Floor Statement of U.S. Senator Max Baucus on Savings and Economic Competitiveness
(WASHINGTON, D.C.) U.S. Senator Max Baucus delivered the fifth speech in a series of floorstatements addressing the United States’ ability to compete in the world economy. As rankingmember of the Senate Finance Committee, Baucus has played a leading role in shaping policyinfluencing the economy, international trade, and health care.
This past summer, Baucus began delivering speeches on America’s role in the globaleconomy, the importance of education in keeping a competitive edge, the importance openingnew trade markets, and warning of the damaging effects rising health care costs have onAmerican companies.
Today’s speech addressed the importance of national savings and its impact on keepingAmerica’s economy strong. The floor statement follows:
Floor Statement of U.S. Senator Max Baucus
Savings and Economic Competitiveness
More than 10,000 years ago, on the eastern edge of the Mediterranean Sea, peoplebecame farmers. They started growing crops of emmer and einkorn wheat. They harvested thegrain with curved, hand-held sickle-blades.
And 5,000 years ago, Mesopotamian farmers yoked cattle to pull plows. The plows’bronze-tipped blades cut deeply, greatly increasing productivity.
Today, in Ethiopia, wheat farmers still harvest their wheat with oxen or by hand. Theyuse tools much like those invented 5,000 years ago. An Ethiopian wheat farmer harvests an acreof wheat in a week.
A few weeks ago, in Montana, a wheat farmer whom I know near Fort Benton, inChouteau County, finished harvesting this year’s hard-red spring-wheat crop. He and his familydrive a John Deere 60 series STS combine that they bought for more than $225,000, a couple ofyears ago. STS stands for the “single-tine separator” system that the combine uses for threshingand separating. The combine’s rotor technology yields a smooth, free-flowing crop stream,giving the farmer higher ground speeds and increased throughput capacity. This Fort Bentonwheat farmer harvests 5 acres and 220 bushels of wheat in half an hour.
What the Ethiopian farmer can do in a week, the Montana farmer can do in 6 minutes.There are a lot of reasons for the difference: land, climate, seed quality, farming skills.But one big difference between the productivity of farmers in Ethiopia and the productivity offarmers in Montana is their tools — their physical capital.
Capital distinguishes the modern age. Capital is the most important reason why theaverage American earns about $40,000 a year and the average sub-Saharan African earns about$600 a year. Capital makes American workers more productive and more competitive.
Mr. President, this is my fifth address to the Senate on competitiveness. Starting thissummer, I spoke on competitiveness generally. I spoke on the role of education incompetitiveness. I spoke on the role of trade in competitiveness. I spoke on the role ofcontrolling health-care costs in competitiveness. And today, I wish to speak about the role ofcapital and savings in competitiveness.
Capital means financial wealth — especially that used to start or maintain a business.Many economists think of capital as one of three fundamental factors of production, along withland and labor.
Capital and the productivity that it engenders set apart developed economies from thedeveloping world. With capital investment, the construction worker uses a backhoe, instead of ashovel. With capital investment, the accountant uses a calculator, instead of an abacus. Withcapital investment, the office worker uses a personal computer, instead of a pencil.In the late 1950s, there were about 2,000 computers in the world. Each of thesecomputers could process about 10,000 instructions per second.
Today, there are about 300 million computers. Each of them can process severalhundred-million instructions per second.
In less than 50 years, the world’s raw computing power has increased four-billion-fold.This sustained increase in productivity is unparalleled in history. Capital investment ininformation technology made it possible.
In 1960, capital investment in information technology was about 1 percent of oureconomy. By 1980, investment in IT increased to 2 percent of our economy. By 2000,investment in IT increased to 6 percent of our economy.
These are slow, single-digit increases in investment. But look at the revolutions that theyignited.
This information technology investment contributed to a new era of American workerproductivity and competitiveness. That productivity continues today. In the mid-1990s, whenthe benefits of IT investment kicked in, American workers began producing nearly 4 percentmore per hour. As increased productivity surged through the economy, the standard of livingimproved for the Nation.
Capital made possible this unprecedented productivity. Investment made possible thiscapital. And savings made possible this investment. Savings is the seed corn for productivitygrowth.
National savings fuels investment. Investment provides capital to our workers. Capitalignites productivity. And productivity makes our economy accelerate.
