U.S. consumers are not saving enough to finance domestic fixed investment. Far from being a negative, the trade deficit is necessary for America to sustain prosperity. The relationship between saving and investment is pretty straightforward. I’ll explain it soon. But Americans are terrible savers. Between 2000 and 2024, the average savings rate was 5.7 percent.
The savings rate is total national saving by households as a percentage of total national personal income. In other words, it’s saving as a percentage of income. But the low US savings rate is a relatively recent phenomenon. Before 1985 savings rates routinely exceeded 10 percent. Luckily, that fact is also explained by simple accounting. (There are three sharp increases in the saving rate. The 1930s was caused by the Great Depression. The 1940s were, of course, World War II. Rationing restricted spending, essentially forcing saving. The third, 2020, is COVID when, once again, spending was constrained, this time by lockdowns.)
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But, despite low savings rates, U.S. business fixed investment has increased steadily. The relationship between saving and investment is not complicated. Capital investment – buildings, machines, and other non-financial assets – must be financed somehow. The financing comes from saving from various sources. One source is saving from U.S. residents which can take many forms, including
- buying shares in mutual funds, either stock or corporate bond,
- buying individual stocks or corporate bonds,
- putting aside part of your income in a savings account or money-market fund,
- buying capital assets directly,
- reinvesting undistributed profits.
A second source is global saving. Foreigners buy U.S. stocks, build factories and office buildings here, and buy U.S. bonds (corporate and government).
Between 2000 and 2024, gross private fixed investment rose from $1.98 to $5.22 trillion in current dollars (nominal fixed investment). But total domestic saving only exceeded $1 trillion during the 2019-2021 COVID years. From 2000 to 2024 saving rose from $0.32 to $0.99 trillion. U.S. taxpayers are not saving enough to finance domestic fixed investment. The difference (saving – fixed investment) was -$1.67 trillion in 2000 and -$4.24 trillion in 2024. And this ignores another main drain on U.S. savings: the government budget deficit.
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The US is very productive. That means incomes and wages are high compared to the rest of the world. High wages mean the cost of producing goods and services is also high, so US exports will have high prices and much of what we export will be technically sophisticated products. imports will be relatively cheap. Americans will buy lots of imported products but foreigners will buy fewer of our exports.
That means the US will have a balance of trade deficit. The deficit is caused by high productivity, great wealth, and low savings. American economic growth is directly tied to this deficit. Trying to reduce it by tariffs, quotas, or other interventions will harm the economy in the short and long run.
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