CABINET COUNCIL ON ECONOMIC AFFAIRS PLANNING MEETING - JULY 30 1984 SAVING THE U.S. EXPERENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86M00886R001900200013-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 29
• Document Creation Date: December 21, 2016
• Document Release Date: November 5, 2008
• Sequence Number: 13
• Publication Date: July 27, 1984
• Content Type: MEMO

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CABINET AFFAIRS STAFFING MEMORANDUM
Date: 7/27/84 Number: 169039CA Due By:
Subject: Cabinet Council on Economic Affairs Planning Meeting - July 30, 1984
10:00 a.m. - Roosevelt Room
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Attorney General
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
UN
U STR
GSA
EPA
NASA
OPM
VA
SBA
Executive Secretary for:
CCCT
CCEA
CCFA
CCH R
CCLP
CCMA
CCNRE
There will be a Cabinet Council on Economic Affairs Planning
Meeting on Monday, July 30, 1984, at 10:00 a.m. in the
Roosevelt Room.
The agenda and background papers are attached.
RETURN TO:
^ Craig L. Fuller
Assistant to the President
for Cabinet Affairs
^ Don Clarey [g" Tom Gibson
Associate Director
^ Larry Herbolsheimer
456-2823 (White House) 456-2800 (Room 124 ( C R1
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Saving: The U.S. Experience
TOPICS: Economic Impact of Demographic Shift
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July 26, 1984
MEMORANDUM FOR THE CABINET COUNCIL ON ECONOMIC AFFAIRS
FROM: ROGER B. PORTER &-i"
SUBJECT: Agenda and Papers for the July 30 Meeting
The agenda and papers for the July 30 meeting of the Cabinet
Council on Economic Affairs are attached. The meeting is
scheduled for 10:00 a.m. in the Roosevelt Room.
The first agenda item concerns trends in saving and
investment in the United States. Several weeks ago, the
Council requested a study on the U.S. experience with respect
to saving and for an explanation of alternative measures of
saving.
The Department of Commerce was requested to undertake
the study. The paper has benefitted from comments and sug-
gestions made by the Department of the Treasury, the Office
of Management and Budget, and the Council of Economic Advi-
sers.
The second agenda item is part of the study of the
economic effects of demographic shifts. Immigration and
its impact on the economic is one of the subjects the Work-
ing Group was asked to address. A paper from Sidney L.
Jones, the chairman of the Working Group, on this subject is
also attached.
i
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July 30, 1984
10:00 a.m.
Roosevelt Room
1. Saving: The U,.S. Experience (CM # 487)
2. Report :`:-ori t.hO Working Group on the Economic Impact of
Demographic, Shifts (CM # 403)
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- I
UNITED STATES DEPARTMENT OF COMMERCE
The Under Secretary for Economic Affairs
Washington, D.C. 20230
July 17, 1984
FROM: - Sidne' L(/ Jones
Under Secretary for Economic Affairs
SUBJECT: "Saving -- United States Experience"*
This paper responds to CCEA's request for information on trends in
United States saving and investment relative to GNP and for an
explanation of alternative measures of saving.
There are seven sections: (1) a definition of gross saving and
gross investment and a description of their trends since 1955; (2)
an explanation of differences between the National Income and
Product Accounts (NIPA) and Flow of Funds (FOF) measures of saving;
(3) an analysis of the personal saving component of gross saving;
(4) an explanation of the difference between gross and net saving
(i.e., economic depreciation); (5) a discussion of the relationship
between saving and net worth; (6) a brief comparison of United
States and selected foreign saving rates; and (7) an overview of
broad policy approaches for increasing United States saving rates.
I. Gross Saving and Investment: Definitions and Trends
Gross saving ($405.8 billion in 1982 and $439.6 billion in 1983)
equals total income (GNP or the sum of incomes -- wages and
salaries, profits, proprietor and rental income, interest,
depreciation, etc.) less private and government consumption. Since
GNP less private and government consumption is also-defined as
investment, gross saving is equal to gross investment. They differ
empirically by a small amount because of errors in measurement, or
statistical discrepancy. During the period 1955 to 1983, gross
saving averaged 15.9 percent of GNP, expressed in nominal dollars.
Aside from economic downturns, when gross saving declines relative
to GNP, the ratio has been remarkably stable.
During 1982 and 1983, however, gross saving fell to 13.2 percent of
GNP, a low annual average by post WWII standards. By the fourth
quarter of last year the ratio had recovered to 14.1 percent, still
below every annual average since 1955 except for 1958; and by the
first quarter of 1984 the ratio reached 15.1 percent.
*Prepared by H. Kemble Stokes, Economist
Office of the Chief Economist
Department of Commerce
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GROSS SAVING.
(PERCENT OF GNP)
20
18
16
14
12 84 Q1 12
1955 1960 1965 1970 1975 1980
Gross investment may be viewed as two parts, gross private domestic
investment and net foreign investment. Net foreign investment can
be positive or negative depending upon whether people in the United
States are investing more abroad than foreigners are investing
here. It approximates the current account balance in international
transactions (with the opposite sign for the capital flow figure).
Gross private domestic investment has averaged 15.6 percent of GNP
during the period since 1955, slightly less than gross saving. The
difference reflects the fact that, on balance, the United States was
investing a portion of its gross saving abroad. During 1982 and
1983, however, the historical pattern has been reversed. Net
foreign investment has been negative, that is he United States has
become a capital importer, and the current account balance has been
in deficit. In fact, in 1983, gross investment and saving were
below gross private domestic investment by $35 billion, or 1 percent
of GNP. By the first quarter of this year this difference was $79
billion or 2 percent of GNP.
