Brookings: Experts - Barry P. Bosworth

The Hollowing-Out of Japan’s Economy: Myths, Facts and Countermeasures

Wed, 20 Feb 2013 13:30:00 -0500

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February 20, 2013
1:30 PM - 5:15 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

The skyrocketing cost of importing energy combined with an uncertain electricity supply, a maze of regulations, a contracting domestic market, and the appreciation of the yen have led the Japanese economy to be in peril of deindustrialization. The hollowing-out of the Japanese industrial base as companies seek new business opportunities through overseas manufacturing has become an issue of pressing concern in the Japanese national debate.

On February 20, the Center for Northeast Asian Policy Studies at Brookings hosted a discussion to address the future of the Japanese economy, whether it will become a high-end manufacturing economy or a post-industrial economy based around services and repatriated income from overseas investment. Presentations examined the extent to which fears of deindustrialization are warranted, the extent of internationalization of Japanese manufacturing activities, and assess possible countermeasures in the areas of deregulation, promotion of inward investment, and the encouragement of innovation.

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Export Expansion: The Key to Economic Recovery

Barry P. Bosworth — Thu, 27 Dec 2012 11:00:00 -0500

The United States economy is now entering its fifth year of underperformance, and with the unemployment rate stuck at 8 percent there is little prospect of change in the near future. What can be done to reinvigorate the economy and restore full-employment? The standard response of many economists is reflected in the call for greater fiscal stimulus and larger budget deficits. Yet, larger deficits hardly seem like a lasting answer to our economic problems. Added fiscal stimulus would initially lift production and employment, but at some date in the not too distant future that stimulus would have to be reversed, pulling the economy back down. To believe otherwise, one must believe that a tax cut or a new expenditure can somehow pay for itself, but the country fell for that supply-sider argument once and should not do so again.

It is important to recognize that the United States is no longer faced with a standard cyclical shortfall of demand, and the current gap between potential (full employment) output and GDP reflects deeper problems in the structure of aggregate demand. In the prior decade, the economy became overly focused on a binge of domestic consumption and excess homebuilding. All that collapsed in the 2008 recession. Housing demand will recover, but it will not and should not return to the bubble conditions of the mid-2000s. And, far from being weak, consumption is being supported at an unsustainable high share of GDP by large tax reductions and government transfers that have boosted household disposable income to an artificially high level. When those programs are scaled back, consumption will be a lower share of GDP. Furthermore, the nation cannot sustain its heavy foreign borrowing–importing far more than it exports. Hence, it is difficult to foresee a situation in which increased domestic demand can recover to the inflated levels that we associate with the spree of domestic spending in earlier years.

Instead, economic recovery will require the expansion of export markets and elimination of the remaining trade deficit. A renewed focus on exports will induce increased investment to expand capacity, and the rise in employment and incomes will leverage a higher level of consumption. Thus, the United States needs to concentrate on actions that will make it more competitive in global markets and an attractive place to produce and do business. It cannot afford to continue to see its most productive firms shift abroad. That means it needs a more skilled workforce, a better physical infrastructure, corporate tax rates closer to the average of its competitors, and the speedy development of shale gas as an inexpensive source relatively clean energy for both heat and electrical generation.

In past decades, the United States could justify its high wage rates with the argument the U.S. workforce was better educated and more productive than that of other countries. That is no longer the case. Other countries have caught-up and surpassed the U.S. performance, and younger generations of Americans rank near the average of OECD countries. Similarly, many studies suggest a significant deterioration in the public infrastructure. The United States has the highest corporate tax within the OECD and it exceeds the OECD average of 25 percent by more than 10 percentage points. In a world of increasingly mobile capital and technology, it should reexamine its position on corporate taxation, and sharply reduce the effective tax rate. The doubling of exports over a five-year period was an important aspect of the National Export Initiative that was announced by the Obama Administration at the beginning of 2010. Unfortunately, there has been little follow-through since its announcement and the goal is unlikely to be realized.

Authors

Barry P. Bosworth

Image Source: © Hyungwon Kang / Reuters

Conflicts in the U.S.-China Economic Relationship: Opposite Sides of the Same Coin?

Barry P. Bosworth — Thu, 06 Dec 2012 17:47:00 -0500

ABSTRACT

In recent years, discussions between the governments of China and the United States have centered on each country’s external imbalances, large trade surpluses for China and deficits for the United States, and the need for structural reforms to achieve more sustainable patterns of growth in future years. This paper argues that reductions in external imbalances suggest that some restructuring has occurred. However, a more detailed examination of economic developments within each country offers less basis for optimism. China has experienced a large appreciation of its real exchange rate and an external surplus less than half that of the years preceding the global recession. However, the domestic counterpart has been even-higher rates of investment as opposed to lower rates of saving and a more sustainable growth of public and private consumption. For the United States, a reduction in the external deficit has been associated with an extreme contraction of domestic investment rather than increased saving. It is noteworthy that the economic trade between the two countries has become even more unbalanced than in the years before the recession, and the bilateral deficit now accounts for two-thirds of the U.S. global current account deficit.

