Government Deficits and Private Saving

According to the Ricardian perspective, increases in the government deficit should be matched by increases in private saving and vice versa. Private and government savings rates for the United States are shown in Figure 14.20 “US Government and Private Savings Rates”. [3] The private saving rate equals private saving as a percentage of real GDP. The government saving rate essentially equals the government surplus as a percentage of GDP (there are some minor accounting differences that we do not need to worry about). Figure 14.20 US Government and Private Savings Rates

There is some evidence that private and government saving move in opposite directions, as suggested by the Ricardian view. Source: Calculations based on Economic Report of the President, Table B-32. Private savings increased from the 1980 to 1985 period and decreased thereafter. Large deficits emerged during the early 1980s (negative government savings). At this time, there was an increase in the private savings rate. The government savings rate increased steadily during the 1990s, and, during this period, the private savings rate decreased. These data are therefore more supportive of the Ricardian view: private and government savings were moving in opposite directions. Turning to international evidence, an Organisation for Economic Co-operation and Development study that examined 21 countries between 1970 and 2002 found that changes in government deficits were associated with partially offsetting movements in private saving. On average, the study found that changes in private savings offset about one-third to one-half of changes in the government deficit. [4] Figure 14.21 “Government and Private Savings Rates in Spain and Greece” and Figure 14.22 “Government and Private Savings Rates in France and Ireland” reproduce some figures from this study. In Spain and Greece, for example, we see patterns of savings that are consistent with the Ricardian perspective: private savings and government savings move in opposite directions. By contrast, the pictures for Ireland and France show little evidence of such an effect.

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