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A Savings Crisis? Maybe Not


You hear it all the time: Americans don't save enough. Foreigners warn that the government doesn't save enough to finance its budget deficits. Economists worry that consumers don't save enough to finance growth. The Bush Administration is framing the debate over Social Security privatization in terms of Americans not saving enough to retire.

Is the U.S. in a savings crisis? We think not, though one may be brewing if attitudes toward the budget deficit don't change in Washington. The fact is that for the past 20 years, America has grown faster than Europe and Japan, two of the world's highest savers. Year after year, U.S. deficits are financed, bills are paid, and living standards rise. If anything, America is awash in money. So where's the crisis?

Part of the problem is simply measurement. When the U.S. government calculates savings, the official statistics count spending on education and research and development as "consumption," which is then subtracted from the country's savings rate. It makes little real-world sense. This spending is "investment" and should be a component of savings.

A far greater problem is conceptual. Conventional wisdom sees savings as a finite amount of money that is transformed into physical capital, investment, growth, profits, and jobs. Saving is about building factories and adding capacity. This wisdom is out of date in an economy driven by human capital and innovation. Money spent on education, R&D, and innovation should be perceived as investing for the future. Fortunately, the U.S. still invests more in higher education -- 2.7% of gross domestic product -- than other industrialized nations with higher savings rates. It is also among the largest spenders in R&D.

Conventional wisdom also says there is a limited amount of national savings, and each country has to husband it. Not so. Thanks to international markets and securitization, a vast and growing pool of savings flows from country to country, depending on investment opportunities, risk, and returns. And thanks to mortgage securitization, the U.S. housing market has been liquefied and is part of this global capital pool. While the government doesn't count home equity as savings (another measurement problem), Americans do. Add gains in housing and equities, and U.S. consumer net worth rose 8% in 2004, to a record $50 trillion. Despite a low rate, cash savings hit $5 trillion last year, doubling in a decade. Corporations, too, are flush, with $2 trillion on hand.

If there is a savings crisis, it resides in Washington. The forthcoming debate over Social Security privatization is really about savings. The danger is that in striving to increase a savings rate that isn't measured properly and matters less and less, the country borrows huge new sums, deepens the budget deficit, and undermines the confidence of global investors. We need to go beyond the traditional definition of saving to ask just what policies will increase education and innovation in America. They are the true drivers of growth and prosperity.


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