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18 May 2009


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Kieran Latty

Thanks for this excellent article. I would like to add to your discussion of low U.S investment rates, and the possible policy options open to raise the rate of savings and investment.

You argue that a reduction in either government expenditures or a decline in living standards is necessary to raise the rate of savings. However, there are two other policy options that may enable a simultaneous rise in living standards and investment, (or a more dramatic rise in investment and a stabilization of living standards)

Firstly, let's dis-aggregate 'consumption' into its 'class' elements of wages and 'consumed profits', and of 'wage goods' and 'luxuries'. A quick look at the U.S. figures reveals that U.S consumption is highly unequal, and therefore significant cuts to 'luxury' consumption could be achieved without any reduction in living standards for the mass of the U.S population.

Progressive taxation, including luxury sales taxes could significantly increase government revenue, enabling the government to become a net saver and investor. (Incidentally, the high point of British investment and capital formation was in the 1950's, when the British state was a significant net saver and investor)

Secondly, there is a significant scope to increase the efficiency of production of one 'consumption good'- healthcare. The U.S system is terribly inefficient (in terms of the ratio of health outcomes to cost), and the implementation of even a relatively 'inefficient' public system (such as exists in Australia or Britain)could reduce the % of total output 'consumed' in the form of healthcare.

Add to that the already identified space for massive cuts to the military, and there is significant space to raise the savings rate without any cuts to living standards at the base of U.S society.The arms producers and upper middle class I have no sympathy with- let them suffer !

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John Ross

  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

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