General Discussion

William Nordhaus agreed with Richard Cooper that saving is understated in the national accounts, but he noted some improvements in this area, such as the addition of software spending to investment and output in the core accounts, the creation of a satellite account for research and development, and ongoing work to create a satellite account for education. Nordhaus wondered why Cooper used gross rather than net saving and investment. For most countries net investment is much smaller than gross, and the current account is a net saving concept. Cooper replied that gross saving and investment are the relevant concepts because firms do not distinguish between depreciation allowances and other sources of internal funding, but instead treat all investments in the same manner based on an assessment of their profitability.

Charles Schultze suggested that the magnitude of Cooper's adjustments to saving and investment was overstated. For example, including advertising makes some sense because it provides information to consumers, but it also creates negative externalities for other firms, as one firm's gain is another firm's loss. Similarly, recent large increases in aggregate public spending for elementary and secondary education have not had a large payoff. From 1974 to 2004, real per pupil spending for public K-12 education doubled, but the performance of seventeen-year-olds on national assessment tests in math and reading was more or less flat. Competition regulates rates of return on private investment, but the same is not true for public education. Schultze added that the same problems apply to many other government investments, such as highways and flood control infrastructure. Because no method exists for properly determining the scale and allocation of these investments, the relationship between the money spent and the return is complicated.

William Gale added that including additional forms of saving raises the estimated level of saving but does not reverse its decline over time. Gale also wondered how much the analysis of the U.S. current account deficit changes if Americans' foreign borrowing is mostly done for consumption rather than for investment. Similarly, he wondered how the analysis changes if investment from abroad is composed more of foreign central banks buying Treasury bonds than of foreign private investors buying real assets. Cooper replied that inflows to the United States are overwhelmingly private. In fact, he noted, even official flows are often mediated private flows: In Japan, for example, where large quantities of domestic savings are conservatively held in domestic banks, the central bank invests some of these assets in foreign markets in order to meet the country's retirement needs.

Olivier Blanchard suggested that uncertainties about the factors supporting the current capital inflow to the United States tilt heavily toward a reduction in that inflow in the future: foreign official purchases seem more likely to decline than to increase, the institutional setting for investments in other countries is likely to improve, recent declines in the value of the dollar are likely to heighten perceptions of exchange rate risk, and America's role as a risk-taking financial intermediary in the world economy may backfire.

Martin Feldstein pointed out that the real foreign exchange value of the dollar has dropped about 15 to 20 percent over the last five years, depending on the measure used. Therefore the current account deficit should decline further, and he wondered about the implications for Europe and other countries. To avoid recession in their countries, he suggested, foreigners will have to increase their consumption by 2 or 3 percent of their GDP, which may be possible given their current high saving rates.

Robert Gordon emphasized that differences in asset returns and changes in the value of the dollar have prevented an explosion of U.S. net international indebtedness so far: U.S. net debt to foreigners was the same fraction of GDP in 2006 as it had been in 2001 (19 percent), despite a cumulative current account deficit of 30 percentage points of GDP over this period. Robert Lawrence pointed out that receipts on U.S. assets abroad exceed payments on foreign assets in the United States by about ¼ percent of GDP, the same as twenty years ago. Given that the...