What is the 'right' amount of saving: is our national savings rate a national disaster?

Is our national savings rate a national disaster? Only, says Professor Friedman, if you believe government knows more about

what individuals want than they know themselves.

Seven eminent economists and businessmen express a wide range of agreement and demurral.

THE U.S. IS SAVING too little." That has become the battle cry of the doom-and-gloomers of all shades of opinion-left, right, and center. Low saving, we are told, condemns the U.S. to becoming a second-rate nation, or even a banana republic. It threatens our future standard of living, and imposes unjustified burdens on future generations.

How fashions change! By chance, I recently came across notes of a course on business cycles that I taught nearly half a century ago (in 1940). Glancing through the notes, I was struck by how much attention I paid to what was then the favorite battle cry: We're saving too much. Class period after class period was devoted to describing and criticizing the now nearly forgotten under-consumption theories of the business cycle.

Then as now, the concern was with maintaining economic growth. However, the perceived threat was not too little saving to finance investment, but too little consumption to provide an incentive to invest. Unless consumers spent more lavishly, we were doomed-or so we were told-to secular stagnation. The railroad revolution had come and gone, the automobile and electric-power revolutions had come and gone, and no comparable new industries were in sight to absorb the potential savings of a fully employed economy-so spake the prophets, Alvin Hansen and John Maynard Keynes. Only a sharp rise in the propensity to consume or large doses of government deficit spending could fill the gap left by the exhaustion of investment opportunities.

In fact, the alleged "oversaving" of the 1930s did not condemn us to "secular stagnation" and permanent high levels of unemployment. No more will the alleged "undersaving" of the 1980s condemn us to low growth and a declining standard of living. That may be our fate but, if so, for very different reasons.

A "shortage of investment opportunities," if it had existed, would have produced a market reaction in the form of lower interest rates, which would have encouraged investment in lower-yielding projects-including investment abroad-and discouraged savings. Similarly, the currently much deplored reduction in the propensity to save, if it exists, combined with ample investment opportunities, is working its own cure by keeping interest rates high enough to moderate any reduction in saving, to attract capital from abroad, and to discourage investment in low-yielding projects. These and related market reactions are adequate to avoid the dire consequences that are the stock in trade of the doom-and-gloomers who are always in our midst.

AS PRESCRIPTIONS FOR POLICY, both the earlier and the current battle cries rest on an unstated, and I believe fallacious, assumption: that it is a proper function of government to determine the level of saving. The proponents of this view seldom attempt to justify it except by citing the dire consequences that are alleged to follow from failure to achieve the "right" level of saving. And they never specify what they regard as the "right" level of saving-just calling for less and less, or more and more-nor do they even discuss the criteria that can be used to decide what the "right" level is.

Currently, net saving in the United States is about 1.5 per cent of the national income. This is the excess of private net saving of 3.5 per cent of the national income over, government dissaving of about 2 per cent. (These figures are all rough estimates and, in my view, seriously understate the actual value of the addition to the nation's physical wealth correctly measured, but that is not relevant to my present purpose so I shall here regard these figures as correct.*) If 1.5 per cent is too low, what is the right level? Is it the roughly 15 per cent reported as saved by the Japanese? Or the roughly 10 per cent reported as saved by the West Germans? Or the roughly 4 per cent reported as saved by the British? How are we to judge?

As a classical liberal, my answer is straightforward. The right level-at least to a first approximation-is the level that would emerge if all the separate households were ftee to divide their income between current and future consumption in accordance with their own values, provided only that the terms on which they could do so were not distorted and did not impose uncompensated costs or benefits on other households-in economic jargon, if there were no external effects.

Suppose, to take an extreme case for the sake of argument, the end result was zero saving: that is, given the rate of return on capital, the members of the community on the average did not regard the reward from saving as sufficient to justify sacrificing current consumption in order that they or their progeny could have still higher consumption in the future. Some households might be spending on consumption more than they were currently earning, for example, those composed of older persons or of young persons with young children; other households might be spending on consumption less than they were currently earning, for example, those composed of persons at their peak earnings with few dependents. But dissaving and saving would just offset one another. Would there be anything wrong with that outcome?