The concluding section argues that further reduction in the trade deficit through the expansion of U.S. exporting capabilities is critical to its future performance. The section discusses policy changes that would slow the process of shifting production facilities out of the United States and promote improved export competitiveness. Those measures include further devaluation of the dollar, reform of corporate taxation, and increased investments in education and physical infrastructure.

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Conflicts in the U.S.-China Economic Relationship: Opposite Sides of the Same Coin?

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Barry P. Bosworth

Image Source: © Carlos Barria / Reuters

Changing Sources of Income Among the Aged Population

Barry P. Bosworth and Kathleen Burke — Thu, 01 Nov 2012 00:00:00 -0400

Abstract

This paper focuses on an explanation for the large shift over the past two decades in the composition of the income of the aged (65+), increasing the role of earned income and reducing the importance of income from their own assets. We find that the pattern of change is consistently reported in all of the major household surveys. The increase in the importance of labor income can be attributed to delayed exit from the labor force by workers at older ages. We attribute the increase in work time to a rise in the proportion of more educated workers who choose to continue working, changes within the pension system that previously encouraged early retirement, and a decline in the availability of retiree health insurance. The increase in work time is concentrated among the highest income groups and those with the most education, suggesting that it is largely voluntary. The fall in asset income can be traced to lower interest rates and a reduced propensity for the aged to convert their wealth to annuities. It does not reflect reduced wealth at older ages. A measure of the annuity equivalent of their wealth holdings suggests that there has been no decline for aged units. We also find only a weak relationship between changes in asset income and the decision to remain in the workforce.

Download the full paper from the Center for Retirement Research at Boston College »

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Barry P. Bosworth
Kathleen Burke

Publication: Center for Retirement Research at Boston College

Growth in Health Consumption and Its Implications for Financing OASDI: An International Perspective

Barry P. Bosworth and Gary Burtless — Thu, 20 Sep 2012 12:46:00 -0400

The rising cost of U.S. health care has reduced the share of compensation that is taxable by Social Security. Between 1960 and 2010, non-taxable employer premiums for worker health plans increased from 1 percent of employee compensation to 7 percent. We use international data to examine the determinants of trends in health care spending and the reasons that the U.S. experience has differed from that of other high-income countries.

In 2010, the share of U.S. gross domestic product devoted to health care was 7.2 percentage points higher than the share in other rich countries. We document the growth of this gap in the past five decades. Much of it developed between 1980 and the mid-1990s, though we also find another episode of outsized growth in the early 2000s. We identify six countries, including most of Scandinavia, which have seen a slowdown in health spending growth. These were also countries that had higher-than expected health spending, given their average incomes, in the 1960s and 1970s.

The slowdown in health expenditure growth may simply reflect a reversion of their spending toward the OECD mean. We find no mean reversion in U.S. health spending growth. Our review of other literature suggests that the current excess in U.S. health costs is mainly traceable to higher prices for health care goods and services. Compared with other OECD countries, the United States has been slow to develop institutions or global budget constraints that restrain the pace of growth in health costs.

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Publication: Center for Retirement Research, Boston College

Image Source: Jim Young / Reuters

Australia’s Future in the Asian Century

Tue, 28 Aug 2012 11:30:00 -0400

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August 28, 2012
11:30 AM - 12:30 PM EDT

Stein Room
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC

Australia’s economy and public finances have weathered the global slowdown in better shape than most of its peers, but the nation’s future is closely linked to Asia’s continued prosperity. The Asian century will reshape both the global and regional economy, and will have lasting and profound results. Australia is well placed to benefit from Asia’s mounting strength and the shifting global economic landscape, but there will also be challenges ahead.

On August 28, Global Economy and Development at Brookings hosted a discussion on the transformation of the global economic landscape and challenges and opportunities for Australia and other countries in the Asia-Pacific region. Senator the Honorable Penny Wong, minister for finance and deregulation for the Commonwealth of Australia, delivered a keynote address, and was joined by Brookings Senior Fellow Barry Bosworth for a panel discussion following her address. Senior Fellow Homi Kharas, deputy director of Global Economy and Development, moderated the discussion.

Growth in Health Consumption and Its Implications for the Financing of the OASDI Program: An International Perspective

Barry P. Bosworth and Gary Burtless — Fri, 03 Aug 2012 00:00:00 -0400

Editor's Note: The following is a paper presented at the Annual Joint Conference of the Retirement Research Consortium.

