Congressional Research Service: Report for Congress, 94-102E -ti- Saving Rates: An International Comparison February 10, 1994 By Brian W. Cashell, Analyst in Quantitative Economics, and Gail Makinen, Specialist in Economic Policy SUMMARY An examination of estimates of saving published by the Organization for Economic Co-operation and Development (OECD) reveals that the U.S. is one of the least thrifty of the major industrial nations. But, the data also indicate that the U.S. is not the only country to experience a falling rate of saving in recent years. It may be that the large difference between the rates of saving in the U.S. and abroad depends on how saving is defined. A broader definition of saving than the one employed by the OECD suggests that the saving rates in the U.S. and abroad may be closer than official measures suggest. BACKGROUND AND ANALYSIS There is a widespread perception that the U.S. economy did not "deliver the goods" during the 1980s as well as it had in the early decades of the post World War II era. While it is pointed out that the U.S. economy created a near record number of jobs during the 1980s, it was also true that real per capita income growth was not up to what had been achieved in the past. Moreover, it appeared that several other industrial nations were doing much better in this latter regard than the United States. One reason often cited for these developments is the apparent decline in American thriftiness. Further, the relatively stronger economic performance in some other countries has been attributed by some to their comparatively higher rates of saving. 1 1 For a comprehensive examination of the saving issue see: U.S. Library of Congress. Congressional Research Service. Saving in the United States: Why Is It Important and How Has It Changed? CRS Report No. 94-54 E. by Brian W. Cashell and Gail Makinen. January 10, 1994. Table 1 presents a comparison of the gross and net national saving rates of the United States and the other G-7 countries. (The G-7 countries are the United States, Germany, Japan, United Kingdom, Italy, France, and Canada. They are all highly developed industrial nations that have substantial trading relations with each other). TABLE 1. Gross and Net National Saving Rates of the G-7 Countries (percentage of GDP) ----------------------------------------------------------------- U.S. Germany Japan U.K. Italy France Canada ----------------------------------------------------------------- Grs/Net Grs/Net Grs/Net Grs/Net Grs/Net Grs/Net Grs/Net ----------------------------------------------------------------- 60s 20.1/ 27.2/ 34.9/ 19.0/ 27.0/ 26.5 22.9/ 10.3 17.7 21.7 10.2 17.3 17.9 8.3 ----------------------------------------------------------------- 70s 20.0/ 24.1/ 35.0/ 19.3/ 26.0/ 25.9/ 22.8/ 8.2 13.5 22.3 7.4 14.6 15.3 11.4 ----------------------------------------------------------------- 80s 17.8/ 22.4/ 31.8/ 16.9/ 21.8/ 20.4/ 20.3/ 4.5 9.8 18.2 4.8 9.8 7.9 8.5 ----------------------------------------------------------------- '85 17.3/ 22.0/ 31.8/ 17.7/ 21.6/ 18.9/ 19.6/ 4.6 9.1 18.1 5.9 9.3 6.4 7.8 ----------------------------------------------------------------- '86 16.1/ 23.8/ 32.1/ 16.2/ 21.4/ 20.1/ 18.4/ 3.1 11.2 18.2 4.4 9.4 7.6 6.0 ----------------------------------------------------------------- '87 15.5/ 23.5/ 32.3/ 15.8/ 20.8/ 20.0/ 19.6/ 3.4 10.8 18.6 4.5 8.9 7.4 7.3 ----------------------------------------------------------------- '88 16.0/ 24.3/ 33.4/ 15.4/ 20.8/ 21.1/ 20.0/ 4.0 11.8 19.8 4.2 9.0 8.5 9.3 ----------------------------------------------------------------- '89 16.6/ 25.7/ 33.8/ 15.4/ 20.1/ 21.7/ 19.5/ 3.9 13.1 19.7 4.3 8.3 9.1 8.3 ----------------------------------------------------------------- '90 15.7/ 24.6/ 34.1/ 14.8/ 19.3/ 21.2/ 16.7/ 3.0 12.1 19.8 3.6 7.6 8.5 5.2 ----------------------------------------------------------------- '91 15.2/ 22.5/ 34.7/ 13.9/ 18.4/ 20.5/ 15.2/ 2.3 9.9 20.4 2.7 6.7 7.5 2.8 ----------------------------------------------------------------- Source: Organization for Economic Co-operation and Development. Several conclusions can be drawn from these data. First, the gross and net saving rates differ markedly across the G-7 countries. Japan stands out as noticeably different. Both its gross and net saving rates are much larger than the others. For the United States and U.K., both gross and net