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U.S. Saving and Investment: Forty Years of Decline

By: Alan Cole

A society provides for its future by saving and investing. Saving, as economists use the word, is diverting some income into assets with lasting value rather than using all income for immediate consumption. Investment, as economists use the word, is spending the saved income on physical assets, like equipment or buildings or machinery. These assets make a nation more productive and provide it with returns in the future.

Unfortunately, America has gotten worse and worse at saving and investing over the last forty years. In 1969, America on net saved 10% of its GDP. The country, as a whole, increased its net worth by 10% of GDP. In contrast, America’s saving after the financial crisis was less than zero—largely because government borrowed faster than households could save.

Investment has fallen similarly. In 1969, America invested over 10% of its GDP net of depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. . That is to say that even after accounting for the fact that buildings and equipment need repair and replacement, America still built new capital in the amount of 10% of GDP. By 2013, that was less than 4%.

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These trends are worrying because saving and investment are so essential for bringing security and productivity growth to an economy. America can and should do better in this respect, and one way it can do that is by improving the tax code to be less biased against saving and investment. For more on this topic, read the new Tax Foundation report that studies this issue in detail.