JOURNAL OF

Economic Behavior
Journal of Economic Behavior and Organization &Ofganbtion
ELSEVIER 23 (1994) 111-126

Real government saving and the future

Robert Eisner*
Departmentof Economics,NorthwesternUniversity,2003 Sheridan Road, Evanston,
IL 60208-2400, USA
Received January 1993, final version received August 1993

Ah&act

Government saving should properly include government-financed investment.

Changes in public tangible investment and investment in education are found to be
positioely related to changes in inflation-adjusted, structural deficits. Changes in these
deficits have also been associated with changes in the same direction in gross private
domestic investment and even changes in narrow measures of national saving. Hence,
changes in real deficits have been associated a fortiori with changes in the same
direction in a broader measure of national saving, including government and
household investment in tangible capital. Our data also suggest that the pay-off to
more public tangible investment, at least, is distinctly positive and very possibly larger
than that to more private investment.

Key words: Saving; Investment; Government; Deficit

JEL classification: E62; H62; H60

1. Introduction

Conventional accounts measure government saving as the sum of Federal

and state and local budget surpluses. Large reported deficits in the last
decade have hence been viewed as major depressants of ‘national saving’, the
sum of private and government saving. Consequently lower national saving,
it is then argued, leaves a greater burden to the future. The appropriate

*William R. Kenan Professor of Economics, Northwestern University. I am greatly indebted to

a number of research assistants who have helped in processing and statistical analysis of the
data and, most important in recent work, Satish Reddy. Underlying series, frequently unpub-
lished, have been generously made available by Gerald Donahoe, Bruce Grimm and John
Musgrave of the Bureau of Economic Analysis.

0167-2681/94/$07.000 1994 Elsevier Science B.V. All rights reserved

SSDI 0167-2681(93)EOO41-W
112 R. Eisner / Journal of Economic Behavior and Organization 23 (1994) 111-126

corrective is reduction of government dis-saving, that is, the reduction of

budget deficits.
There is in fact evidence that cyclically-adjusted, inflation-adjusted or ‘real’
federal deficits have been associated with more not less subsequent national
saving, even as conventionally mismeasured. This results, apparently, from
the stimulatory effect of these deficits on real GNP and its components of
gross private domestic investment as well as consumption. The increases in
domestic investment have exceeded the declines in net foreign investment so
that, after abstracting from the role of monetary variables and exchange
rates, total investment and saving have increased.
Real government saving, in any economically meaningful and relevant
sense, however, is a far cry from the conventional measure of budget
surpluses or deficits. The failure to have separate capital accounts even for
the tangible reproducible fixed capital of structures and equipment, let alone
expenditures for the intangible capital of R&D and education, makes the
traditional measures a very poor, even perverse guide to provision for the
future.
In this paper we will present a comprehensive measure of government
saving, drawing on capital accounts being put together by the Bureau of
Economic Analysis for R&D and similar accounts for education. We shall
then offer estimates of parameters of relations determining these expanded
measures of government saving. Finally, we shall endeavor to estimate a
production function including private and public tangible capital stocks
among its arguments, to suggest the productivity of at least some of
government investment, and hence its contribution to future output.

2. Correcting the accounts

We can have no meaningful picture of public saving, conventionally

viewed in the United States as the excess of tax revenues over government
outlays, without making the government accounts at least consistent with
private business accounting practice. That means setting up current accounts
that exclude capital outlays but include depreciation or capital consumption
allowances as charges against revenues. Such accounts would then recognize
net government capital expenditures as a component of public saving.
Further adjustments, beyond merely bringing government accounts into
conformity with private accounting practice, are important to have a
measure of economically relevant saving and provision for the future. These
include recognizing household tangible investment in what are referred to as
‘consumer durable&. In current, conventional accounts government purchase
of an automobile is lumped into ‘government expenditures for goods and
services’, counted neither as consumption nor investment. Household pur-
 R. Eisner 1 Journal of Economic Behavior and Organization23 (1994) 111-126 113

