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Appreciating U.S. saving and investment.

In this paper, the authors challenge the

validity of some standard national saving

and investment statistics. By using

alternative measures, they conclude that U.S.

saving and investment held up reasonably

well in the 1980s relative to past U.S.

experience and that of other developed


THE OBJECTIVE of this paper is to question the validity of some standard national saving and investment statistics, including those discussed in the accompanying article.(1)


Figure 1 presents, in current-dollar terms, gross and net private saving and domestic investment, government saving and net foreign investment -- all relative to net national product.(2) The figure shows a decline in net private saving in the 1980s, more or less matched by a decline in net private investment, and a decline in government saving, more or less matched by a net inflow of foreign investment. There statistics are generally cited to support the argument that U.S. saving and investment are inadequate.

According to these figures, net private saving was 8.9 percent of NNP on the average in the 1960s and 1970s but only 6.2 percent in the 1980s. Because government dissaved, net national saving fell from 8.6 percent of NNP in the 1960s to 7.9 percent in the 1970s to 3.4 percent in the 1980s, at which rate even greatly reduced private domestic investment growth was associated with a substantial net inflow of foreign investment from the rest of the world.

To say the least, such statistics have raised concerns about the adequacy of U.S. public and private saving and investment and suggested that future U.S. growth is at risk.

All of these nominal NIPA statistics are suspect.

1. Saving is calculated as a residual, so that errors

in measuring exports, capital consumption,

etc. cumulate in net saving.

2. Investment data are flows not adjusted for

changes in the price level, relative prices, or

market values of outstanding asset positions.

3. Investment data are based on a definition of

capital formation that excludes government

investment, consumer durables, research and

development, and education and

training -- all of which enhance future consumption

prospects, which is what capital does.


Theoretically, economic growth would be expected to be linked to net saving and investment, yet, empirically, gross, rather than net, saving and investment are more closely associated with growth.(3) This finding may reflect a variety of measurement errors.

Net private saving is not measured independently but as a residual. It is what is left of GNP after subtracting consumption, including consumer durables, government spending net of taxes, and net foreign investment. Errors in measuring any of these elements are reflected in net private saving. For example, net exports, and hence net foreign investment, may be understated because customs authorities are less able to keep track of exports than imports. Moreover, conceptually, net private saving and investment are defined to exclude net accumulations of consumer durables, which are assets that enhance future consumption and, as such, are part of the private capital stock.(4)

Net investment may also be mismeasured because of errors in estimating capital consumption allowances. In addition, replacement capital is often superior to what it replaces, thereby effectively increasing the capital stock. Capital consumption allowances rose from less than 10 percent of NNP in earlier decades to 12 percent in the 1980s, an increase about equal to the swing from outward net foreign investment from the United States in the 1970s to the net inflow of the 1980s.

Figure 1 shows that gross private investment held up much more than net private investment in the 1980s, averaging 17.6 percent of NNP, down marginally from 18.2 percent in the 1970s, but up from 17.0 percent in the 1960s. Comparably, gross private saving was 18.7 percent in the 1980s, down from 19.5 percent in the 1970s, but up from 18.1 percent in the 1960s. Gross private saving including consumer durables totaled 28.6 percent of NNP in the 1980s, gross private domestic investment including consumer durables, 27.6 percent of NNP, the former up, the latter down slightly from the 1970s, but both up from the 1960s. Thus, even nominal statistics such as these offer no clear indication of deteriorating gross private saving and investment in the 1980s.(5) Moreover, because nominal statistics net or gross are not adjusted for relative price changes, they greatly understate real national saving and investment in the 1980s.


The nominal net and gross saving and investment statistics such as those plotted in Figure 1 are comparable to the figures typically cited in discussions about saving and investment patterns in the 1980s, yet such figures do not take into account that the large decline in the relative price of investment goods that occurred in the 1980s substantially increased the quantity of goods that investment spending purchased. Surprisingly, this point is often overlooked in discussions of U.S. saving and investment in the 1980s, including Hoover's accompanying article.

Figure 2 shows that inflation-adjusted gross private domestic investment ratios to NNP, defined both to exclude and include consumer durables, were higher in the 1980s than comparable nominal ratios -- and at least as high as in earlier decades! The relative price of producers' durable equipment, nonresidential and residential structures, and consumer durables all held steady or rose in the 1970s but fell in the 1980s. Consequently, the increase in gross private investment accounted for only 11.8 percent of nominal GNP growth in the 1980s but 15.3 percent of real GNP growth. The rise in gross consumer durables spending accounted for only 9.5 percent of nominal GNP growth in the 1980s but 17.5 percent of real GNP growth. Such increases in real output not only raise measured real -- relative to nominal -- private investment but, as a residual, real relative to nominal private saving. To top off this point, some economists have estimated that many investment goods prices probably fell more in the 1980s than official measures indicated.(6) If that interpretation is correct, real private investment and saving were even higher than Figure 2 shows.

