Capital in the Twenty-First Century (31 page)

In any case, these differences are very small compared with differences in the demographic
growth rate. In the period 1970–2010, population grew at less than 0.5 percent per
year in Europe and Japan (and closer to 0 percent in the period 1990–2010, or in Japan
even at a negative rate), compared with 1.0–1.5 percent in the United States, Canada,
and Australia (see
Table 5.1
). Hence the overall growth rate for the period 1970–2010 was significantly higher
in the United States and the other new countries than in Europe or Japan: around 3
percent a year in the former (or perhaps even a bit more), compared with barely 2
percent in the latter (or even just barely 1.5 percent in the most recent subperiod).
Such differences may seem small, but over the long run they mount up, so that in fact
they are quite significant. The new point I want to stress here is that such differences
in growth rates have enormous effects on the long-run accumulation of capital and
largely explain why the capital/income ratio is structurally higher in Europe and
Japan than in the United States.

Turning now to average savings rates in the period 1970–2010, again one finds large
variations between countries: the private savings rate generally ranges between 10
and 12 percent of national income, but it is as low as 7 to 8 percent in the United
States and Britain and as high as 14–15 percent in Japan and Italy (see
Table 5.1
). Over forty years, these differences mount up to create significant variation. Note,
too, that the countries that save the most are often those whose population is stagnant
and aging (which may justify saving for the purpose of retirement and bequest), but
the relation is far from systematic. As noted, there are many reasons why one might
choose to save more or less, and it comes as no surprise that many factors (linked
to, among other things, culture, perceptions of the future, and distinctive national
histories) come into play, just as they do in regard to decisions concerning childbearing
and immigration, which ultimately help to determine the demographic growth rate.

If one now combines variations in growth rates with variations in savings rate, it
is easy to explain why different countries accumulate very different quantities of
capital, and why the capital/income ratio has risen sharply since 1970. One particularly
clear case is that of Japan: with a savings rate close to 15 percent a year and a
growth rate barely above 2 percent, it is hardly surprising that Japan has over the
long run accumulated a capital stock worth six to seven years of national income.
This is an automatic consequence of the dynamic law of accumulation,
β
=
s
/
g
. Similarly, it is not surprising that the United States, which saves much less than
Japan and is growing faster, has a significantly lower capital/income ratio.

More generally, if one compares the level of private wealth in 2010 predicted by the
savings flows observed between 1970 and 2010 (together with the initial wealth observed
in 1970) with the actual observed levels of wealth in 2010, one finds that the two
numbers are quite similar for most countries.
⁹
The correspondence is not perfect, which shows that other factors also play a significant
role. For instance, in the British case, the flow of savings seems quite inadequate
to explain the very steep rise in private wealth in this period.

Looking beyond the particular circumstances of this or that country, however, the
results are overall quite consistent: it is possible to explain the main features
of private capital accumulation in the rich countries between 1970 and 2010 in terms
of the quantity of savings between those two dates (along with the initial capital
endowment) without assuming a significant structural increase in the relative price
of assets. In other words, movements in real estate and stock market prices always
dominate in the short and even medium run but tend to balance out over the long run,
where volume effects appear generally to be decisive.

Once again, the Japanese case is emblematic. If one tries to understand the enormous
increase in the capital/income ratio in the 1980s and the sharp drop in the early
1990s, it is clear that the dominant phenomenon was the formation of a bubble in real
estate and stocks, which then collapsed. But if one seeks to understand the evolution
observed over the entire period 1970–2010, it is clear that volume effects outweighed
price effects: the fact that private wealth in Japan rose from three years of national
income in 1970 to six in 2010 is predicted almost perfectly by the flow of savings.
¹⁰

For the sake of completeness, I should make clear that private saving consists of
two components: savings made directly by private individuals (this is the part of
disposable household income that is not consumed immediately) and savings by firms
on behalf of the private individuals who own them, directly in the case of individual
firms or indirectly via their financial investments. This second component consists
of profits reinvested by firms (also referred to as “retained earnings”) and in some
countries accounts for as much as half the total amount of private savings (see
Table 5.2
).

