Federal Budget Must Balance to Counter Foreign Savings in U.S./If Deficit Persits, Even Tax Rise Better Than Inaction, Says Economist

By Silk, Leonard | THE JOURNAL RECORD, May 26, 1987 | Go to article overview

Federal Budget Must Balance to Counter Foreign Savings in U.S./If Deficit Persits, Even Tax Rise Better Than Inaction, Says Economist


Silk, Leonard, THE JOURNAL RECORD


Foreigners now supply more savings to the United States economy than do Americans.

In 1986, the inflow of foreign savings to the United States totaled $142 billion, or 3.4 percent of gross national product, while domestic savings totaled only $83 billion, or 2 percent of GNP.

That development is worrying William C. Freund, chief economist emeritus of the New York Stock Exchange, who has just completed a study, ``Investment and Saving: The Engine of Economic Growth,'' for the Equitable Life Assurance Society of the United States.

Without those foreign savings, Freund said in an interview last week, ``the American economy would have been catapulted into a recession.'' He agreed with Paul A. Volcker, chairman of the Federal Reserve, that the volatility in exchange and interest rates ``provided a little taste'' of how vulnerable our markets and economy have become to the expectations of foreign investors.

``We are obviously in danger of losing control over our own economic destiny,'' Volcker said earlier this month.

Even with the huge inflow of foreign savings, the saving rate in the United States fell to 6.1 percent in 1981-86, compared with 8 percent in the 1970s. And without the foreign savings, the net domestic savings rate fell to 2 percent in 1986, compared with an average of 7.1 percent in the 1970's, 7.5 percent in the 1960's and 7.1 percent in the 1950's.

Part of the explanation for this steep decline in domestic savings is that personal savings, which averaged 5.5 percent of GNP in the 1970's, dropped to 2.7 percent in 1986. Corporate savings, represented by net corporate earnings, rose slightly, to 2.6 percent in 1986, from an average of 2.5 percent in the 1970's. Thus, total private savings came down to 6 percent in the 1980's, a significant but not disastrous fall from the rates of 7.5 percent, 8.2 percent and 8 percent in the 1950s, 1960s and 1970s.

But the leading cause of the drop in the domestic savings rate in recent years has been the swelling of the budget deficit. Budget deficits count as ``dissaving,'' which must be financed by foreign or domestic savers.

Back in the 1950s and 1960s, the government's deficits annually absorbed less than half of 1 percent of GNP. But that percentage exploded to 5.2 percent in 1983 and was still at 4.8 percent in 1986.

State and local governments ran a small surplus in 1986, but total governmental dissaving still amounted to 3.3 percent of GNP.

As a result, net domestic savings fell to a mere 2 percent in 1986, compared with an average of 7. …

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