Summary

1. Introduction
For more than a quarter century, the Social Security program has faced worsening long-run financial prospects. The estimated actuarial balance has declined from a small surplus in the immediate aftermath of the 1983 reforms to a deficit that is now estimated to be 2.7 percent of taxable payroll (about one percent of GDP). Much of this deterioration can be traced to the increased benefit cost of an aging population and the inclusion of additional years in the projection period in which expected outlays will far outstrip predicted revenue. The program has also been adversely affected on the revenue side by a steady deterioration in taxable wages as a share of both GDP and labor compensation. Since the last major reforms in 1983, the share of taxable wages in GDP has fallen by 6 percentage points, from 42 to 36 percent. This paper focuses on the role of increasing health care costs as a deduction from labor compensation in computing taxable wages. The United States spends a far larger share of its resources on health care– 18 percent of GDP in 2010–compared with other rich countries, yet health outcomes are equivalent to or worse than those of others. The goal of the study is to see whether there are lessons from other rich countries’ experiences that would guide the Social Security trustees in projecting trends in health care spending and predicting a future year in which the excess of spending above that of the nation’s income will end.

1. Estimating Excess U.S. Health Spending

Figure 1 shows trends in aggregate health spending measured as a share of national output. In 1970 the United States allocated 7.1 percent of its GDP to health care, 2.1 percentage points more than the weighted average health spending of the other 19 countries. Since 1970 the share of U.S. GDP devoted to health spending has increased about 0.26 percentage points a year. In the other OECD countries, health spending as a share of GDP has increased about 0.12 percentage points per year. By 2010 we estimate that the spending gap had risen to 7.2 percentage points of GDP. If the United States had allocated the same proportion of GDP to health spending as the other 19 countries, American health expenditures would have been lower by about $1.05 trillion, or 41 percent.

One partial explanation for higher spending in the United States is higher income. Depending on the measure of purchasing power parity used, in 2009 the United States had an average income level that was between one-quarter and 40 percent higher than that of the median country in the comparison group. If the share of income devoted to health consumption increases with average income, we would expect the United States to spend a higher proportion of its income on health compared with other OECD member countries. Indeed, 2009 there was a positive correlation between countries’ average incomes and the share of their GDP devoted to health care. Most of the correlation, however, is due to the United States. The correlation between average income and the percentage of GDP devoted to health care is small in the other 20 countries in the sample.

Figure 2 shows estimates of the relationship between health care spending per capita and GDP per capita in a small sample of countries. The chart presents OLS estimates of the health spending – income relationship in 1990. It shows health spending and GDP per capita for 10 of the 21 countries in our sample – Australia, Austria, Canada, Finland, France, Japan, Norway, Spain, the United Kingdom, and the United States. Incomes and health spending for each country are converted into constant U.S. dollars using purchasing power parity estimates for 2000 published by the World Bank. The sample of countries is determined by the availability of PPP estimates of GDP per capita, published by the World Bank, and estimates of the share of GDP devoted to health, which is published by the OECD. For each year, we estimated a simple cross-national equation: Ln(H) = α + β Ln(Y).

The equation was first estimated with all 10 countries in the sample, including the United States. It was then re-estimated without the United States. The exclusion of the United States from the estimation sample in the 1960s has little effect on the regression line. Before 1965 U.S. spending on health care is close to the level that would be predicted based on the cross-national relationship between spending and GDP per capita observed in the other nine countries. By 1975, however, U.S. health spending was considerably higher than predicted given its income and the relationship between health spending and income in the other nine countries. The gap was even wider by 1990 (see chart), when U.S. health spending measured in 2000 dollars was $3,500 per person. This amount is about $1,200 (54 percent) more than would be predicted by a regression that includes the United States, and it is almost $1,500 (74 percent) greater than predicted by a regression that excludes the United States. The absolute size of the prediction error is even larger in 2009, but the proportional gap between U.S. spending and the amount of spending predicted on the basis of the other countries’ experiences is not much greater than it was in 1990.

Another way to use the results is to derive an estimate of the U.S. health spending gap compared with spending levels in the other nine countries of the panel. In the full paper we develop estimates of the gap using this method as well as alternative methods that expand the number of OECD countries in the comparison group. A notable conclusion of the analysis is that the period of excess growth in U.S. health spending was mainly concentrated in a 15-year period starting in 1980. The same basic method can be used to identify countries that have seen slower growth in health outlays relative to the growth that would be predicted based on the experience of other rich countries and their own record of income growth. Among the countries we identify as having slower growth than expected are Canada, Finland, Denmark, Sweden, and Ireland.

2. Why Is U.S. Health Care Spending So High?
The issue of why the level of health care spending in the United States is so different has been the subject of considerable research, but without a clear resolution. In the early 2000s, the OECD health care data were used as a framework to argue that that the differences between the United States and other OECD countries were largely a reflection of higher prices in the United States (Anderson and others, 2003) since researchers could find little evidence that Americans consumed a larger volume of health services. However, Cutler (2003) and others have argued that such studies fail to reflect the intensity of patients’ interactions with the health care system and that the United States differs from other countries in the use of more intensive technologies for some diseases. The most significant barrier to cross-national comparisons is the lack of meaningful measures of the prices of health services. Reliable price measures would help us to answer the basic question of whether the greater amount of spending in the United States is largely a reflection of higher prices or the provision of more health services.

