The greatest economic perils facing the United States are excess private consumption and insufficient savings, conditions that have aggravated both the trade deficit and the budget deficit, a report released by a private industry organization declared Wednesday.
The report, prepared for the American Business Conference, a group of 100 chief executives of mid-sized, high-growth companies, says the sharp decline in saving during the high-income, free-spending Reagan years was accompanied by a parallel decline in investment and a sharp inflow of investment money from abroad.
Although many economists welcome the trend toward foreign investment, Wednesday’s report finds it alarming.
“To a certain extent, the U.S. is not only mortgaging its future through foreign borrowing but holding a ‘fire sale’ of its assets at bargain prices in order to raise funds,” the report warns.
To put matters right, the business conference report urges a reduction in the federal budget deficit and an effort to export more and import less. And in conjunction with those goals, it calls for a return to the higher saving rates of the 1970s, to free up funds for productive investment in plant and equipment.
Net national saving, the report says, plummeted from 7.9% of net national product in the 1970s to only 2.1% in the three years from 1985 to 1987. Net national saving is the difference between the nation’s output in goods and services and what is consumed by government and individuals.
At the same time, net domestic investment fell from 7.6% of net national product to 5.7%--of which more than half, or 3.6%, was accounted for by foreign investment in the U.S. economy.
Wealth Induced More Spending
The report calls for several tax measures that were tried in the Reagan Administration but abandoned as unfair or ineffective at encouraging Americans to save. These include reviving individual retirement accounts for most Americans and instituting “supersaver” bonds to encourage more private saving.
The report, prepared by Chairman George Hatsopoulos of the Federal Reserve Bank of Boston and MIT economists Paul R. Krugman and James Poterba, says the large and ominous increase in private sector consumption during the 1980s was caused in part by a large increase in personal wealth.
Greater wealth, in the form of privately held stock or real estate of growing value, induced spending increases at a greater rate than that at which national income grew during the same period. Wealth as defined by the authors grew from 69.3% of net national product in the 1970s to a high of 74.1% in the mid-1980s.
In addition, the authors say that demographic changes during the 1980s, as the baby boom generation moved into peak spending years, further aggravated the tendency of a population of increasing affluence to consume.
The report does not address the probability, argued by other economists such as Edward Yardeni of the Prudential Bache investment firm, that those baby boomers, as they grow older during the 1990s, are just as likely to continue to act their age and begin to save more and spend less.
The business conference report skews its results by pitching its statistical analysis in terms of net investment and net national product. These figures are derived by reducing the gross figures by estimated depreciation of plant, equipment, real estate and other capital stock, a tricky and controversial calculation.
In the more common terms of gross domestic investment as a percentage of gross national product, Commerce Department statistics suggest that real business fixed investment--that is, excluding accumulated inventories and residential housing--was slightly higher during the 1980s than the 1970s.
The report concedes in a footnote that its measure of national savings is somewhat underestimated “because of failure to take account of the fact that part of government expenditure is actually investment.” Government spending on schools, roads, bridges, power lines, harbor equipment and military equipment counts as “consumption,” not as an addition to the nation’s capital stock.
WHERE NATIONAL INCOME GOES Consumption and net national saving; percent of national income 1970-79 Personal consumption: 69.3% State and local government purchases: 13.2% Federal government purchases: 9.6% Net national saving: 7.9% 1985-87 Personal consumption: 74.1% State and local government purchases: 13.2% Federal government purchases: 10.6% Net national saving: 2.1% Sources: American Business Conference, Associated Press