Savings is what is left of income after consumption. National savings collects thesurpluses of private households, businesses, and governments. When workers put part of theirsalaries into 401(k) plans, that adds to national savings. When companies hold on to their excessearnings and profits, that too adds to national savings. And when the government runs a budgetsurplus, that public sector savings adds to the national pool of savings, as well.
The three elements of national savings — household savings, corporate savings andpublic savings — are fundamental to economic competitiveness. Savings lets us invest in newfactory equipment, machines, or tools. Savings lets us invest in high-technology innovations.Savings lets us invest in human, physical, and intellectual capital.
But America’s level of national savings is dwindling. The decline of America’s savingsdemands action.
At the end of last year, net national savings stood at just under 2 percent of grossdomestic product. That is less than $2 for every $100 that our nation earns. This is down morethan 70 percent since 2000. No other industrialized country in the world has such a low nationalsavings rate.
If we break down national savings into its component parts, we can see why nationalsavings has fallen off. First the good news: Corporate savings has held steady — even increased— over the past decade. But the good news ends there.
Personal savings — what American households are contributing to nation’s savings —has fallen dramatically. Just 10 years ago, Americans saved about $4 of every $100 that oureconomy produced. By the end of 2004, we were saving just 99 cents. And today? The recentdata show that personal savings has fallen even further, below zero.
In July, for every $100 of disposable income that Americans generated, we spent that$100, plus 60 cents more.
Rather than saving, American households are borrowing. In the 1980s, total householddebt equaled about 70 percent of a year’s after-tax income. By 2004, household debt equaled107 percent of after-tax income.
And the bad news gets worse. As American households fish pennies out of the nation’spiggy bank, there is a growing hole at the bottom. The public sector is draining national savingsas the huge federal budget deficits grow.
In just 4 years, the federal government’s contribution to national savings has gone from apositive contribution of more than 2 percent of the economy, to a drain of more than 3 percent.Instead of contributing $2 for every $100 the economy earns, the federal government’s takes out$3 dollars. Government deficits are the chief cause of our abysmal national savings rate.With national savings so low, how has America’s economy remained an engine ofgrowth?
We find the answer in Japan, Europe, China, and even the developing world. Americanshave stopped saving. But the rest of the world has not.
Today, Americans turn to foreign lenders for our savings. The rest of the world hasbecome America’s creditor, happily lending their savings to our government, corporations, andhouseholds. Fully 80 percent of the world’s savings come to America. The world’s largesteconomy has become the world’s largest debtor.
This is a big change. Between 1950 and the early 1980s, our foreign borrowing wasbalanced. Some years we borrowed from foreigners. And other years we lent. But for mostyears, we remained a net creditor.
Since then, our situation has dramatic reversed. We now depend on foreigners to fuel oureconomy.
Look at foreign and domestic investment flows. Last year, our net borrowing fromforeign lenders totaled nearly $700 billion. This year, our net foreign borrowing could wellexceed $800 billion.
This kind of borrowing adds up. As recently as 1985, America’s had zero net foreigndebt. Today, America’s net foreign debt is the of nearly 30 percent of our economy.The last time that we had this level of foreign debt, Grover Cleveland lived in the WhiteHouse. The last time that we had this level of foreign debt, 18 percent of Americans wereunemployed, violent railroad strikes shook the nation, and a deep depression gripped the worldeconomy.
What is worse, soon, the ratio of foreign debt to GDP will hit 50 percent. In 7 years, theratio will hit 100 percent.
This is unprecedented, not just for the United States. It is unprecedented for any modernindustrialized country.
We welcome foreign investment in America. Our economy’s openness to the world’scapital has helped keep our economy strong. Foreign investment fuels our economy and createsgood American jobs.
But if we continue to become increasingly dependent on foreign capital, then we willhave to pay the piper.
First, continued borrowing means an ever-growing claim on our nation’s assets. Themore that foreigners lend to America, the more dividend and interest payments they will collect.In 2005, for the first time since these data were recorded, America will pay more onforeigners’ investments in America than American investors earn on their investments abroad.This year, these payments could amount to $30 billion. By 2008, these payments could rocket tomore than $260 billion.
That would be a quarter of a trillion dollars paid out that would not boost ourproductivity. That would a quarter of a trillion dollars that would increase foreign countries’standard of living, not ours.
