In National Saving and Economic Performance, edited by B. Douglas Bernheim and John B. Shoven, that task is addressed by offering the results of new research, with recommendations for policies aimed to improve saving. Leading experts in diverse fields of economics debate the need for more accurate measurement of official saving data; examine how corporate decisions to retain or distribute earnings affect household-level consumption and saving; and investigate the effects of taxation on saving behavior, correlations between national saving and international investment over time, and the influence of economic growth on saving.
Presenting the most comprehensive and up-to-date research on saving, this volume will benefit both academic and government economists.
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National Saving and Economic Performance
By B. Douglas Bernheim, John B. Shoven
The University of Chicago PressCopyright © 1991 National Bureau of Economic Research
All rights reserved.
Market Value versus Financial Accounting Measures of National Saving
David F. Bradford
This essay is a venture into well-trodden terrain: the definition of saving. Because so many others have thought about the same issues, probably nothing I say here has not been said before by someone else. J.R. Hicks (1946) mapped the territory in a particularly well-known theoretical treatment. More recently, Auerbach (1985), Boskin (1986, 1988), Eisner (1980, 1988), Goldsmith (1982), Peek (1986), Ruggles and Ruggles (1981), and Shoven (1984) have discussed many of the points raised here in connection with empirical explorations of saving and wealth. In his presidential address to the American Economic Association, Eisner (1989) included the main theses argued here in a broadside indictment of the divergence between measurement and theory to be found in economics. This paper differs, perhaps, in degree of emphasis of two propositions. The minor theme is that saving should be defined by reference to the underlying concept of wealth to which the saving is an increment. The major theme is that the most useful wealth concept is the market value of assets, not the cost-based measure of capital implied by the use of national income and product account (NIPA) saving. Whereas NIPA investment measures tell us something about the margin of productive additions to the stock of wealth in a particular form, the (definitionally equal) saving measures are neither those that the microeconomic theory of consumption explains nor those appropriate to assess national economic performance.
Inspection of a sample of the extensive literature commenting on and analyzing national saving has surprised me by the diversity of positions, often implicit, on these issues. It appears that the macroeconomists are truer to microeconomic principles than are many of those who approach the subject from a public finance perspective. The fact that so much research is carried out making use of statistical measures of saving that seem to me to bear so little relationship to economic theory suggests there is a place for a review of fundamentals and display of some basic data related to them.
1.1.1 Income, Saving, and Wealth
Beginning students are taught that saving is a residual, what is left from personal income after deducting consumption and taxes or after deducting from aggregate income consumption by households and governments. But saving is also conceived of as an addition to wealth, and it is not always recognized that the three ideas—consumption, income, and wealth—are not independent. Defining any two determines the definition of the third. The Schanz-Haig-Simons (SHS) conception of income familiar to public finance takes the ideas of consumption and wealth as fundamental and defines income as the sum of consumption and the change in wealth during an accounting period. The basic notion of wealth, in turn, is the market value of a household's (or household aggregate's) stock of claims on goods and services in the future. This is the approach to saving taken by the microeconomic theory of household behavior.
Most commentary on and analysis of national saving, by contrast, start with a NIPA definition of income. To make life confusing, the term "income" in the national income account context is attached to factor payments and makes distinctions between taxes regarded as falling on factor payments and those that do not (indirect business taxes). It is doubtful that there is an economically meaningful distinction between taxes that bear on factor payments and those that do not. We can cut through the problem if, for the concept of income in the SHS sense, we read "product" in the national accounting sense.
Which of the three notions—product, consumption, wealth—are fundamental in the case of national income accounting is not immediately obvious. As is well known, national income accounts involve two conceptions of product, gross and net. Gross national product, "the market value of the goods and services produced by labor and property supplied by residents of the United States (U. S. Department of Commerce, Bureau of Economic Analysis 1986), and consumption, personal and governmental, can reasonably be described as the fundamental ideas. Together (by subtraction) they define gross investment and saving. To reach net product, net investment, and net saving, it is necessary to subtract an allowance for the "using up" of the reproducible capital stock, a wealth notion. Here, then, it is the wealth and consumption ideas that are fundamental: we can think of net product (income) as definitionally equal to the sum of consumption (personal and governmental) and the change in the reproducible capital stock owned by U.S. residents.