Some progress has been made and we report the results from three studies that focused on the comparison of prices for inpatient hospital services, pharmaceuticals and physician incomes. By following the cost of treatment within a narrowly-defined Diagnostic-Related Group (DRG) category, it is possible to develop price indexes for medical services that are comparable to the matched-model price indexes used in other sectors of the economy. International comparisons have followed a comparable approach with efforts to obtain cost estimates for medical treatments are that sufficiently similar across countries.

In a 2010 report (Koechlin, Lorenzon, and Shreyer 2010), OECD analysts described a comparison for inpatient hospital services in 2007 for 12 OECD countries that included the United States. They incorporated nine specific cases of medical services and 23 surgical procedures that they believed represented comparable medical treatments. The price comparisons were expressed as indexes with the average of the 12 countries set equal to 100. Thus, total inpatient services in the United States were 164 percent of the group average and were 45 (164/113) percent above the level of Canada. While the United States was not the highest cost reporter in all of the individual procedures, it was never lower that 4th, and it was first in two-thirds of the specific comparisons. Within this small sample, however, some of the price differences may be attributed to variations in the level of income per capita.

Kanavos and Vandoros (2011) used data on the top-selling 50 prescription drugs in 15 OECD countries in 2007. The price measures were inclusive of all discounts or rebates. The authors used statistical regression analysis to control for differences in VAT rates, the age of the drug, and the existence of a generic, and they concluded that U.S. prices were about 30 percent higher on average.

Laugesen and Glied (2011) indentified some of the sources of the cost differences for primary care physicians and orthopedic surgeons in six OECD countries (Australia, Canada, France, Germany, United Kingdom, and the United States). They obtained data for the average fee for an office visit and a hip replacement within the six countries, and developed volume measures based on the number of primary care office visits and the number of hip replacements. On a per capita basis, the United States had by far the lowest number of office visits, but the average fee per visit was the highest of the six countries, although fees in the United Kingdom and Canada were near the same level. For hip replacements, the United States performed fewer surgeries on a per capita basis than France, Germany and the U.K, but the fees were nearly twice as high.

While not all categories of medical care have been included in the comparisons, the recent international comparisons strongly suggest that differences in prices account for most of the international variation in health care expenditures.

References Gerald F. Anderson, Uwe E. Reinhardt, Peter S. Hussey, and Verduhi Petrosyan. 2003. “It’s the Prices, Stupid: Why the United States Is So Different from Other Countries,” Health Affairs, May/June 2003, vol. 22(3):89–105.
Cutler, David M., and Ernest R.Berndt, (eds.). 2001. Medical Care Output and Productivity, National Bureau of Economic Research Studies in Income and Wealth, Vol. 62, The University of Chicago Press, Chicago.
Kanavos, Panos, and Sotiris Vandoros. 2011. “Drugs U.S.: Are Prices Too High? Measuring International Pharmaceutical Price Differences,” Significance, the Royal Statistical Society, vol. 8: 15–18.
Koechlin, Franchette, Luca Lorenzoni and Paul Schreyer (2010), “Comparing Price Levels of Hospital Services Across Countries: Results of Pilot Study”, OECD Health Working Papers, No. 53.
Laugesen, Miriam J, and Sherry A. Glied. 2011.”Higher Fees Paid To U.S. Physicians Drive Higher Spending For Physician Services Compared To Other Countries.”Health Affairs (September) 30:91647-1656.

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Publication: 14th Annual Joint Conference of the Retirement Research Consortium

American Savings and Growth

Barry P. Bosworth — Tue, 28 Feb 2012 00:00:00 -0500

On Bloomberg Radio's Taking Stock, Barry Bosworth discusses why saving rates in the United States have fallen and the consequences this has had for growth and business. Bosworth talks with Bloomberg's Pimm Fox and Vonnie Quinn. Audio of the session is available at Bloomberg's website (MP3).

Pimm Fox: Are we addicted to the idea that higher savings means better economic growth? Lets find out more about savings. I want to bring in Barry Bosworth. He is a Senior Fellow and economist at the Brookings Institution in Washington, DC. He is also the author of the book The Decline in Saving: A Threat to America's Prosperity? Barry Bosworth, good to have you with us here on Bloomberg.

Barry Bosworth: Thank you.

Fox: So in reading the book this weekend, I was struck by some of the conventional wisdom - the assumptions that people make about savings and economic growth. You found something different.

Bosworth: Yeah, there is not a very close connection in a modern society between savings of an individual country and how well it is doing in growth terms.

Fox: So why do we worry so much about the savings of individuals?