That would be a quarter of a trillion dollars simply paying on our existing debt. Moreand more, we would have to borrow new amounts from foreign sources to pay back funds thatwe had already borrowed.
And that would be a quarter of a trillion dollars of behavior that one associates with athird-world economy, not the United States of America.
Secondly, foreigners are increasingly not investing their savings in America’s productivesectors, but in U.S. government securities. Foreigners are frequently buying our governmentsecurities as part of schemes to manipulate currency markets and subsidize their exports. Thoseschemes further hurt our competitiveness and our future standard of living.
When 80 percent of the world’s savings flow to just one country, the world economy isunbalanced. This imbalance creates dangerous problems and distortions in the U.S. economyand throughout the world.
Eventually, the pendulum will swing back. The world economy will return toequilibrium. Foreign investors will decide to rebalance their portfolios. They will reduce theirlending to America. America will have to pay more for its borrowing. Interest rates will rise.This rebalancing could cause severe dislocations in our economy.
We can steer clear of some of these costs. But we can do so only if we consider themnow and do what we can to secure our economy from sudden and difficult adjustments later.Where do we look for solutions?
America must increase its own national savings. We must finance more of our owninvestment.
We must create a reliable and stable pool of investment funding to fulfill our investmentneeds. This saving will also make us more profitable in the long run. We will gain the returnson capital investment here. We will not send them abroad.
We will continue to welcome foreign savings to our shores. But America will have ahigher stock of self-financed investment.
First we must plug the biggest leak in our national savings pool: the federal budgetdeficit. The federal government continues to run huge deficits. Prior to 2003, the record deficitwas $290 billion in 1992. But in 2003, the government set a new record deficit of $375 billiondollars. In 2004, the government set an even higher record deficit of $412 billion dollars. Thisyear, the government is projected to run a deficit of more than $300 billion dollars. The last 3years have produced the 3 largest deficits in the Nation’s history.
And now with the immense costs of Hurricane Katrina, Goldman Sachs now predicts thatthe deficits for the next 2 years will once again be about $400 billion. That would be 2 moreyears of deficits once again approaching record levels.
These deficits increase our national debt. At the end of fiscal year 2001, thegovernment’s debt held by the public was $3.3 trillion. By the end of this month, economistsproject that debt held by the public will rise to $4.6 trillion. This would be an increase of 40percent in just 4 years.
There are times when deficits are appropriate. If the economy is in a recession, netborrowing by the federal government can help to restore prosperity and job growth. But with theeconomy humming along now, huge deficits no longer serve Americans well. Instead, theselarge deficits divert domestic and international savings away from productive economic sectors.These productive sectors need savings to invest in innovative capital goods that can boostproductivity, help our economy to grow, and improve our nation’s living standards.
We must be honest about our spending needs today and in the future. Budget forecastsfor the near-term that neglect the costs of war and of neglect upcoming reductions in revenues —such as reform of the alternative minimum tax — serve no one but cynical political strategists.And the retirement of the baby boom generation beginning in 2008 will put enormous long-termpressure on the federal budget through increased Social Security, Medicaid, and Medicarespending. We must own up to these long-run problems.
Once we define the problem honestly, we must find ways to solve it.
First, we must restore the pay-as-you-go rules for both entitlement spending and tax cuts.We are stuck in a hole. We have to stop digging. We must pay for any new spending or tax cutsthat we enact.
Until 2003, tough pay-as-you-go rules governed the Congressional budget process. Butthese rules expired in 2003. And a virtually meaningless alternative has taken their place. Wemust restore strong and meaningful pay-go rules.
Second, we must reduce the annual tax gap. As much as $350 billion of taxes wentunpaid in 2001. Since then, the government has collected only $55 billion of that 2001 shortfall.These huge gaps occur every year. We cannot afford this tax gap.
Third, we must eliminate wasteful and unnecessary spending. For example, the InspectorGeneral at the Department of Health and Human Services recently discovered that thegovernment had paid nearly $12 million in benefits to recipients in Florida who had alreadydied!
Fourth, we must eliminate wasteful and unfair tax breaks — such as abusive tax sheltersand corporate tax loopholes.
