Being a member of the House of Representatives must sometimes feel like being a high school freshman. You're a nobody, part of a big crowd where it's difficult to make a splash.
So you have to give Rep. W. Henson Moore, a third-term republican from Louisiana, credit for getting his pet project as far as he has. He proposes an annual tax exclusion of up to $100 for interest earned on savings accounts. The bill actually cleared the Ways and Means Committee before becoming tangled in a dispute between Ways and Means and the Rules Committee. Now Ways and Means Chairman Al Ullman (D-Ore.) has incorporated Moore's proposal into his latest version of a bill to limit the use of tax-free municipal bonds for single-family housing construction.
Moore's success attests to the growing political appeal of a new economic folk wisdom -- a celebration of saving and investment as the antidote to high inflation, perpetual trade deficits and low productivity.
Only a few weeks ago, for example, Ullman proposed a $130 billion value-added tax (VAT) that would attempt to reorient the entire tax system toward saving and investment. A VAT resembles a national sales tax; anyone who didn't spend a cent of income on consumption -- in other words, saved everything -- would escape the VAT. With the $130 billion used to reduce personal and corporate taxes, as Ullman proposes, the VAT would reward saving.
The sudden fashionability of these ideas is bringing us full circle from the economic widsom of the post-Depression era, when excess saving was the dominant worry. Too much saving, in this view, would so weaken consumer demand that business -- which had to invest what others saved -- would have no logical reason to do so. The economy would go into a slump, and as individual income declined in the process, so would saving. The process was destructive to everyone, and consequently, the government's job was to maintain consumer demand and prevent the onset of this vicious circle.
The new wisdom holds just the opposite. We are (it is said) too much inclined toward immediate gratification and overconsumption. Inflation exaggerates these tendencies by eroding the value of our savings so rapidly that we are discouraged from saving. Consequently, we are said to be slowly eroding the foundation on which our economy rests. The solution: Save more.
It is probably true that the Depression-era fear that we would save ourselves into stagnation should no longer excite much worry. Society can produce goods that are either consumed immediately or are consumed over time -- that's all investment really is -- and, clearly, there is a strong underlying demand for the later: housing for example.
But, at the same time, we should beware of thinking that saving and investment constitute some sort of economic Zen. As politicians use the terms, they imply that these two processes are virtuous by themselves and amount to a new religion, which -- if followed -- will purge the economy of sin. Nonsense.
The basic reason for saving more, as Harvard economist Martin J. Feldstein correctly argues, is to create the possibility of greater future consumption, based on the gradual expansion of our productive base. As the proportion of elderly in our population grows, we will need that added production to help support them and to minimize competition among age groups.
The bare statistics also indicate a need for some shift in economic emphasis. Despite a lag in personal saving, total private saving -- from businesses and pension funds as well as individuals -- has actually held up well. The worrisome trend is "net private saving": saving and investment that actually add to our productive base rather than just replace what becomes absolete. In the 1960s, such net investment averaged about half of total investment; in the 1970s, it's about one-third.
This drop resulted from higher inflation, which has raised cost of replacement investment, and the increasingly erratic swings of the business cycle. It's important to understand that private saving doesn't always translate into new investment. When the government runs large deficits -- typically, during recessions -- private savings are, in effect, borrowed by the government and then spent for current consumption.
So we come back to the persistence of high inflation and the complications it causes in the economy's functioning. And, here, extra investment is hardly an instant cure. The link between investment and higher productivity growth, for example, is murky. Even if it weren't a miraculous restoration of previous levels of productivity growth (about 2 to 3 percent annually, against today's virtual stagnation) would still offset only part of the 8 to 9 percent annual increase in labor costs that makes our inflation self-perpetuating.
Moreover, today's inflation is more complicated than lagging productivity. Since the beginning of the year, consumer prices have increased at an annual rate of 12 to 14 percent, with more than half the increase from two sources: energy and the cost of new homes (including mortgage and insurance costs).
In these areas, government policies have actually distorted saving and investment decisions, making our problems worse. We held down energy prices and, therefore, did not sufficiently induce individuals and businesses to make energy-conserving investments. And government has exaggerated an already high demand for housing by providing subsidies -- primarily to the middle and upper-middle classes in the form of tax deductibility of mortgage interest -- that cause some buyers to purchase bigger homes and others to buy second homes.
Any genuine saving and investment policy would address these distortions, but politicians are loath either to withdraw benefits (for example, housing) or to impose burdens (higher energy prices, for one).
We do need to pay more attention to saving and investment, but the reorientation should go far beyond the usual "incentives," such as Rep. Moore's plan. Unless we treat some of the economy's basic weaknesses and begin to break down the price-wage feedback that turns past price increases into future inflation, we may find such incentives largely ineffective: another panacea that didn't work.