saving rates are below the others. Second, for all G-7 countries, the gross and net rates have declined over the longer run. The declines, however, are not of equal magnitude. On a decade average basis, the largest declines have been in the United States and U.K. The German, Italian, and French declines would be in the middle range with Japan showing the smallest decline. Canada is an anomaly. Its net rate in the 1980s is close to its 1960s average, but below the average for the 1970s. Third, in the late 1980s and early 1990s, the net saving rate for the United States, U.K., and Canada declined to very low levels. This did not occur in the other G-7 countries. Table 2 attempts to explain the proximate cause for this development. Net saving is broken down for each G-7 country into its three components: government, corporate business, and households (including noncorporate business). TABLE 2. Change Between 1980 and 1991 in Net Saving Rates of the G-7 Countries (percentage of GDP) U.S. Germany Japan U.K. Italy France Canada ------------------------------------------------------------------ Total -4.1% 0.1% 1.7% -2.9% -6.4 -3.8% -3.6% Government -2.6 -1.6 6.4 0.6 -1.8 -2.7 -3.6 Corporate Business 0.6 1.7 -1.8 -1.0 -2.6 2.7 -3.3 Households -2.1 0.0 -2.9 -2.5 -2.0 -3.8 -1.6 ------------------------------------------------------------------ Source: Organization for Economic Co-operation and Development. While Germany and Japan have the smallest change to explain, the component parts of their net saving rate behaved quite differently. For Germany, the rise in government dissaving was offset by an increase in corporate business saving. In Japan, the decline in business and household saving rates was more than offset by a sharp rise in the budget surpluses of government. These rose from 2.6 percent of GDP in 1980 to 9.0 percent in 1991. For the five remaining G-7 countries, the decline in net saving has been due to several different factors. For four out of the five (United States, Italy, France, and Canada), increasing government budget deficits played an important role. In all five, the household saving rate declined. In Italy and France, it was a larger decline than that due to the growth of the government budget deficit. Only in the U.K., Italy, and Canada, did the decline in business saving contribute to the decline in net national saving. International Saving Differences and GDP Accounting It is possible that the pessimistic conclusions drawn above regarding the U.S. saving rate, both when that rate is considered in isolation and when it is considered relative to other G-7 countries, are heavily influenced by how expenditures are classified in the economic accounts. When some of these expenditures are reclassified, a more sanguine U.S. picture emerges. The data shown in table 1 are drawn from a set of GDP accounts constructed according to United Nations accounting methods known as the System of National Accounts (SNA). In the SNA, the U.S. gross national saving rate tends to be higher than in the National Income and Product Accounts (NIPA) published by the Commerce Department. 2 The main reason for the difference is that the SNA treat nonmilitary government capital outlays as investment unlike the NIPA where they are counted as consumption. As a result, if government capital outlays in the United States are a different fraction of GDP than they are in other countries, the U.S. saving rates could be relatively higher or lower compared with other countries than if the U.S. conventional NIPA saving rates are used in the comparison. 2 For a comparison of the U.S. National Income and Product Accounts (NIPA) and the U.N. System of National Accounts, see Carson, Carol and Jeanette Honsa. The United Nations System of National Accounts: An Introduction. Survey of Current Business. June 1990, pp. 20-30. There are several other expenditures that are currently treated as consumption in the SNA, (and the NIPA) for which a case can be made that they ought to be treated as if they were investment or capital expenditures. When they are, they not only raise the level of the U.S. saving rates, but raise the U.S. rates relative to foreign saving rates. They accomplish the latter because they are a larger fraction of U.S. GDP than they are in foreign countries of their respective GDPs. In addition to government capital outlays, the