America's Low Savings Rate: What Can We Do?
GroundSwell, July-August 2005]
Thanks to Professor Robert Shiller of Yale for generous
editorial counsel. The author, of course, is solely responsible for
the contents herein.
I. The Prodigal American?
On August 2 the Commerce Department announced that "the
savings rate" fell to 0.02% -- effectively zero -- in June.
Should we be scared and, if so, what can we do about it? We saw in
the last issue that a wealth-elite is pushing Congress to promote "saving"
by exempting it from the income tax. That means moving to a national
sales tax, or some facsimile. "Saving," however, is one of
those catchwords that pols and pundits sling about without having
much idea what they mean. Let's have a go at it: what is saving,
II. Defining saving.
Saving is income less consumption. That seems straightforward,
but it really isn't, because economists define neither income nor
consumption usefully, clearly, or in many cases, at all. Try to find
a definition of "consume" and you often find nothing more
useful than "Consumption is spending by consumers," or "Consumption
is buying consumer goods and services." This term's meaning is
now so unclear we will devote the next installment to it. Here, we
finesse it temporarily.
How? Saving = income less consumption, and income = consumption
plus increase of wealth. Canceling out consumption, we are left with
"saving = increase of wealth." That makes intuitive sense,
anyway. It leaves many issues, but we will deal with those in the
next installment of Insights.
What is a "useful" definition depends on one's goal. An
evident goal of sales-taxers is to make themselves richer, but the
public and those to be made poorer demand some sop for the general
welfare. The social rationale, the "good reason" used to
persuade voters and economists, is to raise domestic capital
formation. Let's see how blurred definitions divert us from the
III. Defining "Income".
A. Taxable income. The IRS defines taxable income in ways
that keep changing with the winds of politics and K-Street pressures
on Congress. It is not just details that change, and the evolution
is more than incremental. The tax has mutated in a series of basic
quantum leaps into a man-eater entirely different from what the
voters endorsed in 1913. The "intelligent design" behind
this evolution has mostly been the immanent influence of wealth.
What we have now takes a lawyer's library to define, but represents
no coherent philosophy except the favorable treatment of unearned
income at the expense of labor. It was not that way at the outset,
when a constitutive alliance of Congressmen including populists,
socialists, progressives and single-taxers (one being Henry George,
Jr., of Brooklyn) minted the archetypal Revenue Act of 1916
B. Haig-Simons income. Many, perhaps most tax theorists
define the ideal income tax base as "consumption + increase of
wealth." "Increase of wealth" results from saving
plus capital gains. Capital gains include land gains and stock
gains, whether realized by sale or not. This is called "comprehensive
income," and also "Haig-Simons" income, after two
early expositors who had been through the single-tax wars of
1890-1925, and understood what their definition implies. So far so
good, but there are 3 obstacles that prevent our implementing
- Eisner v. Macomber, 1920. Here, the USSC ruled that the
Treasury may not tax unrealized capital gains as they accrue (i.e.
before sale) until Congress so legislates. Congress never has.
Many economists and tax lawyers now write as though the USSC had
ruled that to tax unrealized gains is unconstitutional, but that
is not what it did. Citing Eisner just lets everyone else off the
hook. Of course it has also let beneficiaries of unrealized gains
continue to "grow rich in their sleep" without paying
much or any income tax. It has reinforced their expectation that
this is their right, that it is good for the country, and enhanced
their economic power to hire talent to urge their case. Some of
these talents, sheltered in tax-exempt think tanks, even run
seminars to "educate" judges about "economics"
-- their slant on economics.
- Aseptic academics. Some of the academic champions of
Haig-Simons keep it just a parlor game for unsoiled hands. They
declare it is impracticable to value the increased value of
assets, and especially land, every year; so in practice, forget
it. William Vickrey and Alan Auerbach have published proposals for
applying Haig-Simons, but they involve a lot of bookkeeping, and
other economists have turned away from the subject. This manifests
a distressing lack of imagination, mathematics, and conviction on
their part, for all we need do is what local governments have done
with the property tax for nearly 400 years in America: to tax land
ad valorem in a rising market (for the mathematics, see Gaffney,
1970). To see that, we need to integrate income-tax with
property-tax analysts, who now seem to live in separate gated
communities. That goes for some Georgists, too, who simply hiss at
all income taxation without trying to understand its possibilities
for good, or at least less harm.
