An increased savings rate is one reason why we’ll see a major global economic boom in this decade.
Savings fuel investment. Investment creates growth and opportunities.
Politicians in Washington are giving more attention to stimulating savings and investment. The battle between President Bush and congressional Democrats over reinstating a tax exemption for capital gains is part of this discussion. Unfortunately, this debate has degenerated into sloganeering about “tax breaks for the rich.”
But the tax exemption would, in fact, encourage investment, job creation and – in the long run – more tax revenues.
Congress is also talking about reinstating full deductibility for the popular Individual Retirement Account, or IRA, which gives taxpayers an incentive t stash some money away in tax-exempt savings accounts.
Congress has also repealed some consumption subsidies. One example is elimination of a tax deduction for interest payments on credit-card borrowing. Hence, people may have more incentive to save in a tax-exempt IRA than to purchase a VCR.
Raising the cost of consumption and lowering the cost of savings is a move in the right direction. People tend to do more of those things that are subsidized and less of those things that are taxed.
But that’s only part of the savings story. We must consider other things that affect capital formation.
First, the United States is the only nation among the advanced industrialized nations – the 25 members of the Organization for Economic Cooperation and Development (OECD) – that does not count investments in infrastructure as part of its national savings rate.
So, for example, when Japan builds an airport at Kansai for $6 billion, it counts as part of the nation’s savings. But when the U.S. builds an airport in Denver for $2 billion, it counts as consumption. The same is true for investments in highways, water, sewers and other infrastructure.
Therefore, estimates of current U.S. savings rates of about 5% are too conservative and misleading when compared with Japan, West Germany or other OECD nations that claim savings rates of more than double that of the United States. We are actually much closer to their savings rates than the numbers suggest.
But the most important factor is that the amount of money Americans save will rise dramatically during the next 10 years as the U.S. population ages.
As this group – 26 to 44 years old – gets older, their income will increase, their consumption as a percentage of their income will drop, and their savings rates will increase, perhaps to as high as 9% to 10% by 1997, say some economists.
This will help drive down the cost of capital – providing that Congress controls the budget deficit – leaving more and cheaper money for private investment.
This, in turn, will help re-establish the United States to its former position as the world’s premier capital exporter.