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June 02, 2005

*Sigh*

For a long, long time--it was 43 years ago when Bob Solow made this point while working for the Kennedy Council of Economic Advisors--it has been next to impossible for an economist serious about boosting national savings to avoid saying "balance the budget". Balancing the budget--indeed, moving it into surplus--is almost certainly very close to a magic bullet for increasing national savings, and it's a very good bet that it's the most effective thing the government can do to boost national savings. It's the first an highest priority for those who do care about boosting national savings.

It is very difficult for a real economist to talk about boosting national savings without saying "balance the budget." Greg Mankiw manages:

Magazine - Economist Greg Mankiw Sounds Off on Karl Rove, Paul Krugman, and More - FORTUNE - Page 5: [W]hile the trade deficit isn't a problem in itself, it may be a symptom of a problem. The problem is that Americans aren't saving enough. I don't think there's a single magic bullet to increase national saving, but I do think a switch from an income tax to a consumption tax would help.

Q: But we don't seem to have had much success with efforts to bolster the savings rate, which remains near record lows.

A: I'm intrigued by some compelling evidence from [Harvard economics professor] David Laibson and others that if you design 401(k)s differently, you could improve saving a lot. For example, suppose we made the default for a 401(k) plan that people have to decide to opt out if they don't want to save, rather than having to opt in if they do want to save, as is currently the norm. The evidence suggests that the participation rate would increase substantially.

And let's not forget that while a trade deficit may not be a problem "in itself," a large trade deficit funded by foreign central bank purchases of dollar-denominated assets at a rate that they cannot sustain is a problem "in itself."

Posted by DeLong at June 2, 2005 10:36 AM