[OPE-L] A note on global savings and investment rates

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Wed Feb 15 2006 - 09:55:39 EST

(thought I would post this bit I did a while ago, in case anybody is
interested - JB)

The IMF has more comprehensively covered the historic fall-off in global
savings and investment rates here (also citing crude regional estimates of
average rates of return on capital):
But we have to bear in mind the terminology here.

By "investment" they often mean total real gross fixed capital formation
(plus the change in inventories), which is of course not total investment,
it refers only to net additions to residential and industrial fixed assets
before depreciation, plus unsold inventories - not financial assets (stocks,
options, bonds, securities, futures, derivatives and the like) or land.

In the NIPA's, US gross domestic investment for 2004 was $1,648.9 billion
(excluding capital borrowed overseas) or $2,300.6 (including capital
borrowed from overseas). The depreciation write-off is enormous however,
it's $1,435.3 billion, i.e. 87% of total new domestic fixed investment,
leaving net domestic investment at $865.3 billion. Total US gross saving
(NIPA table 5.1) for 2004 (latest complete series) is $1,572.0 billion,
which includes government, household and business saving. But net saving is
only $136.8 billion. How's that possible? Because $1,435.3 billion of
"consumption of fixed capital" (economic depreciation) has been deducted.

Statistically, household saving is defined as household disposable income,
less final consumption expenditure. Household income consists primarily of
the compensation of employees, self-employment income, and transfers.
Property and other
income - essentially dividends and interest - are evaluated in the light of
business income and debt interest flows. The sum of these elements is
adjusted for direct taxes and transfers paid, to give household disposable
income. The latter is then split between household consumption and saving.
Apart from household saving, the account of course recognizes government
saving (roughly, govt. income less expenditure; this is a special and
complicated topic) and business saving (undistributed profit and, depending
on gross or net definitions, depreciation write-offs).

In the NIPA's, US total disposable personal income for 2005 is cited as
$9,031.3 billion and total personal outlays (=final consumption expenditure
including persons' interest and transfer payments) is $9,072.8 billion, so,
total personal saving equals a negative $41.6 billion. Personal saving as a
percentage of disposable personal income then works out at a negative 0.5%.

How does the housing market factor into this? If somebody buys a new home
with a mortgage, the purchase value of the house will boost the annual total
gross fixed capital formation, i.e. it is included in the calculation of
total gross investment for the year (the net additions to the housing
stock). But mortgage repayments to banks etc. are part of personal outlays
(final consumption expenditure). The capital gains from house ownership or
business assets do not count as "savings" or "disposable income" in the
account, although economically they are. If they are untaxed, there is no
data about it, except what researchers can estimate from average market

The overall result is a conservative economy, that isn't easy to describe
using the conventional national accounting categories, because of the way
saving and investment is defined. Relatively low aggregate price inflation
combines with high house-price inflation, and relatively low total fixed
investment in industries combines with large investments in finance,
insurance and real estate. That is the basic outcome of two-and-a-half
decades of neo-liberalism.

Michael Hudson reaches the same conclusion as I did: "the real reason for
the "savings glut" is that more savings than ever before are being re-lent,
rather than invested in tangible means of production... The problem is not
simply the risk of tangible investment. Why invest in building a factory,
when you can speculate and make money easily on real estate, financial
markets or derivatives?".

In that case, one could see how the industrial entrepreneur becomes a
"heroic" figure, in two ways: s/he organises the making of something that
adds to new tangible wealth and creates jobs, and in so doing, makes money
for the financiers of the enterprise. If only there were more of them...
(there are, according to the ILO, an estimated 192 million unemployed in the
world, i.e. 6% of the total labour force; bear in mind however this refers
only to jobless, not under-employed).

We could draw a graph showing the discrepancy between the trend in real GDP
and the extrapolated trend in real GDP if it had continued to grow at the
same rate as 1947-1973 (i.e. at about 4.2% per annum or so), and the gap
between the actual and the potential would be enormous. That is to say, the
financial system and sluggish demand growth give little incentive to expand
production significantly and cumulatively, except in highly specific areas
(e.g. computer technology). The more income inequality there is, the more
excess capacity grows, as we can see in the car industry. The less everybody
can make income gains, the more they make income gains at other's expense.

Ideologically, however, this is not how it appears - ideologically it
appears that people "consume too much, and save too little", feeding into
the popular Green arguments about "sustainable growth" (we have to tighten
our belts, for the sake of the environment) and cultural pessimism (the
world is going to rot, productive effort no longer pays). We are nowadays
educated into a perspective of scarcity, and into lowering our sights and
expectations, even although there is abundance, in terms of potential
productive capacity.

Interestingly, Poterba (1987), who is cited by the IMF, found that changes
in US corporate saving are empirically only partly offset (somewhere between
25% and 50%) by changes in household saving (James Poterba, "Tax Policy and
Corporate Saving", in Brookings Papers on Economic Activity, 2, 1987, pp.
455-503). So even if households tighten their belts, this only has a minor
effect on corporate saving.

The largest source of investment capital is obviously financial
institutions, not households, and consequently the macroeconomics view that
"capital formation" means "the transfer of savings from households and
governments to the business sector, resulting in increased output and
economic expansion" is largely mistaken. Households have no leverage on the
disposition of the major part of saved funds at all.

An interesting question is what the effect is, of an historic fall-off in
fixed investment on the OCC, since the employed labour force continues to
increase absolutely. Does computerisation lower the OCC?


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