standards continue to be undermined.