chases of automobiles are counted as consumption. But if Hertz were to buy

the same vehicles and rent them to government or households they would be
counted as investment. An economically relevant measure, consistent with
the fact that all motor vehicles are expected to provide services over a
substantial future, would classify all acquisitions of new cars as investment,
regardless of the sector of legal ownership.
But probably most important is intangible investment, particularly in
education and in research. Much, perhaps most, of these expenditures should
be recognized as saving.’
In Table 1 we offer total government current and capital accounts for
1991. They add, to the national income and product accounts, Bureau of
Economic Analysis measures of government investment in fixed capital and
education along with National Science Foundation figures on government-
financed R&D expenditures.
This investment spending is put into a separate capital account, with
depreciation included as capital consumption allowances in the current
account. The $193 billion government deficit on conventional national
income and product account, presumably offsetting private saving and thus
reducing ‘national saving’ by that amount, is now reduced to a deficit of only
$24 billion on current account. Government capital expenditures, nowhere
explicitly recognized in the conventional accounts, come to $530 billion, of
which $184 billion are tangible investment (both military and civilian).
Intangible investment amounted to a considerably greater $346 billion, of
which $279 billion are in education and $67 billion in R&D. With total
capital consumption allowances of $361 billion, net capital expenditures - the
deficit on capital account, to be financed by borrowing (or printing money) -
are $169 billion.
These revised government accounts are then reflected in the revised gross
saving and investment account of Table 2. We add to the conventional gross
private domestic investment figure of $721 billion the $530 billion of ‘gross
public domestic investment’ and we add, on the other side of the account, the
$361 billion of public capital consumption allowances. Net national saving,
about the low level of which so much concern has been expressed, is thus
increased by the $169 billion of net public investment, from $82 billion ($275
billion minus the conventional consolidated deficit of $193 billion) to $251
billion. Perhaps more important, the revised accounts make clear that efforts
to reduce government deticits, if they reduce public investment, are perverse
in their effects on an economically relevant measure of national saving.
Similarly, increases in public sector deficits, if used to finance public
investment, increase national saving.

‘See Eisner (1988, 1989, 1991a) for detailed presentation of concepts and measures of extended
accounts for output, capital accumulation and saving.
114 R. Eisner / Journal of Economic Behavior and Organization 23 (1994) III-126

Table 1
Government receipts and expenditures accounts, 1991 (billions of dollars).

Current account
Credits: Revenues 1,747
Charges: Current expenditures 1,771
Goods and services 560
Net interest, transfer 850
payments and other
Capital consumption 361
allowances
Surplus or deficit (-) -24

Capital account
Credits: Capital consumption allowances 361
Charges: Gross capital expenditures 530
Tangible 184
Intangible 346
Education 279
R&D 67
Surplus or deficit: Net capital expenditures (-) -169

Consolidated account
Revenues 1,747
Expenditures 1,940
Total surplus or deficit (-) - 193
Sources: National Income and Product Accounts, Survey of Current Business,
September 1992, pp. 29-30; ‘Federal Government Expenditures by Type and
Function’ and ‘State and Local Government Expenditures by Type and Function’
Tables 3.16 and 3.17; Survey of Current Business, July 1992, Table 3.1, p. 66, 3.7B
p. 69; Bureau of Economic Analysis, ‘Fixed Government Capital (including
residential) historical-cost valuation, gross investment, depreciation and net invest-
ment’, total, National Science Foundation, Science and Technology (1991), Appen-
dix A, Table 4-2, p. 306; U.S. Department of Commerce, Government Finances,
December 1991, Tables 4 and 5, pp. 4, 6. Intangible capital consumption
allowances assumed equal to two-thirds of gross intangible capital expenditures.

3. Determinants of public and private investment and saving

In fact, increases in inflation-adjusted Federal structural deficits have been

associated over the past 30 years with increases in Federal tangible
investment, as should be apparent in Fig. 1 and is confirmed by the
statistically significant regression coeffkient of 0.102 in the first row of Table
3. There was little obvious association between the Federal structural deficit
and contemporaneous state and local government tangible investment, but
changes in total government tangible investment, apparetly reflecting their
 R. Eisner 1 Journal of Economic Behavior and Organization 23 (1994) 111-126 115

Table 2
Gross saving and investment account, 1991 (billions of dollars).