If one were to ignore this second component of savings and consider only household
savings strictly defined, one would conclude that savings flows in all countries are
clearly insufficient to account for the growth of private wealth, which one would
then explain largely in terms of a structural increase in the relative price of assets,
especially shares of stock. Such a conclusion would be correct in accounting terms
but artificial in economic terms: it is true that stock prices tend to rise more quickly
than consumption prices over the long run, but the reason for this is essentially
that retained earnings allow firms to increase their size and capital (so that we
are looking at a volume effect rather than a price effect). If retained earnings are
included in private savings, however, the price effect largely disappears.

In practice, from the standpoint of shareholders, profits paid out directly as dividends
are often more heavily taxed than retained earnings: hence it may be advantageous
for the owners of capital to pay only a limited share of profits as dividends (to
meet their immediate consumption needs) and leave the rest to accumulate and be reinvested
in the firm and its subsidiaries. Later, some shares can be sold in order to realize
the capital gains (which are generally taxed less heavily than dividends).
¹¹
The variation between countries with respect to the proportion of retained earnings
in total private savings can be explained, moreover, largely by differences in legal
and tax systems; these are accounting differences rather than actual economic differences.
Under these conditions, it is better to treat retained earnings as savings realized
on behalf of the firm’s owners and therefore as a component of private saving.

I should also be clear that the notion of savings relevant to the dynamic law
β
=
s
/
g
is savings net of capital depreciation, that is, truly new savings, or the part of
total savings left over after we deduct the amount needed to compensate for wear and
tear on buildings and equipment (to repair a hole in the roof or a pipe or to replace
a worn-out automobile, computer, machine, or what have you). The difference is important,
because annual capital depreciation in the developed economies is on the order of
10–15 percent of national income and absorbs nearly half of total savings, which generally
run around 25–30 percent of national income, leaving net savings of 10–15 percent
of national income (see
Table 5.3
). In particular, the bulk of retained earnings often goes to maintaining buildings
and equipment, and frequently the amount left over to finance net investment is quite
small—at most a few percent of national income—or even negative, if retained earnings
are insufficient to cover the depreciation of capital. By definition, only net savings
can increase the capital stock: savings used to cover depreciation simply ensure that
the existing capital stock will not decrease.
¹²

Finally, I want to make it clear that private saving as defined here, and therefore
private wealth, does not include household purchases of durable goods: furniture,
appliances, automobiles, and so on. In this respect I am following international standards
for national accounting, under which durable household goods are treated as items
of immediate consumption (although the same goods, when purchased by firms, are counted
as investments with a high rate of annual depreciation). This is of limited importance
for my purposes, however, because durable goods have always represented a relatively
small proportion of total wealth, which has not varied much over time: in all rich
countries, available estimates indicate that the total value of durable household
goods is generally between 30 and 50 percent of national income throughout the period
1970–2010, with no apparent trend.

In other words, everyone owns on average between a third and half a year’s income
worth of furniture, refrigerators, cars, and so on, or 10,000–15,000 euros per capita
for a national income on the order of 30,000 euros per capita in the early 2010s.
This is not a negligible amount and accounts for most of the wealth owned by a large
segment of the population. Compared, however, with overall private wealth of five
to six years of national income, or 150,000–200,000 euros per person (excluding durable
goods), about half of which is in the form of real estate and half in net financial
assets (bank deposits, stocks, bonds, and other investments, net of debt) and business
capital, this is only a small supplementary amount. Concretely, if we were to include
durable goods in private wealth, the only effect would be to add 30–50 percent of
national income to the curves shown in
Figure 5.3
without significantly modifying the overall evolution.
¹³

Note in passing that apart from real estate and business capital, the only nonfinancial
assets included in national accounts under international standards (which I have followed
scrupulously in order to ensure consistency in my comparisons of private and national
wealth between countries) are “valuables,” including items such as works of art, jewelry,
and precious metals such as gold and silver, which households acquire as a pure reservoir
of value (or for their aesthetic value) and which in principle do not deteriorate
(or deteriorate very little) over time. These valuables are worth much less than durable
goods by most estimates, however (between 5 and 10 percent of national income, depending
on the country, or between 1,500 and 3,000 per person for a per capita national income
of 30,000 euros), hence their share of total private wealth is relatively small, even
after the recent rise in the price of gold.
¹⁴