Bosworth: I think in terms of those individuals' welfare it is still important. But companies in the U.S., for example, they can borrow from other countries abroad. It is a big global market nowadays. So the fact that Americans don't save very much doesn't constrain American business firms to invest. But if as an individual you are trying to accumulate for retirement it is still important to try to set some income aside for those future years.

Vonnie Quinn: Well, the savings rate has been going up a little bit and it has been seen as a good sign, right?

Bosworth: I think at the micro level it is a good sign. Individuals are kind of rebuilding their balance sheets - that is what they ought to be doing - and get their wealth position a little bit stronger after this big financial disaster.

Fox: Barry Bosworth, how does the government compute savings? Isn't that an important question, too?

(2:09)

Bosworth: Yes. There has always been a lot of debate over this. But essentially what the government is doing is just people's income that they earn from production - the normal things we think of our salaries, etc. - minus our consumption. It is the amount of resources that we produce as a country that we do not consume. So we set them aside for purposes of investing or we could export to other countries.

Fox: Are there demographic issues that affect the national savings rate?

Bosworth: Very much so. You're going to build up your wealth when you're young, and then when you're older you are going to start to run it down. So countries like, say, Japan that have an aging population have very much been influenced by a lower rate of savings as that whole process has accelerated. The U.S. is kind of surprising because we had this decline in savings when the Baby Boomers were, supposedly, at the height of their working capabilities. You wonder what is going to happen to them now as they start to retire.

(3:15)

Quinn: Well Barry, are there typical things that people do given what point we are at in the business cycle? Do we always see savings going up at certain times and always see them going down at other times? Can you draw any conclusions from the last few business cycles?

Bosworth: I think it always tends to go up at the end of the business cycle or boom. People get scared. They pull back. They hang. They postpone some durable goods expenditures - exactly what we have been doing for the last couple of years. And then we turn optimistic again, and we revert back to the old spending ways. And, at times (as happened, I think, in the middle of the last decade) we get so optimistic we actually go off on a consumption binge and we overdue it and we end up with a disaster.

(4:00)

Quinn: Is it optimism or is it the exact opposite? I mean, in this environment where do you put your savings except in a mattress? So why not spend them?

Bosworth: I don't think we find very much sensitivity of savings to interest rates and the rate of return on it. It influences things, but it can be just as much an income effect that goes the other way. When people were having large stock market gains and were feeling wealthy back in the middle of the last decade, they spent a lot. So I do not see much connection between your saving and your rate of return. You are really saving in preparation for retirement. This seems to be the major motivation. It is easier to do if your income is rising rapidly. It is hard to do when you do not have a job and your income is falling.

(4:47)

Quinn: Pimm, they have a little ceremony in the morning, on the morning radio show John Tucker, [he] opens his 401(k) but it has become a 201(k)…

Fox: 201(k).Yes, indeed. Well, Barry, speak, if you can about housing because that also affects peoples' perception about how much they should save.

(5:02)

Bosworth: Yes, that had a lot to do with when we said we had these big wealth gains over the last decade. A very large proportion of that was in housing. Unfortunately, some people thought it was permanent so they went and took out a second mortgage, or a home equity loan, and they spent a lot of the proceeds, and the level of debt relative to housing went up quite sharply. I think people bought homes that they could not afford because they expected the capital gains to continue in the future so they could refinance and take some of the profits and use it to lower their mortgage cost. All that, it seems to me, has come to an end. The losses have been very painful and now people are in the process of trying to rebuild their balance sheets. I think that is going to take, at least, another five years or so for people to get back to positions that they're comfortable with.

(6:01)

Quinn: Barry, tell us what your impression is of what the safe asset is now - the safe haven. I mean, at one point it would have been your home because home prices were expected to continue to march higher. What is it now?

Bosworth: It is really hard to say, isn't it? You don't want to necessarily invest a lot of assets in governments anymore, as we have learned with Greece. So the people that thought that debt of the government was a safe thing to invest in are learning that is not true. I think the only real advice we can give people in this system is to diversify very broadly. The best investment strategy is one that diversifies across a very wide range of assets and doesn't concentrate on any one. So a lot of the old canards that we used to have like investing in real estate don't turn out to look very good. Buying bonds doesn't look very good. So it is kind of hard. Investing is a lot more risky than people thought, and I think the response to risk is to diversify.

(7:00)

Fox: Barry Bosworth, compare what happened in Canada right now, our neighbor to the north, because you have written how their savings rate has evolved differently than ours.