INVESTMENT
(PERCENT OF GNP)
20
18
Gross private domestic investment
1955 1960 1965 1970 1975
1980
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Gross private domestic investment rose from 13.5 percent of GNP in
1982 to 14.3 percent of GNP in 1983. By the end of 1983, the ratio
(at 15.5 percent) had almost regained its 1955-83 average; by the
first quarter of 1984 it had reached 17.0 percent.
Ratios of private domestic investment to GNP may be expressed either
in nominal or real terms (1972 dollars). Any differences in real
vs. nominal ratios which develop over time reflect changes in prices
of investment goods relative to all goods and services produced.
Gross private domestic investment, in real terms, was 14.3 percent
of GNP in 1983. It rose to 17.2 percent in the first quarter of
1984, well above its long-term average of 15 percent. The
investment/GNP ratio has improved less in current dollar terms than
in real terms because prices of investment goods declined relative
to the GNP deflator in each of the last two years.
II. NIPA vs. FOF Measures of Saving
Gross saving can be calculated either as the difference between
total income and current outlays (NIPA) or as the increase in assets
less the increase in liabilities (FOF). Income not used for current
consumption may be used to increase asset holdings or to reduce
liabilities or both. If there were no conceptual differences or
errors of measurement the two approaches to estimate gross saving
would. give identical results.
The Bureau of Economic Analysis (BEA) uses the income less outlays
approach to estimate saving in the NIPA. The Federal Reserve uses
both approaches in developing the FOF accounts, and shows any
differences between the NIPA and FOF measures as statistical
discrepancies.
Conceptual and Empirical Differences. There are important
conceptual differences between the NIPA and the FOF. The major
difference deals with the treatment of consumer durables. In the
N1PA, all consumer spending is treated as current consumption, even
though purchases of consumer durables (cars, furniture, boats, etc.)
could be considered to have an investment component as well. The
FOE' classifies purchases of consumer durables as investment, or
saving, and the depreciation on the stock of consumer durables as
current consumption. (While a similar distinction could be drawn
with respect to government purchases of durable goods or structures
and machinery and equipment, both the NIPA and the FOF treat these
as current outlays.)
A second difference affects the distribution of saving between the
public and private sector. In NIPA, government life insurance and
retirement funds are treated as social insurance contributions and
transfer payments. Changes in these variables are reflected in
personal income. In the FOF, however, life insurance and pension
claims are treated as personal assets with the liabilities in the
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Federal government sector and in state and local retirement funds, a
separate financial sector. Relative to the NIPA, this shifts saving
from the Federal government and state and local retirement funds to
households.
A third difference is the treatment of special. drawing rights
(SDR's) when created and distributed by the International Monetary
Fund. NIPA treats these as capital transfers from abroad, a
component of saving that offsets the rise in SDR holdings included
in net foreign investment. The FOF does not count them as saving on
the grounds that they are not actual transactions.
These conceptual differences make direct comparisons of NIPA and FOF
saving measures impossible. In this section , FOF and NIPA
estimates have been made comparable by the following adjustments:
o Gross Personal Saving. This sector includes households.
farms, and nonfarm noncorporate business. The NIPA
estimate is made by subtracting current outlays from
disposable income and adding the noncorporate capital
consumption allowance. The FOF estimate is made comparable
to the NIPA definition by adjusting the net accumulation of
real and financial assets for government insurance and
pension reserves, consumer durables purchases and
depreciation, capital gains distribution from mutual funds.
and net saving by farm corporations.
o Financial Saving. NIPA saving is the current surplus of
banks, nonbank financial institutions, sponsored agencies,
and Federal Reserve Banks, plus capital gains distribution
of mutual funds. The comparable FOF estimate is the
current surplus of the monetary authority, plus capital
gains distribution of mutual funds, plus the net financial
and physical investment of banks, nonbank financial
institutions, and sponsored agencies.
o Nonfinancial Corporate Saving. NIPA saving reflects
undistributed corporate profits, capital consumption
allowances and adjustment. The comparable FOF estimate is
net financial investment plus capital expenditures for
nonfinancial corporations plus saving by corporate farms.
o Government Saving. The NIPA measure is the difference
between receipts and expenditures. The FOF estimate for
the Federal sector is net financial investment plus
insurance credits to households less mineral rights sales.
For the state and local sector the FOF estimate is net
financial investment plus retirement credits to households.
The NIPA estimate of gross saving in 1983 was $439.6 billion,
compared with an adjusted FOF estimate of $451.7 billion. In
earlier years the difference in domestic saving was larger and was
approximately the mirror image of the difference in foreign sector
saving. The following table provides details by major sector.
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Summary Comparison of NIPA and FOF Measures of Saving in 1983
($ billion)
NIPA
FOF
NIPA-FOF
Personal (gross)
Non-Corporate Cap.
Con. Allow.
Net Saving
Financial Bus.
Banking
Non Bank
Mutual Funds
(cap. gains dist.)
Sponsored
Agencies
Monetary
Authority
259.3
145.7
113.6
25.4
12.0
7.7
3.4
1.7
0.6
316.5
145.7
170.8
36.4
22.3
9.2
3.4
0.9
0.6
-57.2
-11.0
Nonfinancial Corp.
285.3
242.0
43.3
Non Farm
282.4
239.1
Farm
2.9
2.9
Undist. Prof.
-0.1
-0.1
Cap. Con. Allow.
2.8
2.8
Cap. Con. Adj.
0.2
0.2
Federal Gov.
-181.6
-187.8
6.2
State & Local Gov.