Figure 3 plots not a residual -- but a direct -- measure of the current dollar value of net private saving based on the Federal Reserve Flow-of-Funds Accounts. Individuals' saving sums net accumulations of financial assets less liabilities plus accumulations of tangible assets including consumer durables. In contrast to the much publicized NIPA net private saving estimates, individuals' net saving held up well as a percent of NNP in the 1980s. It averaged 9.8 percent of NNP, down from 10.3 percent in the 1970s but up from 9.1 percent in the 1960s. In contrast, NIPA net private saving was only 6.2 percent in the 1980s, down from 8.9 percent in both the 1960s and the 1970s.(7)


To this point, we have presented some official statistics that are often overlooked in appraising the U.S. saving and investment situation. Here, we introduce some unofficial statistics bearing on saving and investment, which take into account changes in the real values of net asset positions of the private, government, and foreign sectors.

Figure 4 shows government saving ratios both in NIPA terms and in terms of the Eisner series that adjusts government financial positions to account for changes in the market values of assets and liabilities.(8) Government saving was minus 1.1 percent of NNP in NIPA terms in the 1970s but plus 0.5 percent in market value terms; it was minus 3.0 percent in NIPA terms in the 1980s but minus 1.5 percent in market value terms.

The increase in government saving that results from market valuation and inflation adjustment of the government budget is offset by a reduction in private real -- relative to nominal -- saving, and, to some extent, by a decline in the real value of foreign-held, dollar denominated claims on the government, i.e., real foreign investment in the United States. Just as real government saving in inflation adjusted, market value accounting is measured by the change in the real, market valued net asset position of the government, real national saving is measured by change in the real, market value of net national assets, including net international assets.

Figure 5 presents the, until revised in 1991, official U.S. Net International Investment Position (NIIP). It also presents one of our alternative Net External Wealth (NEW) measures, which adjusts the NIIP to incorporate our estimate of the market value of the U.S. direct investment position based on discounted earnings. The NIIP as formerly published mixes debt, equity, and monetary instruments valued at market in some cases but at official prices and historical costs in others. Over the years failure to account for inflation and changes in the real value of direct investments caused the U.S. NIIP, as officially measured, to become increasingly undervalued. By the second half of the 1980s, this undervaluation led to the incongruity that large negative NIIPs earned positive net returns. Our NEW estimates, which link direct investment positions to earnings flows, raise the U.S. net position about $600 billion over the NIIP for 1989 reported in the Survey of Current Business in June 1990.(9) In line with BEA's market value estimates of direct investment published in the Survey of Current Business for May 1991, we made estimates based on stock market and capital goods prices. These alternatives also show large revaluations, though not as large as our estimates based on capitalization of direct investment earnings.(10)

Because market value estimates raise the net U.S. direct investment position, by implication, they raise net domestic saving (wealth accumulation) and net foreign investment (net accumulation of foreign claims) as well. Essentially, taking into account the appreciation in U.S. direct investments abroad relative to that of foreign investments in the United States, our estimates of national saving averaged up to one percent of NNP more in the 1980s than estimates based on figures that ignore the market value of the U.S. net international investment position.


Figure 6 presents real national tangible wealth net of international claims along with two measures of those net international claims.(11) In the 1980s annual increases in U.S. tangible wealth net of the NIIP or NEW measures of the U.S. net foreign asset position averaged 10.2 and 11.1 percent of NNP. Such growth was down from about 14.5 percent for both measures in the 1970s but far above the NIPA nominal or real national saving rates. The latter averaged respectively only 3.4 percent and 4.4 percent of nominal or real NNP. Moreover, tangible wealth, as measured officially, does not take into account many of our most valued national assets, including minerals below the surface, national defense assets, human capital, intellectual property and the like. Land is included, but at farmland equivalent prices, which understate its market value. As measured, however, U.S. tangible wealth adjusted for the official NIIP and our NEW alternative increased in the 1980s by 21 and 23 percent, respectively, certainly no indication that the nation depleted its wealth in a frenzy of credit-financed consumption.


Broad capital concepts, which may be more reflective of productive power than narrow measures, show U.S. capital formation not subpar compared with the pattern in other developed countries. In the 1970s and much of the 1980s, U.S. gross capital formation (defined narrowly) was only 78 percent of the average in eleven other developed countries for which comparable OECD data were available.(12) Lipsey and Kravis broadened the definition of investment to include spending on consumer durables, education and vocational training, research and development, and governmental infrastructure -- all of which raise future consumption opportunities. Investments in these categories tend to run higher in the United States than in other developed countries. On such a common broad definitional basis, Lipsey and Kravis found U.S. capital formation rose from 78 percent to 91 percent of the developed-country average. Two other points led them to conclude that we were not at all laggard in capital formation.

