Drop in National Savings Rate Blamed for Trade Deficit

An alarming decline in the national savings rate is the biggest economic problem facing the United States and the chief cause of its huge trade deficits, according a private report released today.

The report, by the private American Business Conference, said that while the government’s huge budget deficits have contributed to the problem, the decline primarily has been caused by high consumption by individuals.

“This overconsumption is financed through large-scale sales of U.S. assets to foreigners at unfavorable terms, a process that postpones the day of reckoning but that increasingly mortgages the U.S. economic future,” the report said.

It said the decline in national savings also heightens the risk of recession and ultimately leads to slower growth in the standard of living.

Overall, national savings--the difference between the nation’s output in goods and services and what is consumed by government and individuals--fell from 7.9% in the 1970s to 2.1% during 1985-87, the study found.

Over the same period, individuals’ consumption of goods and services rose from 69.3% of national income to 74.1%.

The increase in personal consumption was attributed largely to growth in disposable income, a rise in household wealth that exceeded the increase in national wealth, the maturing of the population to ages above 16 when spending is higher, and the spending of equity that was converted to cash in corporate takeovers and buyouts.

The report said the tendency to spend what is on hand is highlighted when people receive unexpected lumps of cash from their stock investments when they are paid premiums in the course of corporate buyouts.

The authors said action is needed on three fronts to boost the national savings rate from a low point that is unprecedented in a period of economic expansion, not only for the United States but for all industrialized countries:

- Reducing the federal deficit.

- Improving incentives for private saving.

- Eliminating incentives for corporate buyouts.