Finally, we must slow the growth in healthcare costs. We cannot rein in budget deficitswithout controlling the growth in healthcare costs. The private sector cannot sustain its currenthealthcare cost growth. And neither can the public sector. We cannot clamp down on healthcarecosts in the public sector alone. Providers will just shift healthcare costs to the private sector.Fortunately, solutions that contain private sector healthcare costs will likely also help containpublic sector healthcare costs, as well.
Taking these five steps would go a long way towards reducing federal budget deficits andincreasing national savings.
Increasing private savings is more complicated. We cannot adopt pay-as-you-go rulesfor families. Instead, we have to provide families with the tools that they need to develop theirown growth plan.
The first tool is financial education. Too few Americans know how to develop a familybudget. And too few know how to assess the risk of an adjustable rate mortgage when interestrates are rising.
We need to provide our children, and their parents and grandparents, with the tools thatthey need to make good financial decisions — to have more savings and less debt.Programs like “Stash Your Cash” — a program to teach young people the basics offinance, saving, and investing — are a good start.
As part of “Stash Your Cash,” this summer, 15 pigs — each one 4 feet tall and 750pounds — appeared in the streets of Washington. And it was not just another political statement.The colorful animals on street corners were overd piggy banks. Local middle schoolstudents and artists painted each one.
“Stash Your Cash” gets to kids early. It teaches them financial vocabulary, how to createa budget, and how and why they should save for the future. It teaches middle-school studentsthat creating a budget helps them understand where their money goes, ensures that they do notspend more than they earn, finds uses for money to achieve goals, and helps them set asidemoney for the future.
We all could benefit from these lessons. Savings is vital for our children’s and ourfamilies’ financial future. And what is vital for our families is vital for our Country.Second, we need to make it easier to save.
The most successful savings programs are payroll-deduction savings through employersponsored401(k) plans. We can make these programs even more successful by encouragingemployers to enroll eligible employees automatically. Employees would opt out of savinginstead of opting in. Without automatic enrollment, just two-thirds of eligible employeescontribute to a 401(k) plan. With automatic enrollment, participation jumps to over 90 percent.The largest increases are among younger and lower-income employees.
But only half of private sector workers have a 401(k) or similar plan available to them.We need to bring payroll-deduction retirement savings to the other half.
Who is that other half? Part-time workers — those who put in less than 1,000 hours ayear — do not have to be covered by 401(k) plans. Small employers are less likely to offer401(k) plans, or similar arrangements, to their workers. And lower-income workers are lesslikely to have a plan available than moderate- and higher-income workers.
We have a voluntary pension system. We should not change that. But we can makesavings opportunities available to more workers without forcing employers to provide morebenefits.
Third, we need to make incentives for saving more progressive. Like many taxincentives, our current savings incentives give more bang-for-the-buck to those in the higher taxbrackets.
In 2001, we took an important step toward fairness by creating the Saver’s Credit. TheSaver’s Credit helps low-to-moderate-income taxpayers to save by providing a credit of up tohalf of the first $2,000 that they contribute to an IRA or 401(k) plan. More than 5 milliontaxpayers claimed this credit in 2001. It works. But it will expire after 2006. We must extend it.And we must expand it to cover those with no income tax liability.
In ancient times, people viewed the toil of farming as a curse. The ancient text tells howwhen man left the Garden of Eden, he heard God say:
“Cursed be the ground because of you;
By toil shall you eat of it
All the days of your life:
. . . .
By the sweat of your brow
Shall you get bread to eat,
Until you return to the ground—
For from it you were taken.”
But now, increased investment, capital, and productivity have made it so that we mayhear the blessing with which Moses blessed the children of Israel on the plains of Moab, acrossthe River Jordan:
“The Lord will give you abounding prosperity in . . . the offspring of your cattle, and theproduce of your soil in the land that the Lord swore to your fathers to assign to you. TheLord will open for you His bounteous store, the heavens, to provide rain for your land inseason and to bless all your undertakings. You will be creditor to many nations, butdebtor to none.”
From ancient times, the sages recognized that the terms “prosperity” and “debtor” rarelyapply to the same country.
Let us return to being a country whose saving provides the seed corn that brings thoseblessings of “abounding prosperity.”
Let us seek the blessings of being “creditor to many nations, but debtor to none.”And let us do the work that we need to do to see that “[t]he Lord will [continue]. . . tobless all [the] undertakings” of this great Land.
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