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): http://www.imf.org/external/pubs/ft/weo/2005/02/pdf/chapter2.pdf 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 prices. 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?". http://archives.econ.utah.edu/archives/a-list/2006w07/msg00023.htm 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? Jurriaan
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