The US capital glut and other myths

The Global Saving Glut and Secular Stagnation: Examining the Empirical Basis

There is a widespread perception that the US and, indeed, the world, is experiencing a ‘global saving glut’. Former Federal Reserve Chairman Ben Bernanke coined this term in a famous 2005 speech (Bernanke 2005). The view became a component of Lawrence Summers’ (2014) resurrection of Alvin Hansen’s (1938) secular stagnation hypothesis. The twin views have become a mainstay of macroeconomic thinking of both economists and the popular press.

The arguments for a capital glut

Basic economics traces the real return to capital – the marginal product of capital – to the degree of capital intensity – the ratio of capital to output. As capital becomes more abundant, its intensity rises, driving down its return. If the risk premium – the difference between the average return to risky capital and yields on safe government securities – remains fixed through time, declines in yields on government securities imply declines in the marginal product of capital and, all else equal, increases in capital intensity. A dramatic decline in these yields suggests a major increase in capital abundance, or a ‘capital glut’.

1. This is precisely what influenced the capital glut hypothesis and secular stagnation’s policy narrative. As Figures 1 and 2 show, short-, medium-, and long-term real Treasury yields were not just low, but negative in roughly half of the post-2005 period.

Figure 1: Annual average real return on three-month Treasuries (%)

Source: https://fred.stlouisfed.org/series/REAINTRATREARAT1MO

Figure 2: Annual average of daily Treasury par real yield curve rates

Source: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value_month=202308

Bernanke (2005) suggested not just a moderate rise in capital intensity, but a world awash in savings, with capital imports ensuring that even low-saving nations, like the US, would also have a surfeit of capital. Certainly, large US capital imports, i.e. sizeable current account deficits, have been a decades-long feature of the American economy.

Which countries/regions, apart from Japan and Germany, which have been running current account surpluses, are exporting capital to the US and other low-saving advanced economies? The answer is emerging countries. The list includes very high-saving countries, like China. But investors from all parts of the low-income world are seeking to invest in countries with minimal domestic risk, be it financial, real, or political. And low-risk countries are, by and large, advanced economies.

The combination of very low safe rates plus massive current account deficits, in certain countries, is the major pattern presented by Bernanke and referenced by Summers in support of their narratives. But they reference other factors in support of their theories. One is demographics. The world, as most everyone knows, is aging. As populations age, the life-cycle model – the model economists commonly use to predict saving behaviour – predicts asset accumulation among the working population that translates into a higher wealth-to-income ratio, consistent with a capital glut.

Other potential sources of a capital glut include the rapid income growth of China and India, both high saving-rate countries, and rising inequality in the US and elsewhere, which concentrates resources in the hands of the rich, who save more than those living hand to mouth. And some have suggested that there has been a slowdown in employment and productivity growth, making capital all that more abundant in relative terms.

Summers stresses the policy problem of a world flooded with capital. Government borrowing rates are so deeply depressed that central banks lose their ability to stimulate the economy by reducing rates even further unless there is substantial inflation. If economies can’t grow well on their own – his underlying premise – and their central banks can’t lend a hand, fiscal policy must come to the rescue. This translates into increased deficit-finance spending. Given low borrowing rates, such a policy is, arguably, cheap. Indeed, Blanchard (2019) suggests that low government borrowing rates may make deficits free.

The data beg to differ

In this column, we argue that the US has not experienced a capital glut. As we show, there has been no major increase in the US capital-output ratio, nor has there been a major decline in the US marginal product of capital – the economy’s real return to capital. Instead, the US capital-output ratio remains close to its post-war average and capital’s real return has remained roughly constant at around 6%.

Yes, the US has run very large current account surpluses in recent years. But the dramatic post-war decline in America’s net saving rate has, a la Feldstein and Horioka (1980), coincided with an equally remarkable post-war decline in America’s net domestic investment rate. Thus, capital imports have limited the drop in net investment, but not enough to maintain America’s net investment rate. As a consequence, even as the population has aged, the rate of capital accumulation has not produced an increase in the capital-output ratio.

Remarkably, many adherents to the capital glut-secular stagnation view focus on gross, not net saving. Thus Mankiw (2022) points to the post-war rise in the world’s gross saving rate. But the same World Bank data on gross saving show that what’s true of the gross saving rate isn’t true of the net saving rate. The US data illustrate this point. America’s net national saving rate has dropped to 3% from 13% in the 1950s and 1960s – a ten percentage point swing. In contrast, the US gross saving rate has declined by only two percentage points. The difference is explained by the shift in the composition of capital toward assets with higher rates of depreciation (e.g. computers and communication equipment versus buildings).

The capital-output ratio

Those proclaiming a capital gut have, it seems, made the leap from low real Treasury rates to excessive savings without directly measuring the capital-output ratio. This is readily done with Bureau of Economic Analysis (BEA) data on fixed capital (including equipment, structures, and intangible assets), valued at reproduction cost, and

SDGs, Targets, and Indicators

SDG 8: Decent Work and Economic Growth

• Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7% GDP growth per annum in the least developed countries.
• Indicator 8.1.1: Annual growth rate of real GDP per capita.

SDG 10: Reduced Inequalities

• Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average.
• Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40% of the population and the total population.

SDG 12: Responsible Consumption and Production

• Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.
• Indicator 12.2.1: Material footprint, material footprint per capita, and material footprint per GDP.

SDG 17: Partnerships for the Goals

• Target 17.1: Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.
• Indicator 17.1.1: Total government revenue as a proportion of GDP, by source.

Analysis

1. The SDGs addressed or connected to the issues highlighted in the article are SDG 8 (Decent Work and Economic Growth), SDG 10 (Reduced Inequalities), SDG 12 (Responsible Consumption and Production), and SDG 17 (Partnerships for the Goals).

2. Specific targets under those SDGs based on the article’s content:

– Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7% GDP growth per annum in the least developed countries.

– Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average.

– Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.

– Target 17.1: Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.

3. Indicators mentioned or implied in the article that can be used to measure progress towards the identified targets:

– Indicator 8.1.1: Annual growth rate of real GDP per capita.

– Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40% of the population and the total population.

– Indicator 12.2.1: Material footprint, material footprint per capita, and material footprint per GDP.

– Indicator 17.1.1: Total government revenue as a proportion of GDP, by source.

4. Table presenting the findings:

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: cepr.org

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