1.1.2 NIPA Saving and Financial Accounting
In its treatment of business investment and its yield, the NIPA net income concept can be loosely characterized as a consolidation of the account books of business firms. This is not to suggest that the NIPA accountants actually aggregate the income statements and balance sheets of firms. It is rather to emphasize that investment (and therefore saving) in the national income and product accounts consists of acquisitions of tangible property and is, furthermore, cost-based, constructed from historical data on expenditures for machines, structures, and inventories. Increments in the value of intangible property and (what may be the same thing) revaluations of tangible property arising from its location within going businesses are excluded from the NIPA income and saving concepts. Net saving in the national income and product accounts constitutes the change in the stock of reproducible business capital. The NIPA capital data can be thought of as the figures financial accountants would present if they used the NIPA depreciation conventions and adjusted their historical cost-based entries on tangible assets (including inventories) annually to what they would be had historical prices been instead at current levels.
The main difference between the two conceptions of wealth corresponds roughly to the difference between financial accounting for the net worth of business firms, on the one hand, and the market valuation of those firms on the other ("roughly" because financial accounts include intangible assets acquired by purchase from another firm). The difference is sometimes summed up as that between recognition or not of "capital gains," but this description hides as much as it reveals. The market value of the equity of a firm may differ from the "book" value of its tangible property for many reasons, including changes in the supply price of the capital items in question (for which national income accounting makes a correction), changes in discount rates, and changes in the beliefs about the future upon which market valuation of assets depends—all of these give rise to capital gains in the popular sense of the term. But the two values also may differ because of the genuinely stochastic character of the returns on investment and the conservative quality of business accounts, which result in little or no tracking of the accumulation of intangible capital and of such assets as proven oil reserves.
1.1.3 Empirical Relevance: A First Look
Available data suggest that the difference in definition corresponds to a significant difference in aggregate wealth measures. Table 1.1 shows estimates of the net worth of nonfinancial corporate business in the United States (including corporate farms) and of the market value of the equity claims on those firms. The figures are derived from the Balance Sheets for the U.S. Economy (hereafter, National Balance Sheets) prepared by the Board of Governors of the Federal Reserve System (1988). Net worth consists of the difference between assets and liabilities on the account books after various adjustments. Assets in this case include reproducible assets at replacement cost (i.e., after adjusting valuation based on historical cost for changes in the acquisition prices of the same assets), land at market value, and direct investment abroad by U.S. firms. Liabilities include all the usual sorts of debt (at book value), profit taxes payable, and foreign direct investment in the United States. I would emphasize that in its treatment of fixed investment the net worth in table 1.1 is essentially the concept implicit in NIPA accounting for saving. The market value of equity is essentially that appropriate for the SHS saving concept, which, in turn, is in the concept "explained" by microeconomic theories of saving behavior.
It is evident from table 1.1 that the market value of equity and the net worth on firms' books are very different. The column titled "Market Value/Net Worth Ratio" shows the ratio of the market value of the equity claims to the consolidated nonfinancial corporate sector to the consolidated financial accounting measure of net worth, that is, the sum of tangible and financial assets (including direct investment abroad) less the sum of debt claims (at book value), profit taxes payable, and foreign direct investment in the United States. Since 1948 this ratio has varied over a remarkable range, with a high of 110.1 percent at the end of 1968 and a low of 36.7 percent at the end of 1978.
To put the divergence between accounting and market values of corporate equity in perspective, the column of table 1.1 headed "Net Worth Less Market to GNP" shows the ratio of the difference to the GNR. The difference ranges between an excess of over 7 percent and a shortfall of over 62 percent, with a substantial decrease on average. Figures 1.1 and 1.2 make the points graphically.
It seems clear that the basic objective of the National Balance Sheets, to measure wealth at market value, is the one appropriate for discussions of saving. Nevertheless, economists widely accept and use for this purpose the NIPA saving data. Distinguished examples (and I make no claim to a systematic review of the literature) include Blades and Sturm (1982), Boskin and Lau (1988), Campbell (1987), Lipsey and Kravis (1987), most of the contributors to Lipsey and Tice (1989), Poterba (1987), and Summers (1985).
In at least some of these instances, lack of market-value wealth data is taken to justify resort to NIPA concepts, and some analysts (e.g., Auerbach 1985; Boskin 1986, 1988; Poterba and Summers 1987) have noted the potential role for the market-value data provided in the National Balance Sheets. Summers and Carroll (1987) explicitly analyze aggregate saving in the National Balance Sheets sense (although they do not regard it as preferable to the NIPA measure). Noting that "national income account (NIA) data provide notoriously poor proxies for the economic concepts of saving and investment," Obstfeld (1986, 82) explores some of the biases that may result from the use of NIPA data in comparing saving and investment behavior of countries. Some macroeconomists—for example, Hall (1978, 1988) and Campbell and Deaton (1988)—go out of their way to avoid measuring saving. Hall, in particular, has argued that income aggregates are misplaced in macroeconomics; focus should instead be on aggregate consumption and labor earnings. Granting some such exceptions in the literature, I think it is fair to say that there is wide acceptance of NIPA saving measures.
