Cut in savings, rise in deficit don't bother Fed economist
Boston — Richard W. Kopcke doesn't get excited about the drop in the personal savings rate to a 33-year low of 4 percent this past spring. ''It doesn't mean anything, '' says the economist with the Federal Reserve Bank of Boston.
Typically, American consumers have put aside a little more than 6 percent of their take-home pay. This is a lower rate than some other industrial countries, causing considerable concern among policymakers, especially those of a conservative bent.
Indeed, the Reagan administration managed major changes in tax laws, including the biggest tax cut in history, to stimulate savings.
Economist Kopcke, however, likens such a short-term drop in the quarterly personal savings rate to the bouncing around of the weekly money supply figures - of not much economic consequence. The savings rate drop merely reflects the fact that the current recovery is being led by consumer expenditures. Consumers are digging deeper into their pockets as economic confidence returns.
''The savings rate has to fall at these times,'' he says.
As the recovery moves along, the savings rate will rebound. More people will be working, spending, and saving. Eventually, as companies use more of their productive capacity, business will spend more on investment and keep the economy growing.
Nor does Mr. Kopcke get alarmed about the size of the federal deficit.
Those worried by the deficit often note that savings (when back to normal) amount to about 6 percent of personal disposable income (take-home pay) or 5 percent of the nation's gross national product (GNP), that is, the total output of goods and services. That is about the same proportion of GNP as the federal budget deficit. So, the alarmists argue, financing the deficit will eat up, in effect, all those savings, leaving little for use by the private sector for investment purposes.
Mr. Kopcke points out that with a 4 percent annual increase in real GNP (after removing inflation), consumption expenditures and government spending could continue growing at the same level - and yet there would be money to finance the deficit and private investment at a level amounting to the 14 percent of GNP, as usual.
Because, Kopcke explains, corporate savings could increase dramatically. Companies would be more profitable, using retained earnings to finance their expansion and modernization. In fact, he says, that might be desirable, since there has been much concern about how corporations have become too reliant on external borrowing.
''Every cloud has its silver lining,'' he jokes.
If taxes are raised to reduce the deficit, he suggests such action should be ''balanced.'' It shouldn't hit consumers too hard, since business needs their spending to prosper. Nor should it concentrate on business, since investment is important also.
Unless there are sizable tax changes or the recovery is much faster than anticipated, Kopcke expects the deficit as a percentage of GNP to fall only slowly over the next few years. It might reach between 4 and 5 percent of GNP by mid-1984.
But, he points out, state and local governments are likely to be in surplus by an amount equivalent to 1.5 percent of GNP. That will reduce any strain on the financial markets and, in effect, provide savings for federal budget financing or investment financing.
Further, if the economy was running at a full-employment level - an ''if'' that economists used to examine more often some years ago - then the deficit would be even smaller, perhaps around 1.5 percent of GNP. Actually, Kopcke calculates that before the latest tax cut in July, the so-called ''full-employment budget'' was almost in balance.
Looking at these numbers, he concludes: ''The (budget) story isn't so horrific after all.''
He cautions, however, that not everything is hunky-dory, since unemployment will inch down only slowly. With productivity increasing at about a 4 percent annual rate, businessmen will not need to hire so many new workers. He figures unemployment may still be running between 8 and 9 percent at the end of next year.
He is also aware of a study by two economists with the organization for Economic Cooperation and Development comparing the savings rates for the 24 industrial nations that are members of that organization. The two point out that various countries define income and savings differently.
There are institutional factors that also distort the data. For instance, how does a nation handle public and private pension programs statistically? After several such adjustments, the US personal savings ratio remains low. But the national savings ratio - personal, plus business, plus government savings - improves by 1 percent to 19.6 percent, for 1970-80. Japan stands at 36.7 percent , France at 27.6 percent, the United Kingdom at 20.9 percent.
The two economists, Derek Blades and Peter Sturm, go further. They treat such consumer durables as refrigerators and automobiles, which last for some years, as capital outlays and thus include and element of savings. The same treatment can be given private and government expenditures on education, and on research and development. When that is done, the ratio for the United States comes out to 31.6 percent, vs. 33.6 percent for an average of nine countries. That's not so bad.