Bosworth: Yes, Canada is kind of interesting because their savings rate a long time ago when ours went down in the mid-1980s, Canada's was going up quite sharply. But then in the 1990s they kind of paralleled us and they had this big decline, just like we did. I think it was driven by different things. It was driven by raw material prices. In the 2000s with the emergence of China as a big consumer of oil and other commodities, Canada did very well but Canada also avoided all this reliance on these high-risk financial activities. Hence, Canada never really had a financial crisis in 2008 and 2009. They have emerged from it quite unscathed. So it turns out it was a safer place to invest. But Canadians, too, had the same phenomenon as Americans that the savings rate came down dramatically over the last decade. I think it is mainly in both countries because we felt we were rich - in the case of Americans because of the stock market and housing; in the case of Canada because of raw material prices going up so much.

Fox: I want to thank you very much. Barry Bosworth, Senior Fellow and economist at the Brookings Institution in Washington, DC - he is the author of the book The Decline in Saving: A Threat to America's Prosperity?

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Barry P. Bosworth

Publication: Bloomberg Radio

The Decline in Saving : A Threat to America's Prosperity?

Barry P. Bosworth — Fri, 10 Feb 2012 00:00:00 -0500

Brookings Institution Press 2012 135pp.

Video

Low U.S. Saving Rate Coming Home to Roost

Longtime Brookings economist and former presidential adviser Barry Bosworth examines why saving rates in the United States have fallen so precipitously over the past quarter century, why the initial consequences were surprisingly benign, and how reduced saving will affect the future well-being of Americans.

The saving of American households underwent an astonishing collapse in the years before the financial crisis as consumers engaged in a long-lived spending binge. More recently, however, that saving rate has risen as households attempt to rebuild their wealth in the aftermath of large stock market and housing losses. It was not only consumers who were guilty of overspending; budget deficits grew as the government borrowed huge sums from the rest of the world. Indeed, over the past three decades, the cumulative external deficit has exceeded $7 trillion, leaving the United States as the world’s largest debtor nation.

Not only does Bosworth contemplate how reduced saving will affect the future wellbeing of Americans, but he also:

provides alternative measures of saving,

tracks data on household saving decline,

compares international saving patterns, and

discusses consequences of low saving.

The Decline in Saving provides an extensive and unparalleled account of the complexity of present saving patterns, an issue made even more serious by the 2008–09 global economic and financial crises. It objectively examines saving at both the individual household and the aggregate economy levels to understand whether the U.S. decline in saving is truly a threat to American prosperity.

Highlights from The Decline in Saving:

"The magnitude of the two-decade-long fall in household saving has been truly astonishing; it is even more surprising in view of the fact that the large cohort of baby boomers should have been in their peak saving years."

"If Americans save so little, why are they so rich? This divergence emerges because the conventional measure of saving excludes all forms of capital gains . . . ."

"Saving behavior appears to be influenced in important ways by country-specific institutional factors along with a few common determinants, such as income growth, demographic changes, and variations in private wealth."

"In the aggregate, the United States has had a negative net national saving rate since the onset of the financial crisis, and it now relies on foreign resource inflows to finance all its capital accumulation and a portion of its consumption."

"The optimistic projections of just a few years ago about the future well-being of retirees now seem seriously dated."

Barry P. Bosworth's previous Brookings books include Saving and Investment in a Global Economy; Productivity in the U.S. Services Sector, written with Jack Triplett; and The Economy of Puerto Rico, coedited with Miguel A. Soto-Class and Susan Collins.

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Barry P. Bosworth

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Low U.S. Saving Rate Coming Home to Roost

Barry P. Bosworth — Thu, 09 Feb 2012 17:49:00 -0500

For decades, the low rate of saving has had surprisingly benign effects on both American consumers and the U.S. government, but that all may be in the process of changing, and quickly, according to Barry Bosworth. In his new book, The Decline in Saving: Threat to America’s Prosperity? (Brookings Institution Press, 2012). Bosworth examines why saving rates in the United States have fallen so precipitously over the past quarter century and notes that while the consequences to date have been minimal, the magnitude of the fiscal deficit is likely to require scaling back of transfers to the elderly in the future, making them more dependent on their own financial resources.

Another consequence is that people may stay in the workforce or delay retirement to rebuild their balance sheets, but there are not many jobs available. Bosworth notes that although there has been a modest increase in the rate of household saving post-financial crisis—hailed as a major turnaround–it is still half the rate achieved in the decades prior to 1980, and the U.S. has now become the world’s largest debtor nation.

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Low U.S. Saving Rate Coming Home to Roost

Economic Consequences of the Great Recession: Evidence from the Panel Study of Income Dynamics

Barry P. Bosworth — Wed, 01 Feb 2012 00:00:00 -0500

Abstract

The paper uses micro-survey data from successive waves of the Panel Study on Income Dynamics to investigate the distribution of wealth and job losses during the 2007-09 recession for different segments of the population and the effect of the recession on the retirement decisions of older workers. Estimates of wealth losses are constructed for major socioeconomic groups and compared with those of the Survey of Consumer Finances. The panel dimension of the data is used to measure change in the labor force status of workers and to estimate the determinants of the decision to transition from participation in the labor force to retirement. The study concludes that retirement decisions are influenced both by variations in labor market conditions and by the value of household wealth but that labor market exerts a larger impact.