Gross private domestic investment 721 Net private saving 275

Persona) saving 200
Gross public domestic investment 530 Business saving 76
Net foreign investment 9 Net public saving -24
Capital consumption allowance 987
Private 626
Public 361
Statistical discrepancy 22

Gross investment 1,260 Gross saving and 1,260

statistical discrepancy
Sources: Table 1, above, and National Income and Product Accounts, Table 5.1. Gross Saving
and Investment, Survey ofCurrent Business,July 1992, p. 76.

0.0 1

-0.1

-02 0

-0.3

-0.4 -1

-0.5

-0.6 -2
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90

_ DFDTNPC __.__ DPAHEDGP

Fig. 1. Changes in price-adjusted high employment deficit and real federal tangible investment
as percent of GNP.

Federal component, were also positively related to Federal structural deficits,

as may be seen in Fig. 2 and in the statistically significant regression
reported on the third row of Table 3.
Changes in total government expenditures for education and training were
even more positively associated with changes in the inflation-adjusted,
Federal structural deficit, as shown in Fig. 3 and the regression results on the
116 R. Eisner f Journal of Economic Behavior and Organtzation 23 (1994) Ill-126

Table 3
Adjusted deficit and public inv~~ent; AI, = be + brAPAHED6.’

4 be b, R2 D-W rho n
Federal tangible -0.035 0.102 0.250 1.52 0.336 31
(0.049) (0.035) (0.166)
S&L tangible -0.018 0.006 0.274 1.86 0.566 31
(0.040) (0.017) (0.157)
Total.govemment -0.048 0.110 0.302 1.37 0.473 31
tangible (0.079) (0.042) (0.160)
Education & 0.052 0.135 0.347 1.73 0.510 31
training (0.070) (0.035) (0.158)
Government R&D -0.021 0.011 0.29 1 2.08 0.525 30
(0.019) (0.099) (0.163)
Total government -0.056 0.228 0.354 1.70 0.390 30
(0.093) (0.059) (0.176)
‘Ordinary least squares with a first-order correction for serial correlation.
Standard errors are shown in parentheses. Estimated as first differences. Sample
period is 1961-1991 for federal tangible, S&L tangible, and total government
tangible, and education and training and 1962-1991 for government R&D and
total government.
Variable definitions:
APAHED6=price-adjusted 6 percent high-employment deficit as percent of
GNP, first difference.
AI,=real investment of type k - federal tangible, S&L tangible, education 8~
training, government R&D and total government - generally from the BEA,
taken as percent of potential GNP, first differences.

fourth row of Table 3. And all this is reflected clearly in Fig. 4, relating the
Federal deficit to total government investment expenditures, tangible and
intangible, and in the corresponding regression results reported in the
bottom row of Table 3. Each one percentage point change in the ratio of the
inflation-adjusted 6-percent-unemployment deficit to GNP was associated on
average with a 0.228 percentage point change in public investment in the
same direction.
Granted that Federal structural deficits have been associated then with
more public investment and hence real government saving, is it not still
possible that these de&its have absorbed so much private saving and
crowded out so much pr~uate inves~ent that they actually reduced total or
national saving? This would indeed be inevitable, except possibly for foreign
financing of our investment, if national income and product were fixed. For
then more output going to public expenditures would have to mean less
output going to private expenditures or to foreigners. With the presumption
 R. Ether / Jownai of Economic Behavior and Organization 23 (1994) 111-126 117

-DGYTNTTP _v_.DPAHEDGP

Fig. 2. Changes in price-adjusted high employment deficit and real total government tangible
investment as percent of GNP.

l- , , / , , , ’ , ’ , ’ , , , , ’ , , ) , , , , , , , (

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 St

- DEDGVTTP _____DPAHEDGP

Fig. 3, Changes in price-adjusted bigb employment deficit and real total gove~~t expendi-
tures on education as percent of GNP.
118 f Jawnalof Economic Behavior and Organization 23 (1994) III-126
R. Eisner

t r , . , 1 I I I. IV, I, I,. ( I,, , 1,

62 64 66 66 70 72 74 76 78 80 82 84 86 88 90

I--_ DTGOVKPC _____ DPAHED6Pi

Fig. 4. Changes in price-adjusted high employment deficit and real total government investment
as a percent of GNP.

