America's Low Savings Rate:
What Can We Do?
Mason Gaffney
[Reprinted from 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, anyway?
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 goal.
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 (Brownlee).
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 Haig-Simons:
1. 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.
2. 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.
3. 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.
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 hi 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
on. 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 qualify 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
p.233).
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
unproved 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 gain.
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 would attest.
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 micro-economic 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 then-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" "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 FOR 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, levees, 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 getting.
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 into orbit.
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 three generations.
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
hi 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, away profits, or spend them to acquire and downsize
their workers are not adding to ratio or wealth. Foreigners who buy
U.S. mortgage: 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 program.
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.
REFERENCES
1. Brownless, W. Elliott, "Wilson
and Financing the Modern State: The Revenue Act of 1916". Proceedings
of the American Philosophical Society 129 (2), 1985, pp. 173-210.
2. Gaffney, Mason. October 1970. "Tax-Induced Slow Turnover of
Capital", Part IV, American Journal of Economics and
Sociology 29(4):409-24. Also, abridged, 1967, WEJ V(4), September
3. Mandel, Michael, 2005. "Our Hidden Savings." Business
Week 17, Jan 05, pp. 34 ff.; 2005, "Totting up Savings,"
Business Week 11, July 05
4. Miller, rich, 2005. "Too Much Money." BusinessWeek
7-11-05, pp. 59-66.
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