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Barry P. Bosworth

Publication: Center for Retirement Research at Boston College

Is the U.S. Headed for Japanese Style Stagnation?

Barry P. Bosworth — Mon, 12 Dec 2011 14:11:00 -0500

Both the U.S. and Japan suffered a major financial shock, and both nations tried monetary and fiscal stimuli. With both nations’ growth stagnant in spite of these policies, it seems clear both need to fundamentally restructure their economies, says Barry Bosworth. But he notes that it is better to have the United States’ economic problems than the Europeans’ because we have more tools at our disposal to fix them.

"I think both the United States and Japan are caught in a lot of similar economic circumstances. Both of us had severe financial crises that initiated a lot of the problems. In the case of Japan it was a grossly overvalued equity market and a real estate boom. Well, this sounds a lot like the United States where real estate prices got too high. Probably a lesser problem in the U.S. was the stock market. That caused a financial crises in both countries. There has been a big decline in economic activity. I think both the countries are similar in that we're both (sort of) stuck in a stagnating economy with little hope that it is going to recover anytime in the near future. In the case of Japan this has now gone on for 20 years. They have never been able to return back up to the growth rate that they were achieving before the crisis."

"I think other similarities are that both countries have tried monetary policy (driving interest rates to zero), and in both cases they failed to get the economy back to a high growth path. In the case of Japan, interest rates have been at ridiculously low levels almost now for nearly fifteen years. We have now done it for about four [years]. Both countries have tried to use fiscal stimulus as another alternative to try to get the economy growing, again. I would think, on balance, they haven't worked for much the same reason. You can get fiscal stimulus that stimulates the economy and growth picks up for a period of time, but you cannot sustain fiscal deficits. In the case of Japan after an episode of strong fiscal stimulus, they would grow faster but then they are forced to cut back on the size of the budget deficit. When they do growth would slow back down, again. They go through these cycles of tightening fiscal policy and easing fiscal policy. The United States hasn't had quite as long of an experience with it, but it certainly looks the same."

Both economies need fundamental structural changes (2:22)
"Increasingly, the argument is becoming that we treated this as a typical business cycle here in the United States and I think, originally, Japan saw its problems as the same. You think of a business cycle as a quick down, and then right back up again; and in the 'V' of that decline we had a lot of fiscal stimulus thinking that we just needed to transition through the bad times and we would revert to the growth. That has not happened here in the United States. The problems we face seem to be much longer-term. Similarly, in Japan they did not [revert back to growth].

So I think that in both countries, if we are going to recover from this, we are going to have to restructure our economies. It is not simply a problem of stimulus or (as people put it) job creation. We have to change the fundamental structure of our economy. In the case of Japan, I think the stagnation has been caused by an excessive reliance on a few very efficient and well-run export industries - automobiles is the most famous example. But what people did not know is that Japan was sort of like a dual economy - that in the more domestic side (services and such) it was terribly inefficient with (always) low levels of productivity mainly caused by excessive regulation. People talked about the need for Japan to restructure its economy to shift more towards increasing the efficiency in these domestically-based economy industries."

"In the case of the United States the problem is a little bit different, but we look back at what we were doing and we now realize we were devoting way too much in way of resources to consumption. We were on an unsustainable consumption binge here in the U.S. as we spent our wealth trying to sustain the economy. Similarly, here in the U.S. we had way too much reliance on this housing boom building a lot of houses against what was actually a backdrop of a slowing rate of growth in the population. That, too, is gone and it is not going to return; and I don't think we can afford, as a country, to go back to one of these consumption-led booms again."

"For the U.S., we also have to restructure our economy. We have a very efficient domestic sector and we do not have the same regulatory problems as in Japan. In the case of the U.S. we are very inefficient in the area of exports. We have relied for far too long on these large trade deficits as we sucked resources in from the rest of the world. We have to start over now, and we have to learn to export. We have to learn how to balance our imports and our exports to be of comparable magnitude. We are basically looking for some way to become far more successful in the global economy than we have been in the past. That has turned out to be very difficult to do here in the U.S. just as the regulatory changes and other means have been very difficult to accomplish in Japan. So both countries are similar, and it is hard to gain momentum to undertake the structural changes that we have to make."

Better to have the U.S.'s problems than Europe's (5:40)
"Europe, right now, faces much more of an immediate crisis because of the fiscal situation that it caught itself in. As a group of countries they gave up independent monetary policies. They are not able to change their exchange rates. So they have very limited tools that they can use to recover from the situation that they find themselves in. The U.S. is not in that situation. We have flexible exchange rates. We have a monetary policy that can ensure that there is no threat of the government going bankrupt as seems to be the pressure in Europe. I would much rather have the U.S. problems than the European problems. I think they are more solvable."