In this paper I argue that wealth and consumption are both important variables in economic models and important measures of economic performance, that income should be viewed as a derivative concept in this connection, and that the appropriate concept of wealth is measured at asset market value. We should use NIPA saving measures only to the extent that they serve as reasonable proxies for the market-value measures. (This is not to suggest that the corresponding investment concepts are not useful in the analysis of production.) Although it is ultimately a statistical question whether the NIPA saving measures are reasonable proxies, the evidence from the National Balance Sheets leads me to doubt it.
In the next part of the paper I review the relationship between the two notions of wealth (and therefore of saving): market value of assets and financial accounting net worth. I then take up objections to the use of market-value wealth. The fourth section presents time-series data on the behavior of national saving in the U.S. economy, and the fifth raises, without solving, some significant problems with the National Balance Sheets data as measures of market value.
Much attention has been paid in recent years to the saving performance of U.S. residents, which has been generally judged disappointing. My contention, that the NIPA saving aggregates and ratios of NIPA saving to NIPA income measures are poor indicators upon which to base conclusions, is neither inherently in favor of this assessment nor opposed to it. One may still be dissatisfied with the U.S. saving record when it is looked at in the framework suggested by microeconomic theory. The sixth section presents some observations on this issue.
1.2 Concepts of Wealth
1.2.1 Market Value of Assets
The SHS notion of income underlying the base of an income tax (or at least generally accepted by academic commentators as the proper base of an income tax) is the sum of the change in the wealth and the consumption of the taxpaying unit, be it an individual or a family. Consumption and wealth are the primitive concepts, which need to be given operational substance to produce a tax system. Although the general ideas seem obvious enough, both pose difficult problems of definition at the margin. Within limits, the standard to which the operational definitions refer in a tax policy context is essentially normative—one starts with a notion of ability to pay and designs the income measure to implement it. (The limits relate to the substitutability of different forms of wealth in taxpayer portfolios.)
In Untangling the Income Tax (Bradford 1986) I suggested that the usual arguments justifying the SHS income concept as a tax base imply a definition of a person's wealth as "the maximum amount of present consumption he could finance currently by selling or otherwise committing all of his assets" (22). If this definition is accepted, the operational focus shifts to the identification of "assets" and quantifying the opportunities of "selling or otherwise committing" them. Examples of significant but hard-to-quantify assets are human capital (the present value of a person's future earning power) and the discounted value of inheritances. It is interesting that these two are also examples of assets that are difficult to sell or "otherwise commit." Proponents of SHS income taxation normally exclude both human capital and the value of great expectations from the wealth component of the definition of income.
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Table of ContentsAcknowledgments
B. Douglas Bernheim and John B. Shoven
1. Market Value versus Financial Accounting Measures of National Saving
David F. Bradford
Comment: Joseph E. Stiglitz
2. Dividends, Capital Gains, and the Corporate Veil: Evidence from Britain, Canada, and the United States
James M. Poterba
Comment: Robert E. Hall
3. Corporate Savings and Shareholder Consumption
Alan J. Auerbach and Kevin Hassett
Comment: Angus S. Deaton
4. The Saving Effect of Tax-deferred Retirement Accounts: Evidence from SIPP
Steven F. Venti and David A. Wise
Comment: Michael Rothschild
5. Consumption Taxation in a General Equilibrium Model: How Reliable Are Simulation Results?
B. Douglas Bernheim, John Karl Scholz, and John B. Shoven
Comment: Joel Slemrod
6. Taxes and Capital Formation: How Important Is Human Capital?
James Davies and John Whalley
Comment: Sherwin Rosen
7. National Saving and International Investment
Martin Feldstein and Philippe Bacchetta
Comment: Rudiger Dornbusch
8. Quantifying International Capital Mobility in the 1980s
Jeffrey A. Frankel
Comment: Maurice Obstfeld
9. A Cross-Country Study of Growth, Saving, and Government
Robert J. Barro
Comment: James Tobin
10. Consumption Growth Parallels Income Growth: Some New Evidence
Christopher D. Carroll and Lawrence H. Summers
Comment: N. Gregory Mankiw
11. Saving Behavior in Ten Developing Countries
Susan M. Collins
Comment: Anne O. Krueger