51.4
44.6
6.8
TOTAL DOMESTIC
SAVING
439.6
451.7
-12.1
Addendum
Foreign Saving
Historical Perspective. During the period 1955 to 1983 the NIPA
measure of gross saving averaged 15.9 percent of GNP, while the
adjusted FOF measure averaged 15.8 percent. However, between 1979
and 1982 the difference averaged slightly over 1 percent of GNP or
$29 billion. In 1983 the difference was $12 billion or 0.4 percent
of GNP.
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GROSS SATING : NIPA vs. FOF
(PERCENT OF GNP)
I
I -T I ~
16
14 tin % 14
12 - 12
1955 1960 1965 1970 1975 1980
These aggregate data can be broken down by sector, as was done for
1983 in the table on page 5. Both the NIPA and FOF estimates
require estimates of flows of production and incomes and of
financial assets and liabilities among sectors, which are likely to
be less reliable than the total.
Personal Saving. In 1983, net saving, according to FOF definitions,
was $279.8 billion, or 12.0 percent of disposable income. By
-contrast, personal saving (NIPA) was only $113.6 billion, or 4.9
percent of disposable income. While part of the divergence reflects
definitional differences, part reflects a relatively large
statistical discrepancy.
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7
Two Definitions of Personal Saving: 1983
% of
($ billions) Disposable Income
FOF 279.8 12.0
-Gov. Insurance & Pensions 56.3 2.4
-Consumer Durables 49.3 2.1
-Capital Gain Distribution 3.4 0.1
from Mutual Funds
-Net Saving by Farm Corp. 0.1 -
-Discrepancy 57.1 2.4
Some observers contend that the FOF measure of personal saving is
preferable to the NIPA measure because the former is a direct
measure of changes in personal assets and liabilities. The NIPA
obtains personal saving residually. Thus, any error in either the
income or outlay series will affect the NIPA estimate. The FOF
.estimate, however, is also a residual. Personal sector saving is
estimated by subtracting changes in assets and liabilities of each
of the other sectors from the total. The same criticisms which
apply to the NIPA. therefore, apply also to the FOF, and neither
approach is inherently superior.
NIPA gross personal saving has been below FOF estimates, adjusted
for definitional differences, in nearly every year since 1955. In
recent years, the discrepancy has been quite large, reaching a peak
of $97 billion in 1982. In 1983, the difference was $57 billion,
though it declined during the year and virtually disappeared by the
first quarter of 1984.
GROSS PERSONAL SAYING
(BILLIONS OF DOLLARS)
1955 1960 1965 1970 1975 1980
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Financial Sector. Differences in the measures of saving for the
financial sector were negligible until the mid-1970's. Since then,
however, the difference has averaged about $6 billion-$7 billion, or
34 percent of the NIPA estimate.
GROSS SAVING : FINANCIAL SECTOR
(BILLIONS OF DOLLARS)
40
30
20
'10
04.
1955 1960 1965 1970 1975 1980
Nonfinancial Corporate Sector. The NIPA measure of gross saving has
been consistently larger than the FOF measure. During the second
half of the 1950's and 1960's, the difference averaged about $6
billion (12 percent). In the last three years, the NIPA measure
exceeded '`ze FOF measure by nearly $50 billion (20 percent).
GROSS SAVING : NONFINANCIAL SECTOR
(BILLIONS OF DOLLARS)
300
225
150
75
0
FOF 40
30
t- 0
1955 1960 1965 1970 1975 '1980
300
225
F0F 10
__---------- 75
,u
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Government. Discrepancies between the two measures of saving for
the Federal government sector are small; for state and local
governments the discrepancies were historically small until the late
1970's and early 1980's.
GROSS SAVING : FEDERAL GOVERNMENT
(BILLION OF DOLLARS)
50 x.50
0rt" -. Lim t-0
-501- t- -50
-100 rt--100
-150 -150
-200 -200
1955 1960 1965 1970 1975 1980
GROSS SAVING : STATE AND LOCAL GOVERNMENT
(BILLICNS OF DOLLARS)
60--
40--
20 1
1 t-
-20
1955 1960 1965 1970
- NIPA , 60
X40
20
1975 1980
I
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A large part of the difference in the two measures of gross saving
appears to be reflected in the statistical discrepancy in the
international balance of payments. By definition, once the
conceptual differences have been resolved, the difference between
the two measures of saving is composed of the FOF discrepancy
between assets and liabilities, the NIPA discrepancy between income
and expenditures. and the statistical discrepancy in the
international balance of payments. Since the discrepancies between
income and expenditures and between financial assets and liabilities
tend to be small (at least in annual averages), the difference in
the two gross saving measures is dominated by movements in the
balance of payments discrepancy. This latter discrepancy is the
difference between the balance on current account and the net flows
of foreign and domestic assets, which are approximately the measures
of net foreign investment in the NIPA and FOF, respectively.
GROSS SAVING DISCREPANCY COMPARED
TO FOREIGN SECTOR DISCREPANCY
(BILLIONS OF DOLLARS)
50
25--
0_25~
50
Foreign discrepancy , 1-50
-d- 25
-. - - \ -1---0
Gross saving discrepancy \/ V -2b
t---- ---~ -_ __-f- ~ -50
1955 1960 1965 1970 1975 1980
The NIPA-FOF discrepancy in the foreign sector could be caused by an
understatement of net exports, an understatement of net capital
flows, or both. If the balance of payments discrepancy reflects an
understatement of net exports of goods and services then, because
the statistical discrepancy between gross saving and investment
(NIPA) is small, this implies that NIPA estimates of saving are too
low. If the cause of the balance of payments discrepancy is an
understatement of capital inflows then the FOF would overstate
domestic savings. Many experts feel that the likely source of the
balance of payments discrepancy is in the capital accounts and as a
result prefer the NIPA measure of gross saving.
