The Post-American World - Fareed Zakaria [94]
It used to be a law of macroeconomics, for example, that in an advanced industrial economy there is such a thing as NAIRU—the nonaccelerating inflation rate of unemployment. Basically, this meant that unemployment could not fall below a certain level, usually pinned at 6 percent, without driving inflation up. But for most of the 1990s and 2000s, many Western countries, especially the United States, had unemployment rates well below levels economists thought possible. The same economists once thought that America’s current-account deficit—which in 2007 reached $800 billion, or 7 percent of GDP—was supposed to be unsustainable at 4 percent of GDP. The current-account deficit is at dangerous levels, but we should also keep in mind that its magnitude can be explained in part by the fact that there is a worldwide surplus of savings and that the United States remains an unusually stable and attractive place in which to invest.
Harvard University’s Richard Cooper even argues that the American savings rate is miscalculated, painting an inaccurate picture of massive credit card debt and unaffordable mortgages. While many households did live beyond their means in the decades before the financial crisis, and many continue to do so today, the picture looks healthier at the aggregate level, Cooper argues. In 2005, when the personal saving rate was just 2 percent, corporations saved 15 percent of their income. The decrease in personal saving, in other words, was largely offset by an increase in corporate saving. (That fact helps explain today’s fractured economy, in which many families struggle with debt and foreclosure while the stock market soars upward, gaining nearly 13 percent in 2010.)
More important, the whole concept of “national saving” might be outdated, not reflecting the reality of new modes of production. In the new economy, growth comes from “teams of people creating new goods and services, not from the accumulation of capital,” which was more important in the first half of the twentieth century. Yet we still focus on measuring capital. The national accounts, which include GDP and traditional measures of national saving, were, Cooper writes, “formulated in Britain and the United States in the 1930s, at the height of the industrial age.”19
Economists define saving as the income that, instead of going toward consumption, is invested to make possible consumption in the future. Current measures of investment focus on physical capital and housing. Cooper argues that this measure is misleading. Education expenditures are considered “consumption,” but in a knowledge-based economy, education functions more like savings—it is spending forgone today in order to increase human capital and raise future income and spending power. Private R&D, meanwhile, isn’t included in national accounts at all, but rather considered an intermediate business expense—even though most studies suggest that R&D on average has a high payoff, much higher than investing in bricks and mortar, which counts under the current measures as savings. So Cooper would also count as savings expenditure on consumer durables, education, and R&D—which would give the United States a significantly higher savings rate. The new metric worldwide would raise the figure for other nations as well, but the contribution of education, R&D, and consumer durables to total savings “is higher in the United States than in most other countries, except perhaps for a few Nordic countries.”*
With all these caveats, the United States still has serious problems. Many trends relating to the macroeconomic picture are worrisome. Whatever the savings rate, it has fallen fast over the past two decades, though a new recession-driven thriftiness has raised it to about 5 percent in the last two years. By all calculations, Medicare threatens to blow up the federal budget. The swing from the surpluses of 2000 to the deficits of today has serious implications. For most