other expenditures are those on education, research and development, and consumer durable goods. An important part of the capital stock of a nation consists of the skills, training, and knowledge possessed by its workforce--in short, its stock of human capital. Neither the SNA nor NIPA treat educational expenditures that enhance and expand the Nation's stock of human capital on a par with those for physical capital. If they did, it would not only raise the U.S. saving rate, but raise it relative to those of most other countries since the United States spends a larger fraction of its GDP on education than do most other countries. Perhaps the strongest case for reclassification concerns expenditures on research and development. These outlays are clearly aimed at enhancing future productivity and the well being of a nation's citizens. Yet business R & D spending is not treated in either the NIPA or the SNA as investment. A fourth potential reclassification concerns household spending on durable goods. Currently, only such spending on residential housing is included as investment. All other expenditures on durable goods (e.g., automobiles, appliances, etc.) are treated as consumption. If this arguable inconsistency were eliminated, the U.S. saving rate would rise absolutely, and relative to other countries since American purchases of nonhousing durable goods are a larger fraction of U.S. GDP than for most other countries. If these four types of expenditures were reclassified for 10 advanced nations, a study by Lipsey and Kravis using data for the period 1970-1984 reports that the fraction of U.S. GDP devoted to capital formation would rise from 78 percent of the average of 10 countries to 92 percent of that average-- nearly 2/3s of the gap would be eliminated. 3 3 See Lipsey, Robert E. and Irving B. Kravis. Saving and Economic Growth: Is the United States Really Falling Behind? American Council of Life Insurance and The Conference Board. Report No. 901. 1987. This study uses a comprehensive measure for government investment including military capital outlays. Lipsey and Kravis recommend two other adjustments. Since capital goods are cheaper in the U.S. than abroad, they want to compare real additions to capital relative to real GDP. When this adjustment is made, it raises the U.S. saving rate to nearly the average of eight other industrial countries for which a comparable adjustment can be made. Secondly, they want to put U.S. capital outlays on a per capita basis. When they do, U.S. expenditures on the broad measure of capital was more than 120 percent of the average for eight industrial countries - - it even exceeded the per capita rates for Germany and Japan. The ten countries used in the Lipsey-Kravis study were Canada, Japan, Austria, Denmark, Finland, France, Italy, Netherlands, Norway, Sweden, and the United Kingdom. While these adjustments affect the level of the U.S. national saving rates, do they also affect the trend in those rates? Data compiled by the Congressional Budget Office (CBO) show that when government investment and consumer durable (less depreciation) expenditures are added to the NIPA measure of net national saving, the decline in the decade average net rate from the 1960s to the 1980s was from 11.5 percent of GDP to 5.9 percent, versus a decline from 8.0 percent to 3.8 percent when the conventional measure is used. 4 Similarly, when expenditures for R & D and education are added to the gross national saving rate, it declines from a decade average of 33.5 percent in the 1970s to 30.9 percent for the 1980s. 4 From the 1970s to the 1980s, the decline is from 9.9 percent to 5.9 percent versus 7.1 percent to 3.8 percent using conventional methods. The CBO measure of net saving did not include expenditures on R & D and education (including the foregone earnings of students) because reliable measures of depreciation for these outlays are not available. See Assessing the Decline in the National Saving Rate. Congressional Budget Office. April 1993. In summary, while the reclassification of certain expenditures would raise both the gross and net saving rates for the United States, making Americans appear more thrifty, and raising the U.S. saving rates relative to the average for other industrial nations, it would not alter the fact that the U.S. saving rates declined in the 1980s and early 1990s.