Saturday, May 13, 2006

Feldstein on U.S. Saving

"The only function of economic forecasting is to make astrology look respectable." This famous Galbraith quip makes most people smile, while discomfiting those of us who have found ourselves in the forecasting game from time to time.

My Harvard colleague Martin Feldstein boldly ignores this piece of wisdom in his article in the May/June 2006 issue of Foreign Affairs. Here is his punchline:

What can be safely anticipated is that the savings rate of American households will start to increase. It is not clear when that increase will begin, but household saving cannot continue indefinitely at a zero or negative level. Saving will begin to rise because the forces that have promoted rapid consumption growth and depressed saving over the past decade will not continue....

This coming rise in household saving will eventually be good for the U.S. economy. It will make the United States less dependent on capital from the rest of the world and permit American businesses to raise the rate of investment in the equipment, software, and structures that increase productivity and the future standard of living. But a higher U.S. savings rate will also pose a challenge for the rest of the world, because it will mean a reduction in the exports to and an increase in the imports from the United States.