1. Because U.S. capital goods' prices are lower

relative to consumption-goods-and-services

prices than in other countries, we buy more

capital per dollar, on average, than can be

bought elsewhere.

2. Because we have higher incomes, per capita

investment here, even narrowly defined, is

higher than the average for other developed

countries -- and broadly defined by 20 to 25


Comparison of U.S. capital formation with the experience in Communist and formerly Communist countries shows another dimension of saving and wealth accumulation. Capital formation appeared higher in Communist than market economies because of their relatively high saving rates, but we certainly know now that the sacrifices of their populations in foregoing consumption for investment generally haven't paid off. Ours don't always pay off either, but we recognize that investments aren't worth what they cost but what they contribute to the value of output, upon which market values depend. On that note, the sustained growth in real U.S. consumption -- not saving or investment -- is the most fundamental measure of sustained U.S. economic progress.


In spite of the conventional wisdom to the contrary, the statistics that we have presented suggest that U.S. saving and investment held up reasonably well in the 1980s relative to past U.S. experience and that of other developed countries. It is certainly true that the United States could have saved and accumulated even more than it did, but that is not sufficient reason to deprecate its very real accomplishments. [Figures 1 - 6 Omitted]


(1)Dennis K. Hoover "Low U.S. Saving: Increase It by Reducing the Federal Deficit," this issue. (2)Some familiar definitions: Net National Product = Gross National Product -- Capital Consumption Allowances. Government Saving = Taxes -- Government Spending. Net Private Saving = Gross Private Investment -- Capital Consumption Allowances + Net Foreign Investment -- Government Saving. (3)de Leeuw, Frank. "Interpreting Investment-to-Output Ratios: Nominal/Real, Net/Gross, Stock/Flow/Narrow/Broad." Bureau of Economic Analysis, Discussion Paper 39, March 1989. Goldstein, Henry N. "Should We Fret about Our Low Net National Saving Rate?" CATO Journal, (Winter, 1990), pp. 641-662. (4)Failure to count the service flow from durables as consumption understates consumption and the value of the national product. (5)Hoover uses essentially these private gross saving statistics to recommend that government saving be increased to increase national saving. (6)For example, Martin N. Baily and Robert J. Gordon, "The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power," Brookings Papers on Economic Activity, 2: 1988, pp. 347-420. (7)In examining whether the U.S. suffers from a saving shortfall, Thomas E. Swanstrom focussed on demographics as the main determinant of national saving. He argued that demographic patterns are likely to lead to a substantial increase in saving in the 1990s from abnormally low levels in the 1980s, his analysis based on nominal net saving statistics, including the Federal Reserve's Flow of Funds individuals' saving measure. Thomas E. Swanstrom. "The Saving Solution," Business Economics, Volume XXIV, Number 3 (July 1989), pp. 10-16. (8)Robert Eisner How Real is the Federal Deficit? New York: The Free Press, 1986. -- The Total Incomes System of Accounts. Chicago: University of Chicago Press, 1989. (9)William G. Dewald and Michael Ulan, "Appreciating America's Foreign Investments," The American Enterprise (September/October, 1990), 73-75. (10)BEA's valuing direct investment at market rather than historical cost raises the 1990 U.S. NIIP by $167 billion. Valuing direct investment by capitalizing earnings on these holdings would add another $540 billion to the net investment position, yielding a positive NIIP of about $180 billion over BEA's market value estimate for the year. (11)Nominal private sector tangible wealth data come from the Federal Reserve Board's Balance Sheets for the U.S. Economy; public sector tangible wealth data, from the summary fixed tangible wealth series in the Survey of Current Business. Nominal wealth data were deflated by a deflator derived from the nominal and real net fixed tangible wealth series in the Survey. (12)Robert Lipsey and Irving Kravis, "Comparative National Saving and Investment: A Different View," Annual Meeting of the Western Economic Association, July 1988.

William G. Dewald and Michael Ulan are international economists in the Planning and Economic Analysis Staff at the U.S. Department of State, Washington, DC. Views are solely the authors' and do not necessarily reflect positions of the Department of State or the U.S. government. William G. Dewald presented versions of this article at NABE chapter meetings in Cleveland, OH, and Washington, DC.
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Title Annotation:includes reply
Author:Dewald, William G.; Ulan, Michael; Hoover, Dennis K.
Publication:Business Economics
Article Type:Transcript
Date:Jan 1, 1992
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