U.S. Saving and Investment: 40 Years of Decline
Monday, October 6th, 2014
It’s widely accepted that low personal savings in the last decade contributed the Great Recession, wherein people without adequate savings couldn’t insulate themselves from hard times as well as those with adequate savings. Lesser known, however, is the long-term trend of personal savings and the impact it has had on investment. It turns out that saving and investment as a percentage of GDP have declined substantially over the last 40 years, according to a new report from the nonpartisan Tax Foundation.
The considerable burden placed on saving and investment by the U.S. tax code is a major contributing factor to this trend, but it’s one that legislators have the power to correct. The current tax code encourages Americans to consume their income immediately by artificially lowering the rates of return on saving. It favors consumption in the short term over saving for consumption in the future.
“On a nationwide scale, this negatively impacts investment, the process by which financial savings are turned into real assets,” says Alan Cole, Economist at the Tax Foundation. “Investment is important, because it allows the benefits of individual saving to be shared more broadly. The purchase of equipment, for instance, makes the workers at the business more productive, raising their wages, and helps the economy produce more goods overall for consumers to use. Because our tax code punishes both saving and investment, we’ve been losing ground for the last 40 years.”
This bias in the tax code has contributed to several key issues addressed in the report:
- First, in terms of net savings, the U.S. is struggling at best. American private saving barely keeps pace with total government deficits, resulting in net income savings of less than 4 percent for every year between 2004 and 2013, with less than 0 percent for several of them.
- Additionally, American investment barely keeps pace with depreciation; U.S. private and public capital stock and infrastructure deteriorates almost as quickly as it can be repaired or replaced with new investment. The growth of capital stock is at a near standstill.
- Finally, the U.S., overall, does not save enough money to fund all the worthwhile domestic investments and relies substantially on foreign investors to make up the difference. This is because, despite its lack of saving, America is a fairly good place to own investments, and foreign savers recognize this. The physical manifestation of this economic trend is that foreign investors own more property in America than Americans own abroad.
No individual policy, presidential administration, or event bears sole responsibility for the problem. With the recent push for tax reform, however, we are primed to do something about it, as a substantive reform of the U.S. tax code could be a major step towards a solution.