CIAO DATE: 08/05

The Importance of Raising National Saving

Abstract

An old saw has it that central bankers are paid to worry. They are supposed to look past any superficial good news and try to discern longer-run problems--perhaps inflation heating up, perhaps something else. For a central banker, every silver lining has a cloud.

The present time provides a good illustration. We are just completing the forecasting season, at which time various economists make their projections. The Blue Chip survey of leading business forecasters predicts that the growth of real gross domestic product will average 3.5 percent over the next two years and that unemployment rates will decline slightly. Unemployment rates are near their normal, or equilibrium, level, yet these forecasters still look for basic stability in core inflation rates. According to the Blue Chip survey, investment should grow at healthy rates, and productivity growth should remain strong. In these forecasts, the Federal Reserve is expected to keep raising short-term interest rates toward their equilibrium level. It all seems pretty healthy--what is there to worry about?

Well, unfortunately, there could be something to worry about, and that is what I want to talk about today. It is the nation's low national saving rate, basically the share of our output that is devoted to building up the country. This share can be defined either as the share of output not consumed either by households or government, or as the share of output devoted to capital investment less the share represented by borrowing from foreigners. The last clause is important--high investment is a good thing, but if much of this investment is financed by borrowing from foreigners rather than by our own saving, there could be trouble spots down the road. Whether there will be such trouble spots, I don't know. That is another issue I'd like to discuss.

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