Barro on the Rate of Personal Savings

by Don Boudreaux on October 26, 2005

in Current Affairs

The September 2005 issue of The Region — a quarterly publication of the Federal Reserve Bank of Minneapolis — features this interesting interview with Robert Barro.  Among the more intriguing suggestions that Barro offers is this part of his reply to the question "By some measures, U.S. personal savings rates are quite low.  What does this say about people’s anticipations of having to pay higher taxes in the future [because of today's large government-budget deficits]?"

I have been thinking about one interesting fact which may relate to the U.S. national saving rate. If you look particularly since the beginning of the 1990s, there has been a tremendous decline in the price of investment goods relative to consumer goods. Some of that is due to computers and some to other improvements in durable equipment. So if you look at the ratio of nominal investment to nominal GDP, currently that ratio, 17 percent, is a little above its average value since 1954; in particular, it rebounded significantly in the recovery since 2003 from the low ratio during the 2001 recession. Anyway, the current investment-GDP ratio is basically normal.

However, because of the relative price changes, the U.S. economy is getting a lot more in terms of real capital goods with a normal ratio of nominal investment to nominal GDP. In this sense, the saving needed to provide for a given amount of real investment is much less than it used to be. My conjecture is that this development might have something to do with the decline in the national saving rate, but I am unsure whether this view is correct. In any event, the decline in the prices of investment goods compared to consumer goods has been pronounced, and this change is important for economic growth.

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