%DGD
J
8
5 2

3 1

I 0

-I -1

-2

-3 +* I. I ( 1s I. I. t . , St. I. I ., . , -2
! 64 66 60 70 72 74 76 78 80 82 84 86 88 9[1
YEARS
...-_-.-- -
[z ikDP87PC _____ -4

Fig. 5. Percent changes in real gross domestic product and lagged price-adjusted high-
employment deficit, 1961-1991.
 R. Eisner / Journal of Economic Behavior and Organization23 (1994) Ill-126 119

of any reasonably substantial marginal propensity to consume domestic

goods, deficit-financed public expenditures which would raise after-tax
income would generate sufficient additional consumption to lower private
investment more than any increase in public investment.
But that crucial assumption, that national income and product - and with
them, unemployment and employment - are fixed, is a source of major error.
In fact, they are not fixed. The United States economy, whatever its myriad
virtues, like most other market economies, suffers much more often than not
from less-than-full employment and a consequent capacity for variation in
income and output. If a bigger structural deficit, for whatever purpose,
increases employment, income and output, it is quite possible that we can
have more public investment and more private investment too. Indeed, we
can have more consumption, public or private, and more private investment.
More consumption may actually bring about more investment. There may be
‘crowding in’ rather than crowding out of private investment, a possibility
that was elegantly laid forth by Oscar Lange (1938) over half a century ago.
It is an empirical question whether on balance our economy has tended to
have sufficient slack for us to be below ‘the optimum propensity to consume’,
that is to have so little consumption or government expenditures that
increasing them would bring an increase in private investment.2
Fig. 5 makes clear that this possibility is open. Changes in the inllation-
adjusted (or ‘price-adjusted’), structural (or ‘high-employment’) deficit have
been positively associated with subseqent changes in real gross domestic
product. Fig. 6 manifests a corresponding relation with unemployment;
increases in the budget surplus, or decreases in the deficit, have been
associated with increases in unemployment. And these relations are con-
firmed by the regression results reported in Table 4. Those regressions are
better fits with the inclusion of changes in the real monetary base as an
independent variable but they are robust, as well, in the simple relations with
only the deficit variable.
More directly to the point at issue, however, are the relations reported in
Table 5. Here we note that the deficit and monetary base variables are
positively related to gross private domestic investment. There has been
crowding in.
Has that been entirely at the expense of net foreign investment, though?
My results, as well as those of others, indicate that deficits have encouraged
imports and reduced net exports. 3 Thus, the conventional measure of

z See Eisner (1986) for an early, comprehensive treatment of some of these issues and, for more
up-to-date treatments, focussing more considerably on national saving, Eisner (1992a and
1992b).
3 See, for example, Eisner and Pieper (1992).
120 R. Eisner / Journal of Economic Behavior and Organization 23 (1994) III-126

3 2

-1

-2
i

-3
62 64 66 66 70 72 74 76 76 60 62 64 66 66 90

I_= DUWPC~-.-~~DPAHES6P(-l)(
Fig. 6. Percent changes in unemployment and IaBged price-adjusted high-employment surplus,
1961-1991.

national saving - the sum of gross private domestic investment and net
foreign investment - might still be negatively related to these deficits.
That, however, is not the case. As shown in the second column of Table 5,
reporting the regression of NSO, after taking into account the effects of real
changes in exchange rates, we find that each percentage point of structural
deficit, expressed as a ratio of GNP, was associated with almost exactly one
percentage point more of subsequent national saving over the period from
1973 to 1991.4
But finally, what about a broader measure of national saving, one that at
least includes government and household investment in tangible capital. Fig.
7, graphing changes in the real structural deficit against changes in NSl, this
expanded measure of national saving, both taken as percentages of GDP,
tells a striking story. It is clear to the naked eye that changes in the deficit
have been positively associated with subsequent changes in national saving
over the years from 1961 to 1991. And this relation is confirmed in the
regression, for the years 1973 to 1991, where the monetary base and

4Earlier years were excluded because of the absence of earlier measures of trade-weighted, real
exchange rates.
 R. Eisner / Journal of Economic Behavior and Organization 23 (1994) Ill-126 121

Table 4
Changes in adjusted budget deficits, monetary base,
real GDP and unemployment, 1962-1991; Ax=
b,,+b,APAHED6,_, + b*DMB,_ r.