- Undefined consumption. A third problem is that to
define income by this route we must first define consumption. We
have shown above how to finesse that in this paper. ,/li>
IV. Are land gains income?
A big issue remains whether land gains increase national wealth,
or just redistribute it in favor of landowners. If the latter, the
landowners' gain is everyone else's loss, a zero-sum matter.
Henry George in 1879 foresaw and faced this issue:
"Now, while it is unquestionably true that the
increasing pressure of population which compels a resort to inferior
points of production ... does raise rents, I do not think that ...
it fully accounts for the increase of rent as material progress goes
There are evidently other causes which conspire to raise rent, ...."
(P&P, p.228). "Let us suppose land of diminishing
qualities. The best would naturally be settled first, and as
population increased production would take in the next lower
quality, and so on. But, as the increase of population, by
permitting greater economies, adds to the effectiveness of labor,
the cause which brought each quality of land successively into
cultivation would at the same time increase the amount of wealth
that the same quantity of labor could produce from it. ... it would
also ... increase the power of producing wealth on all the superior
lands already in cultivation. ... The aggregate wealth production,
as compared with the aggregate expenditure of labor, will be
greater, though its distribution will be more unequal." (ibid
Crude? Perhaps, but later thinkers (notably excepting Alfred
Marshall) have added little to that basic understanding, and
neo-classical economists have subtracted a lot. George is saying
that a large part of land gains actually represent a net gain in
national wealth, hence a part of social saving. This gain is a
spillover benefit from other lands, from material progress, from
education, from improved manners and mores, from public works, etc.
-- social gains that lodge in private rents. It is an increment to
what Alfred Marshall called the "public value of land."
Macro-economists have done a disservice by omitting 100% of such
gains from their accounts (NIPA). Granted it is hard to distinguish
the redistributive part from the "added public value"
part, but it is better to be vaguely right than precisely wrong. By
omitting land gains entirely, NIPA values both parts at zero, out to
as many decimal places as you like. The resulting "precision"
is tidy, but understates national saving.
To be sure, today most of this added wealth is privatized.
Private landowners treat it as income, and consume much of it.
However, NIPA already accounts for that as consumption, and deducts
it from saving, as we have seen. What NIPA leaves out is the land
At the other extreme, Michael Mandel of Business Week, in an
otherwise sharp article (Jan. 17, 2005), counts ALL land gains as
net gains to national wealth, because they can be sold to
foreigners. That is going too far, as many balked young homeseekers
V. Gains in stock value.
Part of stock gains are gains in aggregate national wealth, too.
Consider three major sources of stock gains.
A. Corporate land. Corporations are major landowners.
Retail chains, forest holders, mineral firms, office owners, mall
owners, hotel chains, land developers, fast-food chains and gasoline
chains with parking aprons on prime corners, spectrum licensees, and
agribusiness giants are a few among many one might list. When the
land values rise, the shares rise. There is no danger that NIPA will
double count the rises, for it does not count either one.
B. Mergers and Acquisitions (M&A). These sometimes
benefit corporations by raising actual efficiency; well and good.
However, they also benefit some corporations by lowering their
numbers and raising their bargaining power: their market power to
squeeze suppliers, workers, customers, and host governments.
Business reporters often cite such gains to illustrate economies of
"scale" and "synergy", but in fact they are at
best redistributive. At worst they entail net social losses. The
losses are laid out in dozens of older microeconomic texts -- but
are trivialized in many of the newer ones, that might as well be
written by Ayn Rand. Major media and textbook firms are themselves
products of M&A, which may color their viewpoint, and certainly
enhances their power to overcharge captive-market students for
textbooks. At any rate, the part of stock gains that come from
enhanced market power are NOT net gains in national wealth.
