One of the fundamental equations in macroeconomics is savings = investment. This makes sense—one can’t invest (i.e. borrow) more than what is available in savings. The Bureau of Economic Analysis (BEA) recently released revised data on aggregate savings and investment in the U.S. economy dating back to 1929. The data shows a looming investment problem on the horizon.
The first graph shows total annual private and government (federal, state, & local) net savings since 1950.
Net savings = gross savings – consumption of fixed capital (i.e. depreciation).
Private savings = domestic business savings (undistributed corporate profits and inventory change) + personal savings.
Throughout the 1950s, the governments balanced their budgets, while the private sector saved modest amounts of their income. Beginning in the mid-1960s, government and private savings began to diverge. The gap grew wider in the 1980s as the federal government began running larger and larger deficits. Federal government surpluses produced a convergence in net savings in the late 1990s. The gap widened again over the past ten years as government spending on the wars in Afghanistan and Iraq and a deep recession outpaced revenue.
The second graph breaks out government savings between federal and state/local sectors. It shows the negative government savings seen in the first graph is almost exclusively the fault of the federal government. The major reason for this is most state and local governments are required by law to balance their budgets; the federal government is not under a similar constraint.
What is troublesome is the growing negative savings in the state and local government sector over the past ten years. BEA doesn’t produce detail data as to the reason, but the most likely culprits were the recent recession and the growing pension liabilities.
The next graph shows the flipside side of the equation: investment. It displays net investment of the private and government sectors. Since the 1960s, the private sector has carried an ever greater burden of total investment in the U.S. economy. The 85 percent drop in private investment between 2005 & 2009 is a vivid picture of how severe the recent recession was. Though private investment has recovered somewhat, it is only back to a level seen in 1996.
The next graphs show detail net investment data of the government sector. During the 1950s and 60s, the investment by the federal and state/local sectors tracked fairly evenly. Federal investment fell in the 1970s, only to recover in the 1980s. Federal government investment fell to negative levels in the late 1990s. Negative investment is possible when depreciation exceeds gross investment. All the while investment by state/local governments increased steadily until the 2008 recession.
The final graph compares the two main components of net federal government investment—defense and non-defense. Much of the up and down movement of the previous graph was due to defense related activities. Federal government investment fell in the 1970s as the U.S. withdrew from the Vietnam War. It picked up in the 1980s during the military buildup initiated by the Reagan administration. It fell in the 1990s with the end of the Cold War—only to pick up again after 9/11. Non-defense investment remained relatively constant–fluctuating between ten and twenty billion dollars since the 1980s.
What Does This Mean?
Investment is the key to long-term economic growth. Without it, the economy will at best only sputter along, barely growing or creating jobs. This is important for retirement and pension accounts. Workers rely on robust rates of return on their savings to provide for their retirement. When they are not realized, they must forego even more current consumption, worker longer, and/or consent to a lower standard of living when they retire.
The data shows that the bulk of investment in the U.S. is made by the private sector and state/local governments. The federal government plays an insignificant role in investment. The federal government reached an investment peak of $54 billion in 2010—roughly 1.5 percent of the budget. In other words, 98.5 percent of the federal budget goes towards consumption.
This may not be as bad as it looks. The data doesn’t show the source of revenue used for investment. The federal government does distribute revenue to the private and state/local government sectors for investment purposes. In the BEA accounts, this appears as spending by the federal government and as investment in the other accounts.
In the end the huge negative savings by the federal government and the growing red numbers accumulated by state/local governments is a serious problem. The thirteen trillion dollar federal debt will need to be paid through either higher taxes and/or lower spending. These data doesn’t include the significant Social Security, Medicare, and pension liabilities that all levels of government will face in the coming decade.
This is going to significantly impact the ability of the government sector to invest in needed things like roads, bridges, and schools. The private sector investment will suffer as well as higher taxes and additional government borrowing will make it difficult to find the funds needed to finance projects needed to grow the economy.