Front Matter Page

Western Hemisphere Department

Contents

• Summary

• I. Introduction

• II. The Decline of U.S. National Saving

  • 1. A review of the data

  • 2. Some measurement issues

• III. Factors Behind Lower U.S. National Saving

• IV. Government Policy and National Saving

  • 1. The role of impediments to private saving

  • 2. The interests of future generations

  • 3. What kind of policy response?

  • 4. Some illustrative calculations based on the golden rule

• VI. An Alternative Approach to Medium-Term Fiscal Targets

• VII. Conclusion

• Appendix: Modified Golden Rule Calculations

• Charts

  • 1. Gross Saving Rates

  • 2. Net Saving Rates

  • 3. Government Saving Rates

  • 4. Private Saving Rates

• References

Summary

The U.S. national saving rate has dropped markedly in the 1980s reflecting declines in both its public and private components. Many of the factors that may be behind the decline in the private saving rate appear difficult to reverse. An alternative strategy would be for the federal government to aim for the achievement of budgetary surpluses to offset reduced private saving. Such an approach would be motivated by the fact that some part of the decline in private saving may reflect unintended consequences of public sector interventions into private market decisions—such as the provision of social security and various aspects of tax policy—and more fundamentally because private sector decisions may not adequately take account of the interests of future generations.

Two alternative frameworks aimed at quantifying medium-term objectives for the federal fiscal balance are developed. The first is based on an explicit optimality criterion—namely, finding the neoclassical steady state path on which per capita consumption is maximized. Illustrative calculations indicate that the current U.S. national saving rate appears to be well below the optimal level by this criterion and suggests that a net national saving rate of close to 10 percent of net national product (NNP) might be called for. The associated target for the federal fiscal balance would be a surplus in the range of 3 percent of NNP.

The second approach calculates net national saving rate consistent with a target output growth rate, assuming, inter alia, no reliance on foreign saving. In this framework the assumption concerning the future behavior of multifactor productivity growth is key; one way to proceed is to assume that the latter rebounds in the projection period above its performance in the 1970s and 1980s, while remaining below the rapid growth rates of the 1950s and 1960s. On this basis, and assuming no reliance on foreign saving, output growth of 3 ¼ percent annually—in line with average growth from 1950-88—would also require a net national saving rate of almost 10 percent of NNP and a federal budgetary surplus of close to 3 percent of NNP.

The two alternative frameworks analyzed in the paper yield the same broad result that a federal budgetary surplus equivalent to 3 percent of NNP or more may provide an appropriate medium-term objective for U.S. fiscal policy. While the precise numerical results, of course, depend on the specific frameworks presented and the assumptions made, they indicate that a strong case can be made for a substantial surplus to be an objective of U.S. fiscal policy.