V
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III. The Composition of Personal Saving
Personal saving is only one component of overall saving. The
measures of personal saving in this section are based on the FOF
definitions. Thus, these measures include insurance and pension
reserves as financial assets and net purchases of consumer durables
(purchases less depreciation) as part of net investment.
Total personal saving as shown in the following table has increased
18.5 percent since 1980, compared with a 26 percent rise in nominal
GNP. Saving has declined relative to GNP in both the NIPA and FOF
accounts.
Personal Saving
($ billions, annual average)
1965-
1970-
1975-
1969
1974
1979
1980
1981
1982
1983
Total Saving
Increase in Financial
Assets 65.5
122.2
237.8
323.1
354.2
365.2
436.7
Deposits & Currency 30.2
72.3
112.9
129.4
92.1
143.5
237.8
Money
Market Shares -
.5
8.6
29.2
107.5
24.7
-44.1
Gov.
Securities 9.0
7.5
28.9
39.5
58.1
59.7
73.8
Corp.
Equities -3.6
-3.7
-6.4
-
-31.7
3.5
9.9
Other
Securities 5.4
7.2
9.4
-2.6
-7.3
-17.6
1.5
Insurance & Pension
Reserves
19.2
30.0
61.1
89.6
101.8
120.4
142.7
Other Assets
5.4
8.4
23.4
37.9
33.6
30.9
15.0
Net Tangible
Investment 49.2
71.1
109.0
88.8
112.8
69.3
101.6
Owner occupied
Homes
14.3
23.7
50.1
52.6
48.3
26.1
49.0
Consumer
Durables
23.5
30.0
45.1
32.8
39.7
35.3
49.3
Non Corp.
Business 11.4
17.4
13.8
3.4
24.8
7.9
3.3
Increase in Debt 41.3
82.9
169.4
175.8
180.3
127.6
258.5
Mortgages 15.8
33.2
85.1
98.3
78.8
55.8
105.6
Consumer Credit 9.0
14.8
33.9
4.9
24.1
18.3
51.3
Other 16.5
34.9
50.4
72.6
77.4
53.5
101.6
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12
As the table also shows, increases in financial assets have risen by
a third between 1980 and 1983, from $323.1 billion to $436.7
billion. Strong growth has occurred in deposits and currency, in
part the result of new savings instruments that compete with money
market unds, and in insurance and pension reserves and purchases
ofgovernment securities. The rate of accumulation of other
financial assets (security credit, mortgages, and other insurance
reserves) slowed.
Net tangible investment was $101.6 billion in 1983, about 14 percent
more than in 1980, but still below the 1975-1979 annual average.
Housing investment, though well above 1982 levels, remained low by
historical standards reflecting the moderate pace of housing
construction and sales. Investment by noncorporate business was
small in 1983.
Increases in debt rose by 47 percent between 1980 and 1983, with
1983 showing virtually all the advance. The increase in consumer
credit was large last year, particularly when compared with 1980.
However, 1980 was a recession year, and a year in which the Federal
Reserve restricted the use of credit.
IV. Gross and Net Saving -- An Explanation of Recent Trends
As discussed in Section I. gross saving averaged 15.9 percent of GNP
between 1955 and 1983. In the past two years the ratio was only
13.2 percent. Trends in net saving (gross saving less depreciation)
relative to GNP have deteriorated even more substantially. Net
saving averaged 6.8 percent of GNP between 1955 and 1981, dropping
to only 1.7 percent in 1982 and 1983.
SAVING.
(PERCENT OF GNP)
20
15
10
5
0fi
1955 1960 1965 1970 1975 1980
Note: If net saving were measured relative to net national
product (GNP less depreciation) the ratio would not decline
as sharply.
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Several factors account for these trends, including the 1982
recession, large Federal budget deficits, increased net foreign
investment in the U.S., and larger depreciation charges because of
shifts in the composition of investment to shorter-lived assets.
The 1982 Recession. Gross saving tends to decline in recessions
because of the squeeze on undistributed corporate profits and
because government fiscal positions tend to deteriorate. Net saving
is affected even more strongly by recessions. Since depreciation is
largely related to past levels of investment and the accumulated
capital stock, depreciation does not decline during an economic
downturn. In no year since 1955 has there been a decline in nominal
dollar depreciation as measured by the NIPA. As a result, net
saving falls very substantially during adverse economic conditions,
as it did in 1958, 1974-75, and 1982.
Deficits. During a recession, government revenues are reduced and
outlays increased by the slowdown in real economic activity.
Historically, deficits were substantially reduced by the ensuing
economic rebound. Current and projected deficits, however, are
becoming more structural. They continue despite economic growth.
Between 1955 and 1974, Federal deficits averaged only 0.4 percent of
GNP. This rose to 5.5 percent in 1983. Unless private saving rises
dramatically to offset the increased budget deficit, gross saving
(including government dissaving) will continue to be depressed.
Moreover, since depreciation is based on existing stocks of capital,
net saving could be expected to be even more severely affected than
gross saving in the near term, as has been the case in recent years.
Increased Net Foreign Investment. Net foreign investment was -$35
billion in 1983, or about 1 percent of GNP, though it rose rapidly
throughout the year. This net foreign investment, a close
approximation to the deficit in the international current account,
is a source of funds. When net foreign investment is negative,
gross private domestic investment will exceed gross saving, as shown
in the following table. Depreciation, in such circumstances, will
rise as a share of gross saving if nothing else changes.