"But Europe is also a group of countries that, in the past, (sort of) adjusted to low growth I think. They found that that was okay. They accommodated it, so Europeans tolerated a more equal society, but a society with a lower rate of growth. I think they thought that was a reasonable trade-off. Right now they face the problem that they cannot sustain what they were doing before."

The U.S. has always been much more a country that is based on a known high level of inequities which we tried to deal with by growing fast. We didn't do anything about trying to level the playing field here in the U.S. Instead we emphasized growth. To see growth disappear from the U.S. is a traumatic experience because to make the system work, Americans have to have a job. Jobs are far more fundamental to living here in the United States than they are in Europe. We do not have the social safety net that Europeans have."

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Is the U.S. Headed for Japanese Style Stagnation?

Innovations in U.S. Infrastructure Financing: An Evaluation

Barry P. Bosworth and Sveta Milusheva — Thu, 20 Oct 2011 00:00:00 -0400

The condition of America’s infrastructure has become a subject of increased public discussion in recent years. This is the result of several factors. First, there is a perception that the existing infrastructure has become badly deteriorated due to inadequate outlays for maintenance and repair and the underfunding of new investment needs. Second, the stagnate condition of the U.S. economy in the aftermath of the financial crisis has stimulated a new search for effective means of stimulus, and public works projects attract considerable attention because those expenditures generate large Keynesian multiplier effects on the aggregate economy. Third, state and local governments, the traditional sponsors of much of the infrastructure, are faced with severe funding constraints that have stimulated a search for new means of paying for future projects. Finally, the growing interest in “green growth”–the promotion of policies to tackle environmental degradation and climate change within a framework of sustainable growth–will result in increased demand for new infrastructure investments, ranging from the retrofitting of buildings, expansion of the rail network, and development of ‘smart grids’ to improving the efficiency of electricity generation.

The focus of this paper is an evaluation of some of the new approaches to the financing of infrastructure projects. They include extension of the Build America bond program that was introduced in 2009-10, proposals for an infrastructure bank, and public-private partnerships. However, a central theme of this report is that U.S. infrastructure investments are not limited by financial market constraints. State and local governments, in particular, can currently obtain long-term financing at very low rates of interest that are further subsidized through a federal income tax exemption. Instead, the more basic problem is the distorted nature of the decision-making process and difficulties of generating future revenue streams sufficient to pay for the initial capital investment, maintenance and operating costs. The decision-making process is perverted by an excessive focus on efforts to obtain free federal funding of infrastructure projects whose benefits are largely local, and the emphasis on new construction results in inadequate funding of operating costs and timely maintenance. Citizens and their representatives often favor expansion of the infrastructure, but they resist paying for their use of it and fail to undertake the required maintenance in a timely fashion. As a result, the primary need is to develop a stronger linkage between the costs of infrastructure projects and the benefits that flow from them. That means increased reliance on user fees, congestion taxes, and special tax zones as means of promoting the more efficient utilization of the infrastructure and providing adequate funding.

The paper begins by examining some evidence on basic trends in infrastructure spending and the adequacy and condition of the stock of U.S. infrastructure. We supplement that with a consideration of investments in the green economy and the experience of incorporating such spending within the 2009 federal economic stimulus program. With that assessment of needs as a background, the primary focus of the paper is on the evaluation of three new financing options for public infrastructure: Build America bonds, an infrastructure bank, and public-private partnerships.

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Authors

Barry P. Bosworth
Sveta Milusheva

Publication: The Brookings Institution and the Nomura Foundation Macro Economy Research Conference

Devastation in Japan: The Aftermath and Implications of the World’s Fifth Largest Earthquake

Fri, 18 Mar 2011 14:00:00 -0400

Event Information

March 18, 2011
2:00 PM - 3:30 PM EDT

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

In days following Japan’s devastating earthquake and tsunami, television and Internet images have been among the most shocking in recent memory. The scope of the disaster is historic and almost incomprehensible. The implications of the disaster are still unfolding, with recovery and relief efforts just getting underway, multiple nuclear facilities facing possible meltdown, and the Japanese people, government and economy reeling.

On March 18, Foreign Policy at Brookings hosted a discussion examining the aftermath in Japan, including the still-developing nuclear crisis and the larger implications of the disaster on Japan’s society and economy. Ambassador Ichiro Fujisaki delivered brief remarks, introduced by Brookings President Strobe Talbott. Panelists included Brookings Senior Fellows Richard Bush, Elizabeth Ferris, Charles Ebinger and Barry Bosworth. Vice President Martin Indyk, director of Foreign Policy, provided introductory remarks and moderated the discussion.

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Devastation in Japan: The Aftermath and Implications of the World’s Fifth Largest Earthquake

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20110317_japan_transcript

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Panelists

Ichiro Fujisaki

Ambassador Extraordinary and Plenipotentiary of Japan to the United States