Variable AY,
or
parameter GDP Unemployment
C 1.922 0.462
(0.570) (0.170)
APAHED6,_, 1.227 - 0.486
(0.317) (0.162)
DMB,_, 8.510 -4.414
(2.493) (1.052)
AR(l) 0.378 -0.010
(0.208) (0.235)
R’ 0.481 0.444
D-W 1.713 1.771
n 30 30
C Constant term
AR(l) First-order autoregressive coelfi-
cient
R2 Adjusted coelkient of determi-
nation
D-W Durbin-Watson coefficient
n Number of observations
APAHEDQ- 1 Lagged price-adjusted, BEA 6%
high-employment budget deficit as
percent of GNP
DMB,_ I Lagged real change in monetary
base as percent of GNP
(December figures divided by 4th
quarter GNP implicit price defla-
tor).

exchange rate variables are also included. With deficits to some extent
financing household and government investment, the relation is even stronger
than that for the narrower measure of national saving. We now note that
each percentage point change in the deficit was associated with an average
move in the same direction of 1.193 percentage points of national saving as a
ratio of GNP. The deficits have apparently contributed to more government
saving and investment and to more total, national saving and investment as
well.
122 R. Eisner / Journal of Economic Behavior and Organization 23 (1994) Ill-126

Table 5
Adjusted budget deficits, changes in monetary base, and real exchange
rates and gross private domestic investment and alternate measures of
real national saving, NSO and NSl, first differences, 1973-1991; Ax=
b0+bIAPAHED6,_I+b2ADMB,_I+b3ADMB,_2+b,AERR,_,.

Variable AE;
or
parameter GDP1 NSO NSl
C - 0.295 -0.376 - 0.430
(0.190) (0.241) (0.169)
APAHED,_ , 1.258 1.004 1.193
(0.274) (0.241) (0.263)
ADMB,_ 1 5.646 6.925 7.605
(1.440) (1.211) (1.318)
ADMB,_, 4.142 5.953 6.223
(1.284) (1.149) (1.180)
XADMB 9.788 12.877 13.828
(2.001) (1.806) (1.834)
AERR,_ 2 - 0.092 -0.122 -0.124
(0.030) (0.026) (0.027)
AR(l) - 0.049 0.282 - 0.062
(0.327) (0.297) (0.322)
R2 0.696 0.746 0.796
D-W 1.866 2.135 1.822
n 19 19 19
C Constant term
AR(l) First-order autoregressive coefficient
R2 Adjusted coeffkient of determination
D-W Durbin-Watson coefficient
n Number of observations
PAHED, _ 1 Lagged price-adjusted, BEA 6% high-employment bud-
get deficit as percent of GNP
DMB,_, Lagged real change in monetary base as percent of
GNP (December figures divided by 4th quarter GNP
implicit price deflator)
DMB,_* Two-year lagged real change in monetary base as
percent of GNP (December figures divided by 4th
quarter GNP implicit price deflator)
ERR,_* Trade weighted, real exchange rate, lagged two years
(March 1973 = 100)
GPDI Gross private domestic investment as percent of GNP
NSO Conventional net national saving= gross saving - capi-
tal consumption allowances with adjustment, as per-
cent of GNP
NSl Change in total fixed reproducible capital plus net
foreign investment, as percent of GNP
 R. Eher 1 Journal of Economic Behavior and Organization 23 (1994) Ill-126 123

62 64 6fi 66 70 72 74 76 76 60 62 64 66 66 90

riiiiipc _____ DPAHEDGP(-I)]

Fig. 7. Percent changes in ratios to GDP of total, real, tangible, national saving and lagged
price-adjusted high-emp. deficit.