Saving and Investment:
1983
($ billions)
Gross Saving
439.6
Gross Investment
437.4
Private Domestic
471.9
Net Foreign
-34.6
Statistical Discrepancy
-2.2
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Depreciation. The NIPA measures economic depreciation by assuming
straight-line depreciation schedules that remain fixed over time for
each asset regardless of changes in tax law. As investment rises
relative to GNP so depreciation rises. (Of course, straight-line
depreciation schedules may or may not reflect true economic
depreciation. Alternative depreciation schedules could yield
different estimates of depreciation, though the magnitude of the
differences remains unknown.) In addition, as the mix of assets
changes toward shorter-lived assets, such as machinery and equipment
as opposed to residential and business structures, depreciation will
rise relative to the capital stock and possible relative to GNP.
In the late 1950's. residential investment accounted for 34 percent
of total fixed investment; nonresidential structures accounted for
29 percent and machinery and equipment 37 percent. During the last
five years, however, the share of residential structures has been
only 22 percent, nonresidential structures 23 percent, and machinery
and equipment 55 percent. Since machinery and equipment have much
shorter lives than structures, this shift has resulted in an
increase in depreciation relative to the capital stock and relative
to GNP, and in the process has widened the difference between gross
and net saving.
Overall, as a result of these and perhaps other factors, gross
saving has declined from 16.4 percent of GNP in the late 1950's to
13.2 percent recently; depreciation has increased from 9.2 percent
to 11.5 percent and net saving has declined sharply from 7.2 percent
to 1.7 percent.
The recent decline in the ratio of net saving to GNP may not have a
large negative effect on capital formation. Decreases in the ratio
due to the recession can be expected to be reversed by the current
expansion. Also, net foreign investment is a source of funds,
though with some longer-term adverse consequences. The government
budget deficit, however, does pose a long-term problem for saving
and capital formation.
V. Personal Net Worth and Saving
Personal net worth is total assets (financial and tangible) less
financial debt. Increments to net worth arise from the flow of
saving, which was discussed in detail in section III, and any
revaluation (capital gains or losses whether realized or not) of the
existing stock of assets and liabilities. The Federal Reserve
develops annual estimates of net worth based on the FOF
methodology. The following table provides estimates for 1982 and
1983.
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In 1983, personal net worth was $11.2 trillion, an $847 billion (or
8.2 percent) increase from 1982. This increase represented $280
billion in saving and investment and $567 billion in revaluations
and discrepancies in the various asset and liability components.
Personal Net Worth and Saving
($ billions)
1982
1983
Net
Worth
Saving &
Investment
Revaluations
&
(Discrepancy)
Net
Worth
Financial Assets
5477.4
436.7
228.6
6142.7
Deposits & Currency
1796.3
237.8
-1.4
2032.7
Money Market Shares
206.6
-44.1
-
162.6
Government Securities
506.0
73.8
5.2
585.0
Corporate Equities
1322.3
9.9
187.3
1519.5
Other Securities
106.1
1.5
-8.8
98.8
Insurance & Pension
Reserves
1179.4
142.7
46.2
1368.3
Other Assets
360.7
15.0
0.2
375.9
Tangible Assets
7251.1
101.6
333.8
7686.5
Residential Structures
2612.4
49.0
83.5
2744.9
Consumer Durables
1096.7
49.3
5.0
1151.0
Land
2541.3
-
225.6
2766.8
Other Assets
1000.7
3.3
19.8
1023.8
Financial Debt
2352.1
258.5
-4.4
2606.2
Mortgages
1572.2
105.6
58.6
1736.4
Consumer Credit
430.7
51.3
2.8
484.8
Other Debt
349.2
101.6
-65.8
385.0
Total Net Worth
10376.5
279.8
566.8
11223.1
NOTE: Discrepancies reflect discontinuities in the underlying
statistical series. Personal net worth includes the net worth of
households and farm and nonfarm noncorporate business.
In 1983, the major revaluations were in corporate equities and land
holdings. The value of corporate equities held by persons rose by
$187 billion, up from a $156 billion gain in 1982. The value of
land holdings rose by $226 billion in 1983. During the inflationary
period 1978-1980, the increases in land values averaged about $320
billion per year. Between 1955 and 1983, personal net worth rose by
731 percent compared with an increase in GNP of 728 percent. Data
on selected sub-periods are given below.
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Personal Net Worth, Saving, & Income Comparisons
(annual percent change)
1955-
1965-
1975-
1965
1975
1983
Net Worth
5.7
7.2
11.4
Gross Saving*
5.9
10.6
7.9
Net Saving*
7.5
10.8
4.2
Disposable Income*
5.6
8.7
10.3
GNP*
5.6
8.4
10.0
VI. International Comparisons
Among selected OECD countries, the United States has had the lowest
ratio of national saving to GNP. and one of the lowest ratios of
household saving to disposable income. Moreover, these rankings
apply even after adjustments for differing institutional
arrangements and differing definitions of saving and income.
The following comparisons of United States and foreign saving rates
use the System of National Accounts (SNA) which is accepted by the
OECD and United Nations. There are important definitional
difference between the SNA and NIPA. For personal saving, the NIPA
treats estate and gift taxes as current outlays, while the SNA
treats these taxes as capital outlays, financed by running down
assets. Thus SNA personal saving rates will be higher than NIPA's.
The SNA also treats government construction and equipment purchases
(excluding military hardware) as investment, while the NIPA counts
all government outlays as current consumption.
