Bush Needs to Inaugurate a Savings Policy

While the loudest advice greeting President Bush is on ways to cut the budget deficit, some influential voices are speaking up for encouraging Americans to save.

And that could be the best advice Bush will get because, ultimately, the success or failure of his Administration may depend on whether Americans increase their savings.

Michael J. Boskin, who will head the Council of Economic Advisers in the Bush Administration recalled and praised the Individual Retirement Account in a recent academic article. The IRA allowed all taxpayers to defer taxes on $2,000 of income. But Congress cut eligibility for such deductions in 1986. Too bad, suggests Boskin, more IRAs might have boosted savings in “the nation with the lowest savings and investment rates in the advanced world.”

Richard Darman, the new head of the Office of Management and Budget, said at hearings last week: “We must keep America growing; we must increase savings and investment, increase productivity and renew our pioneering spirit.”

Which sums it up--although saving money is not often equated with pioneering and national productivity. For most people, saving is desirable but not always possible when the problem is earning enough to make ends meet.

Saved Up to 8% of Incomes

Yet on a national level that’s looking at the problem from the wrong end. The fact is, if there were more savings in this country, the American people would earn more. Alan Greenspan, chairman of the Federal Reserve, explained that recently to the National Economic Commission. “Savings provide investments” that expand the nation’s stock of productive assets, said Greenspan. And as investments increase, so does the amount of capital per worker, which in turn increases output per employee.

When output per employee--or productivity--is growing, the pie gets bigger and there is more for all in wages, in profits, in benefits. That was the situation of the U.S. economy between 1948 and 1973, when productivity grew almost 3% a year and Americans saved 7% to 8% of their income.

But for the past 15 years, productivity growth has lagged and Americans have saved at less than half their former rate.

And that’s a key to many problems facing the new President, including the much-discussed budget deficit. Other governments run deficits, too; Japan’s budget deficit is proportionately as large as that of the U.S. government. But Japan has ample savings to offset its government deficit, so nobody agonizes over Japan’s economy.

Or its ability to compete internationally, where savings are extremely important. In Japan, because of surplus savings, companies can raise capital at less than 4%--while U.S. companies must pay closer to 10%. The difference is critical. If its capital cost is less than 4%, a company can obviously invest more readily and for longer-term than a company that must pay close to 10%. The one company can be confident of a profitable return; the other, nervous and impatient for a payback, must be wary and limit its options.

So fears of U.S. industry’s declining vigor could be exaggerated. The real problem may be costly capital and inadequate domestic savings.

The point for the Bush Administration to keep in mind is that other people didn’t always save more than Americans. Tax exemptions for interest on savings got the Japanese going. Other nations--Canada, for one--have similarly reduced taxes and boosted savings.

So will the Bush years see a comeback for the IRA? Not immediately. (Tax-deductible IRA contributions are still available to some taxpayers, and tax-deferred earnings on IRA investments remain available to all). A Congress focused on deficit cutting won’t easily consider reductions in tax revenues. The only savings reform likely this year is that taxes on stock dividends could be reduced, if Congress acts to curb corporate debt and leveraged buyouts.

But longer-term, some early good advice shows that the Bush Administration understands that boosting savings may be the key to restoring U.S. industry’s place in the world--and turning four years into eight.