4. Tangible public investment and productivity

Finally, we may bring some of our data to bear on the critical question of
the productivity of public tangible investment, of which infrastructure
investment is of course a signifrcant part, a part that we may expect will rise
with the decline of military spending and the policy commitments of the new
Clinton Administration. We have estimated a log-linear production function
from data on total labor hours worked and the end-of-previous-year stocks
of private and public tangible capital. 5 Parameter estimates indicate the
expected major role of labor and suggest the usually observed increasing
returns to scale. Most interesting for our purposes, however, are the
significantly positive coefficients to both private and public tangible capital.
We may indeed note that, while the differences are hardly statistically
significant, the coefficient of public capital is larger than that of private
capital. One percent more of private capital was associated with 0.19 percent
more of GDP, while one percent more of public capital was associated with

’ We lack useful series on stocks of government-financed capital stocks of education and R&D.
We are further inhibited from entering even crude approximations into our production function
by the unreasonableness of expecting changes in such stocks from having any effect on output
o&r than with long and variable lags.
124 R. Eisner / Journal of Economic Behavior and Organization 23 (1994) 111-126

Table 6
Production function: gross domestic product and
labor hours and private and public tangible capital;
LGD87, = b0 + b,LLBRHRS,+ b,LKPRVTTAN,_ ,
+ b,LKPUBTAN,_ I.

Variable Regression coefficients

or and
parameter standard errors
C - 0.462
(0.212)
LLBRHRS, 0.973
(0.081)
LKPRVTTAN, _ 1 0.190
(0.054)
LKPUBTAN,_ 1 0.270
(0.068)
AR(l) 0.007
i? 0.998
D-W 1.167
n 31
Constant term
iR(l) First-order autoregressive coef-
ficient
fi2 Adjusted coefftcient of deterrni-
nation
D-W Durbin-Watson coefficient
Number of observations
EGDP87, Logarithm of gross domestic
product in 1987 dollars
LLBRHRS, Logarithm of labor hours
LKPRVTTAN,_ , Logarithm of private tangible
capital stock in 1987 dollars at
end of previous year
LKPUBTAN, _ , Logarithm of public tangible
capital stock in 1987 dollars at
end of previous year
t 1961 to 1991

0.27 percent more of GDP. Inasmuch as the measured public capital stock
was much less than the measured private capital stock, this suggests a much
greater marginal productivity of public capital. If we could take the numbers
seriously - I would caution that they be viewed as just one more bit of
evidence in a very difficult, tricky and controversial set of estimation
 R. Eisner 1 Journal of Economic Behavior and Orgmization 23 (1994) 111-126 125

efforts6 - they would imply a gross marginal product of public capital

investment 4.5 times that of private capital investment.’

5. Summary and conclusion

Government saving should properly include government-financed invest-

ment. Accounts that do so show national saving to be much more than that
shown in conventional measures and the negative accounting contribution of
government budget deficits to national saving to be much less. This, of
course, does not imply incorrectness of the widespread view that national
saving in the United States is in some sense ‘too low’. It does, however, put
new light on proposals to increase it.
First, changes in public tangible investment and investment in education
are found to be positively related to changes in price-adjusted, high-
employment deficits (inflation-adjusted, structural deficits). This suggests that
direct efforts to reduce Federal deficits, particularly subject to the public
constraint of aversion to tax increases, are likely to reduce public investment.
Increases in the deficit, if past history is to be a guide, may conversely be
associated with increases in public investment and government saving.
Second, changes in these deficits have also been associated with changes in
the same direction in gross private domestic investment and even changes in
narrow measures of national saving, excluding government and household
investment in tangible capital. Hence changes in real deficits have been
associated a fortiori with changes in the same direction in a broader measure
of national saving, including government and household investment in
tangible capital.
Finally, our findings suggest, as have those of some others, that the pay-off
to public tangible investment, at least, is distinctly positive and very possibly
larger at the current margin, than that to private investment.

68ee, for a not entirely representative sample, Aschauer (1989), Munnell (1990) and Eisner
(1991b).
‘The mean of the observations of LKPRVTTAN, the natural logarithm of private tangible
capital stock, is 8.8850, corresponding to 7,222.7 billions of 1987 dollars. The mean of
observations of LKPUBTAN, the natural logarithm of private capital stock, is 7.7377,
corresponding to $2,293.1 billion. The ratio of (geometric) means is thus 3.15. The mean of the
observations of LGDP87, the natural logarithm of gross domestic product is 8.0852, correspond-
ing to 3,245.9 billion in 1987 dollars. The implied gross marginal product of private tangible
capital is thus 0.0855358. The implied gross marginal product of public tangible capital is
0.3817155, or 4.46264 times the marginal product of private capital.
126 R. Eisner / Jou?na/ of Economic Behavior and Organization 23 (1994) Ill-126

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