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Gross Saving Rates: 1970-1980
(percent)
National
United States (NIPA)
16.0
United States (SNA)
18.6
Canada
22.1
Japan
35.0
Australia
22.3
France
24.1
Germany
25.1
Italy
22.3
Sweden
21.5
United Kingdom
19.0
U.S. Rank
9/9
Personal
12.1
12.6
13.8
25.0
16.8
16.7
-
25.1
8.3
10.9
NOTE: National saving is calculated as a percent of gross national
disposable income (gross saving plus private and government
consumption). Personal saving is calculated relative to gross
disposable income (gross personal saving and consumption).
Source: Blades & Sturm, "The Concept and Measurement of Savings:
The United States and Other Industrialized Countries,"
Saving and Government Policy (Federal Reserve Bank of
Boston, 1982).
Blades and Sturm adjust national and personal saving rates for
institutional differences among countries and alternative
definitions of income and saving.
Institutional Differences. Institutional differences that affect
personal saving rates are social security pensions, public health
and education expenditures, and tax structures. However, even
adjusting for these institutional differences, the saving rate in
the United States remains low relative to other countries.
The SNA treats social security schemes as current outlays, while
treating private pensions as capital transactions. Treating all
social security pension fund transactions as private funds results
in shifts in saving rates depending on the relative mix of private
and public pensions in each country. The results of such a
calculation are shown in column 2 of the following table.
I d
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The SNA includes health and education expenditures paid for directly
by persons in private consumption. Health and education services
purchased indirectly from government by taxation are counted as
government consumption. Shifting this spending from the government
to persons, and assuming that direct taxes are reduced by an
identical amount, results in the saving rates shown in column 3.
Countries rely on different mixes of taxes to finance government.
either direct taxes--income and social security taxes--or indirect
taxes--value added taxes, import duties and sales taxes. The level
of saving is not affected by the mix of taxes in an accounting
sense, but calculated saving rates are affected because disposable
income is affected. Column 4 shows saving rates adjusted so that
consumption taxes are replaced by direct taxes.
Personal Saving Rates: 1970-1980
(percent)
(1)
Gross
Saving
(,2)
Including
Saving of
Social
Security Funds
(3)
Adjusted
for Gov.
Health &
Education
(4)
Adjusted for
Expenditure
Taxes
United States
12.6
13.7
13.4
Canada
13.8
15.3
16.0
Japan
25.0
27.6
23.7
26.3
Australia
16.8
15.3
18.7
France
16.7
17.6
-
20.2
Italy
25.1
24.8
23.0
28.1
Sweden
8.3
14.4
6.8
10.4
United Kingdom
10.9
11.4
9.0
12.5
6/8
6/7
4/6
6/8
National saving rates are unaffected by shifts in public pension
accounting or private vs. public spending for health and education,
but are affected by tax structure. The following table shows
national saving rates adjusted by replacing consumption taxes with
direct taxes.
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National Saving Rates: 1970-1980
(percent)
Gross
Saving
Adjusted for
Expenditure Taxes
United States
18.6
19.6
Canada
22.1
24.3
Japan
35.0
36.7
Australia
22.3
25.8
France
24.1
27.6
Italy
22.3
24.4
Sweden
21.5
24.3
United Kingdom
19.0
20.9
Definitional Differences: Personal saving rates are also affected
by whether consumer durable purchases are treated as current outlays
or capital outlays, whether private education spending is a current
or a capital outlay, and whether adjustments are made for inflation
gains or losses. Even adjusting for definitional differences, the
saving rate in the United States remains low relative to other
countries. The following table makes those adjustments.
Personal Saving Rates: 1970-1980
(percent)
Gross
Saving
Including
Consumer
Durables
Including
Including Inflation
Private Gains or
Education Losses
United States
12.6
20.7
14.4 10.7
Canada
13.8
23.8
16.3 12.0
Japan
25.0
28.2
26.2 21.1
Australia
16.8
-
17.3 -
France
16.7
23.6
17.0 13.3
Italy
25.1
28.6
25.4 -
Sweden
8.3
16.2
8.5 -
United Kingdom
10.9
17.9
12.7 4.0
U.S. Rank
6/8
5/7
6/8
Ii
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National saving rates are also affected by the inclusion of consumer
durables and education (private and public) in saving. The
following table reflects this adjustment in a comparison of national
saving rates that include R&D spending in investment rather than as
a current outlay.
National Saving Rates: 1970-1980
(percent)
Gross
Saving
Including
Consumer
Durables
Including
Education
Including
R&D
Spending
United States
18.6
24.3
24.7
19.5
Canada
22.1
28.4
-
22.3
Japan
35.0
37.0
39.4
36.1
Australia
22.3
-
26.2
-
France
24.1
28.9
-
24.6
Italy
22.3
25.5
26.7
22.6
Sweden
21.5
25.6
27.1
22.1
United Kingdom
19.0
23.4
24.5
19.3
U.S. Rank
8/8
6/7
5/6
VII. Saving Policy: Broad Considerations
Recent declines in gross saving are troublesome for two reasons. In
the short run, changes in the propensity to consume or save can have
an important impact on the pace of economic growth. A decline in
personal saving stimulates the economy in much the same way as a
reduction in personal taxes. Both provide for a higher level of
consumption and output in the short term, for any given initial
level of disposable income. Alternatively, a rising saving rate
might mean less personal consumption, offsetting any fiscal stimulus
from the government sector and, in the process, holding down both
inflation rates and interest rates.
In the longer run, saving and investment are needed to maintain,
expand, and modernize the nation's capital stock, thus adding to the
productive capacity of the economy.