Some Georgist reviewers of this paper suggested the above
paragraph is too critical of M&A. They bypassed the first
sentence, and took alarm at the antimonopoly sentiments. This may
illustrate how corporate and libertarian propaganda has marinated
and turned even many followers of George, a man who dedicated his
major book to those who see the vice and misery that spring from
unequal distribution of wealth and privilege.
C. Undistributed profits. Probably the largest source of
stock gains is corporate saving. Corporations routinely squirrel
away or "plow back" half or more of their profits to
increase their assets. They may acquire new assets; or simply buy
back some of their own stock. Either way, it is to convert their
shareholders' ordinary income (dividends) into capital gains, to
lower the shareholders' taxable personal income. Capital gains are
taxed, if taxed at all, at a lower rate; not taxed until sale; and
forgiven forever on the death of the personal owner.
NIPA reports two savings rates: "personal" and "national."
The "personal" rate is the one near zero, cited in the
opening paragraph above. The "national" rate includes
corporate saving and government saving. This "national"
rate is much higher: corporations do most of our saving. Michael
Mandel and Rich Miller, columnists for Business Week, deserve credit
for pointing this out. However, they get carried away and
over-assuage us when they make the saving rate at about 15% of
national income as of July 2005. They seem to have taken gross
saving for net saving, and credited government with a lot more
saving than it really does, if indeed it does any. Federal
government saving nowadays is an oxymoron, a bitter joke.
The U.S. Department of Commerce's Bureau of Economic analysis
(BEA) reports the undistributed profits of corporations in 2005 so
far are running at an annual rate of $521 billions, or about 4.3% of
national income. Some unknown fraction of that is not true saving,
but a "Capital Consumption Allowance" (CCA) to cover
depreciation. BEA reports a small CCA of only $51 billions, making
only a dent in the gross figure, but the definitions used are murky,
and the numbers therefore worthless. The NIPA scriveners in BEA
don't even claim to know how to define depreciation, let alone
measure it. Nor can they ever, until they face up to counting
Appreciation, for to count Depreciation while blanking out
Appreciation is as unbalanced as you can get. We are left with a
large measure of doubt about what corporate saving is. We only know
it dwarfs personal saving.
VI. Government saving.
BEA counts spending on new public works as saving. Fair enough,
if you cut out the porkbarrel boondoggling and goldplating and
military waste. However, there is no offset for depreciation and
obsolescence of existing works. A scary ride on the FDR expressway,
built by PWA in the 1930's along the east side of Manhattan, is an
object lesson many travelers have survived -- so far. Such casual
viewing, plus a rash of engineering surveys, tell us that extant
roads, bridges, tunnels, dams, aqueducts, sewers, schools, rails,
ports, and all the invisible underground networks that tie us
together need a lot more repair and maintenance than they have been
Since 2001, Federal deficits have rocketed with numbing
regularity. City government treasurers have mastered many arts of
concealing liabilities, so debts officially reported are far below
real debts, and the surpluses that BEA reports are not to be
believed. Harvard Professor Robert Barro assures us that private
saving will rise to compensate for government debt, and standard
modern economics texts, ever behind the facts, still would have
students take this seriously. What we see, though, is private
(non-corporate) saving falling to zero while federal dissaving soars
VII. Balance of Payments.
Lacking well-conceived data categories from BEA, the best
indicator of our saving shortfall is the balance of payments. Here
there is no doubt. We borrow hugely abroad each year, which
automatically makes us import more than we export as we hock or sell
parts of the nation to foreigners, and reconvert our nation into the
economic colony it was before 1914: shirtsleeves to shirtsleeves in
Is that bad? Some say it just shows that America is the best
place to invest, thanks to our low taxes and pro-business climate.
That is too sanguine. If foreign money were making American jobs and
raising wages, wonderful; but when it is used to buy American
securities and real estate and U.S. bonds, while American jobs are
outsourced offshore, I think we'd better think it out again.
