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Are we saving enough?

  • Economics
  • Political Science


August 22, 1980 Are We Saving Enough? The most recent business expansion saw a steady erosion in household saving. The personal saving rate-the ratio of personal saving to disposable (after-tax) income- averaged 7.7 percent in 1975, the first year of the expansion. The ratio thereafter dropped precipitously, however, and in 1979 aver- aged only 4.5 percent, the lowest figure of the past quarter-century. Many observers view this decline with dis- may, if not outright alarm. In view of the nation's lagging productivity and growth, more and more attention has come to be focused on supply-side economics, with its emphasis on how decisions to work, save and invest affect the long-run performance of the economy. Savings behavior plays a prominent role in this analysis, because savings set an upper limit to the amount of resources devoted to capital accumulation (investment}-believed by many to be a ma- jor contributor to growth. In this context, the decline in the saving ratio has been particu- larly unsettling, because it suggests that in- vestment, and hence productivity and growth, are likely to suffer even more. There is no question that the rate of in- vestment in the u.s. has slowed in recent years. Whether that represents a permanent change remains to be seen. But one thing seems clear-the decline in the personal saving rate has had very little to do with the investment decline. To understand that surprising statement, we should keep three points in mind. First, part of the decline in the personal saving rate is transitory, while another part represents a re- version to more typical behavior. Second, personal saving represents a relatively small part of total saving, and its movements are a poor.indicator of what is happening to the total. Finally, investment must compete with other uses of savings-primarily government borrowing-to finance the deficit. Indeed, the growth in government borrowing has contributed more than the drop in saving to the

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