Concern about the growth and quality of United States productive
capacity has assumed new urgency because of recent declines in
saving. The central question is whether personal or total saving
behavior can be altered measurably by public policy.
Until 1981, gross saving relative to GNP had been relatively stable,
aside from business cycle effects, and despite rather significant
changes in inflation rates, demographics, interest rates, and tax
rates. Moreover, research has failed to demonstrate convincingly
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that any of these factors has had an important direct effect on
saving during the post-WWII period. It is difficult to argue,
therefore, that incentives in the range of magnitude normally
considered can be effective in changing the nation's private saving
behavior. On a grander scale, however, two lines of approach merit
attention.
One approach is fundamental tax reform. A consumption-based tax
system, one that is being studied in a CCEA Working Group, could
exempt all saving from taxation and thus dramatically increase
saving incentives. Past experience, however, provides little
guidance as to the magnitude of any effect. Principles underlying
such a system should include the following:
o Equal Incentives for Various Types of Saving. The Internal
Revenue Code already has numerous provisions to enhance
saving incentives, including deductions for retirement
saving, dividend and interest exclusions, and special
treatment for capital gains income. Because these
provisions were enacted independently, and because not all
forms of saving are given equal treatment, tax benefits
accrue to individuals who merely shift assets from one form
of saving to another. Tax revenues are reduced with no
necessary increase in saving. Any new tax system should
provide equal incentives for various types of saving.
o Elimination of Opportunities for Arbitrage. A new tax
system should treat positive saving and negative saving
(borrowing) equally. Currently, taxpayers can borrow
money, the interest on which is tax deductible, to invest
in assets whose return is partially or fully exempt from
taxation. Thus, taxpayers can save on taxes without doing
any additional saving.
The second and most direct, gross saving would be increased if we
reduced the Federal budget deficit. The Federal government competes
directly in the market for sources of funds, and unless private
sources of funds increase dramatically, which is unlikely, gross
saving must fall as Federal borrowing becomes larger. This is the
likely explanation for the continuing low ratio of gross saving to
GNP. Reducing the deficit by reducing spending is the most direct
way to increase gross saving. A second option would be to raise
taxes in ways which will not affect saving.
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UNITED STATES DEPARTMENT OF COMMERCE
-`s1 The Under Secretary for Economic Affairs
Washington, D.C. 20230
ETA TESCi C#403
July 26, 1984
MEMORANDUM FOR TH CABINT COUNCIL ON ECONOMIC AFFAIRS
FROM: i ney L: ones
Under Secretary for Economic Affairs
SUBJECT: Effects of Demographic Shifts on the Economy:
Immigration Issues
Much of the public discussion of changing U.S. immigration
patterns has been marked by misunderstanding of the changes
themselves and their effects. This paper seeks to sharpen
understanding of these developments by describing trends in the
main components of net immigration -- legal immigration,
including refugees and asylees, emigration of former
immigrants, and net illegal immigration -- and by assessing the
costs and benefits of legal and illegal immigration for the
nation at large. 1/
Net Immigration: Twentieth Century Trends
Legal Immigration. The level and composition of legal
immigration to the United States has been determined by law
since the early 1920s. In recent years, total legal
immigration to the United States has ranged between 450,000 and
550,000. On average, about 120,000 of these immigrants have
been refugees (mainly from Southeast Asia, but also from
Eastern Europe, the Soviet Union, and Afghanistan). The rest
have been newly arrived aliens admitted for permanent residence.
The flow of legal immigration was much heavier during the early
part of this century. From 1905 to 1914, an average of over
one million immigrants per year were admitted to the United
States.
1/
The Administration has been committed to immigration
reforms that would curb the entry and presence of illegal
aliens in the United States since 1981. The bill passed
by the Senate in 1982 and again in 1983 and the House in
June 1984 would make it illegal to knowingly hire aliens
illegally present in the United States and would establish
a system to verify eligibility to work for all new hires.
It would also legalize that portion of the illegal
population which is self-supporting and has been here for
a substantial period of time. The bills have not gone to
conference and it is now unlikely that a final agreement
can be reached during this session.
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Legal immigration has amounted to roughly 15 percent of total
U.S. population growth since 1980. This is a smaller share
than in the 1910s when net immigration accounted for about 30
percent of total population growth, but much larger than in the
1930s and early 1940s when the share was about two percent.
(By the 1950s, the share had increased to eight percent; by the
1960s, to 10 percent; and by the 1970s, to 14 percent.)
The'sources of legal immigration have also changed.
Approximately one-third of legal immigration now comes from
Asia, compared with only six percent thirty years ago. Since
the 1950s. the Latin American share of legal immigration has
grown from 25 percent to 40 percent, and the Canadian and
European share has fallen to one-fifth from more than
two-thirds.
In addition, the 1980 census indicates that for the first time
since the high immigration years of the 1900s and 1910s. the
share of total U.S. population which is foreign-born has
increased (to 6.2 percent from 4.6 percent in 1970). In
absolute terms, this segment of the population (14 million in
1980) was only a few hundred thousand short of the all-time
high.
Emigration of Former Immigrants. Emigration has proven hard to
measure. However, available data indicate that roughly 30
percent of legal immigrants (more than 100,000 per year in
recent years) eventually emigrate. This relationship appears
to have persisted throughout the present century. The reasons
for it are not well known, though presumably they include lack
of employment, poor cultural adaptation, and retirement.
Net Illegal Immigration. Estimates of the size of the illegal
alien population vary within the range of 2 million to 12
million (or even more) and lack empirical support. However.
recent research at the Census Bureau and elsewhere suggests
some overall limits on the size of this population in 1980.