Should we worry? Yes, about several things. First is the
perpetually rising fraction of corporate wealth in total wealth that
must result in the future from high corporate saving relative to low
personal saving. Second is the nation's growing dependence on
foreign loans, and vulnerability to a run on the dollar with soaring
interest rates. Ben Bernanke, once an insightful observer, assures
us we can depend indefinitely on a global glut of savings, but now
he is in politics, I am not soothed. Third is the tendency of most
of the media and the texts, dominated by corporations, to misdirect
public concern away from the growing concentration of wealth and
power. Fourth is the growing diversion of new savings, both
corporate and foreign, from making new jobs in America to amassing
old assets like land, and mortgages on the same when the borrowers
are just withdrawing equity for consumption, and government bonds.
VIII. Does saving alone create capital?
We know we must save the seed corn, that is basic and proverbial.
However, capital formation depends on investing as much as, maybe
more than, on saving. Corporations that sock away profits, or spend
them to acquire and retire competitors and downsize their workers
are not adding to national income, production, or wealth. Foreigners
who buy U.S. mortgages, real estate, bonds, and extant securities
are not, either.
What we need is a high rate of return (ROR) on real net
investing. That means productive, active, income-creating investing,
actually paying workers to produce new capital (or other goods and
services), as opposed to just buying land, or swallowing
competitors. Except, make that Marginal Rate of Return (MROR), for
that is what makes people invest to make jobs. The excess of Average
Rate of Return (AROR) over MROR is mostly land rent; buying land and
paying rent do not make jobs. Again, finally, make that Marginal
Rate of Return After Taxes (MRORAT), for the after-tax return is
what moves investors.
That is what both Henry George and John Maynard Keynes were all
about. Keynes called it the "Marginal Efficiency of Capital"
(MEC). Keynes, and later his followers in the age of JFK, pursued a
variety of measures to raise the MRORAT, or MEC. Some of the
measures were too gimmicky, perhaps, but the basic idea was always
there: raise investing of the net income-creating kind. After 1980,
however, economists gradually slid away from distinguishing active,
Keynesian net investing from just piling up assets as passive stores
of value. Keynes' distinctive term, the MEC, is nearly extinct
today. Losing the terminology is no disaster per se, "efficiency"
was never the right word. However, MEC does contain the key word, "Marginal."
Macroeconomists and policy-makers are losing the concept behind it,
the difference of MARGINAL rates of return, net of rent, and AVERAGE
rates, including rent. So-called "supply-side economics"
has come to include mainly measures to untax and raise rents and
land values and unearned increments. Real wage rates have been
falling ever since.
George was more direct and thoroughgoing: untax wages, untax
capital, tax land values. It is a macro-economists dream: raise
active investing, make jobs, raise saving, provide for government
spending, all in one stroke. It is hard to explain, without being
impolitic, why macroeconomists hold back from touting George's
IX. How to raise domestic savings.
There was a simple old formula saying that savers respond to
higher interest rates. That has been scoffed away, but it is true.
The scoffers simply missed the intermediate step that high interest
rates lower values of old property, and that is what makes people
save: the need to replenish assets.
There is a diminishing marginal need for private assets. Any
private asset that is not real capital is a portfolio substitute for
real capital, and has the effect of satisfying the need for wealth
without any real capital formation. The formula for raising domestic
savings rates is to deflate values of these substitutes.
Emancipating slaves once had such an effect. Today, the major
portfolio substitutes for real capital are land values and
government bonds. To lower land values, untax capital to raise the
MRORAT which raises the cap rate. Also, tax the land values, for the
property tax rate is also part of the cap rate. To shrink the supply
of government bonds, pay as you go -- by taxing land values. The
basics are really pretty simple.
- Brownlee, W. Elliot, "Wilson
and Financing the Modern State: The Revenue Act of 1916".
Proceedings of the American Philosophical Society 129 (2), 1985,
- Gaffney, Mason, October 1970. "Tax-Induced
Slow Turnover of Capital", Part IV, AJES 29(4):409-24. Also,
abridged, 1967, WEJ V(4), September
- Mandel, Michael, 2005. "Our
Hidden Savings." BW 17 Jan 05 pp. 34 ff.; 2005, "Totting
up Savings," BW 11 July 05
- Miller, Rich, 2005. "Too
Much Money." BW 7-ll-05, pp.59-66