Based on comparisons of aggregate 1980 census data with figures
on legal aliens derived from Immigration and Naturalization
Service (INS) data, Bureau researchers estimated that about two
million illegal aliens were counted in the census. (Of these,
slightly over half were born in Mexico). In all probability,
this is an undercount. Estimates of illegal immigration are
largely guesswork because data are lacking. By all estimates,
however, the number of illegal aliens in the United States in
1980 was significant, and in view of economic and other
difficulties, in Mexico and Central America, this number may
have grown at an increasing rate since 1980.
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Although the precise number of illegal aliens in this country
in 1980 is unknown, the census research suggests that as a
group they are young--seven out of eight are under age 40 and
about one in five is less than 15. About 60 percent of the
adults are male; roughly 25 percent of the total were in the
United States before 1970; and about two-thirds are Hispanic.
Illegal aliens appear to come from the world over, but Mexico
stands out as by far the largest source, with the rest of the
Caribbean basin also providing substantial numbers.
Future Immigration. Future levels of legal immigration are
subject to legislative and executive control and can be
adjusted to match policy goals. Large backlogs of applications
for admission as permanent resident aliens exist in many
sending countries (e.g. Mexico, 313,496; Philippines,
308,261). Moreover, as more aliens are admitted for, permanent
residence, the pool of persons eligible for admission under
family reunification criteria becomes larger.
In addition, the forces that drive illegal immigration --
excess population and poverty in the less developed countries
-- are unlikely to abate in the near term. Indeed, they may
increase. The Census Bureau's population projections for
Mexico illistrate the pressures. Over the next 20 years, the
Mexican labor force will double with the addition of 20 million
workers who are already born. Unless the Mexican economy is
much more successful in creating jobs than it has been, the
incentive to cross the U.S. border will increase. Similar
projections characterize the rest of the Caribbean basin.
Thus, if U.S. policy is to control immigration during the next
decade, we will probably have to devote increasing resources to
enforcement.
Social and Economic Effects of Recent Immigration Patterns
Much of the discussion of the effects of higher levels of
immigration on the United States has focused on presumed
negative impacts -- e.g., the added public burden of supporting
the increased population, and the displacement of native-born
workers. However, the available evidence raises questions
about these presumptions.
Immigration contributes to higher U.S. population growth
directly and indirectly because new arrivals tend to be
concentrated in the child-bearing ages and to have high
fertility rates. This higher population growth may carry with
it certain costs, but it also promises important benefits.
Fueled by the postwar "baby boom," the U.S. working age
population 'expanded at an annual rate of two percent during the
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1970s. Recently, however, as the "baby bust" cohorts of the
1960s began to reach working age, this growth dropped to about
one percent per year. Some analysts believe that this could
hamper future economic expansion. Also, since the number of
persons of retirement age will continue rising through the
early decades of the next century, this slower labor force
growth could impose a growing financial strain on the social
security system. Immigration can help to offset both the
long-term constraint on the labor pool and potential pressures
on the social security system.
In addition, because most immigrants are adults, the United
States gains human capital in the form of labor and education.
On average, legal immigrants have about as much education as
native-born Americans (illegal immigrants have less). Legal
immigrants also tend to be self-reliant and innovative (they
must be to face the challenge of a new culture), and once in
the United States, they become consumers, entrepreneurs, and
taxpayers.
On the negative side, generally low-skilled illegal immigrants
may need more social support than other U.S. residents as they
age. The demand for their unskilled labor may fall over time,
and their schooling and language limitations may leave them
ill-suited for retraining. They may also have greater medical
problems in later years than the average American, due to the
dietary and health habits of their early years.
Some observers argue that immigrants displace American workers
from their jobs and that illegal immigrants in particular are
willing to accept low pay and poor working conditions, thus
driving down wage rates for themselves and domestic workers.
The evidence is mixed. In some industries, where immigrants
(especially illegals) are concentrated, some displacement may
occur. Some immigrants, particularly illegals, accept
relatively undesirable, low-paying jobs which most Americans
shun (though studies by INS suggest that illegal immigrants'
wages are not as low as is commonly thought). Overall,
low-paying and undesirable jobs are held predominantly by
domestic workers, except in locales with concentrations of
foreign-born workers.
Often overlooked in the argument about job displacement is the
job creation that results from spending by immigrant consumers
and from small businesses started by immigrants. By increasing
the size of the labor force, immigrants enhance the economy's
growth potential. Also, to the extent that lower labor costs
result in lower priced goods and services, all consumers
benefit.
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Though immigration is a national issue, many of its effects are
concentrated at the local level, particularly in California,
Texas, Florida, and the cities of the northeast. Despite
evidence that legal and illegal immigrants do not abuse welfare
and government services, in areas where population growth has
increased local governments must supply more police and fire
protection, more sanitation service, more health service, and
more. classrooms and teachers. In addition, some immigrants may
have special needs. This is particularly true of refugees who
may have no familial support network, somewhat lower skills
than other immigrants, and who typically have lost their
possessions in their flight from oppression.
Illegal immigration also poses a social integration problem.
Because of their continuous fear of deportation, illegals are
reluctant to participate fully in American society. There is
evidence, for example, that illegals are often victims of fraud
and crime, but that their fear of contact with governmental
agencies leads them to suffer silently without going to police
or other enforcement authorities.
Finally, any reckoning of the total cost of immigration to
American society must also include the costs of enforcement.
Control of immigration, particularly illegal immigration, can
be expensive in terms of financial and social costs.
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