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March 13, 1981
Capital Formation and Competitiveness
Many analysts have cited the slowdown in
U.5. productivity growth -and the related
slowdown in capital formation -as a major
source of the decline in the nation's competitive position in the world marketplace. Accordingtothis view, the nation could haltthe
deterioration in its international competitive
position by promoting greater personal savings and hence a higher level of capital formation, so that the ensuing rise in labor
productivity would stimulate U.S. exports
while reducing its imports. In the process, the
productivity gain would alleviate unemployment by preventing the loss of American jobs
to foreign workers. In espousing these policies, observers have argued that the U.5.
shou Id emu Iate the performance of Germany
and Japan-two countries which (supposedly) have maintained high rates of capital
formation, and thus have promoted job creation through enhanced export performance.
But the Japanese and German advantage is
not so clear-cut as sometimes believed. In
particular, the purported relationship between capital formation and competitiveness
has been less robust than claimed. A review
of U.5. economic performance relative to
Japan and Germany may, therefore, help
correct certain misconceptions on this score,
and thereby help improve policy formation in
the 1980s.
Savings comparisons
Many critics have cited a reduced willingness to save as an important factor behind
the deterioration in the U.S. competitive
position. Indeed, the U.S. personal-savings
rate-the ratio of savings to disposable income-averaged less than 7 percent in the
1970s. In contrast, the German and Japanese
savings rates averaged 14 percent and 20
percent, respectively-and in fact increased
over the decade, whereas the U.S. rate fell
below its historic norm in the last halfSurprisingly, the increases in German and Japanese personal savings rates
went hand-in-hand with increases in the labor share of national income. This is surprising because, supposedly, property-income
recipients normally save proportionately
more than do wage earners.
Critics sometimes attribute this difference in
savings behavior to alleged weaknesses in the
American character, but there are more obvious economic reasons to account for the
difference. One such factor is the tax advantage bestowed on Americans who own,
rather than rent, their homes. But in addition,
Americans are much more likely to invest in
home purchases than their German or Japanese counterparts, simply on grounds of affordability-U.5.
homes are priced much
lower when measured in relation to lifetime
earnings.
Moreover, the U.S. savings rate has actually
been quite respectable after adjustment for
the capital gains accruing from home-price
appreciation. On that basis, the U.S. savings
rate remained stable, at more than 13 percent, between 1975 and 1978, whereas the
official measure showed a decline over that
period, from 8.6 percent to 5.2 percent. Yet
while Americans may perceive the appreciation of their homes as part of their personal
savings, these "savings" are nonetheless not
available for productive investments.
Capital formation and productivity
It should be emphasized that household savings represent only a portion of total private
savings available for investment. A more suitable measure is gross private savings, which
includes not-only personal savings but also
retained earnings of corporations plus depreciation of both business and household assets
(the latter reflecting mainly depreciation of
owner-occupied homes). Between the two
decades, gross private savings as a proportion
of gross domestic product (GOP) remained
fairly stable for all three countries-but at
much higher levels for Germany and Japan
than for the U.S.
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Opinions expressed in this newsletter do not
necessarilv reflect the views of the managenient
the Federal
Bank of 5;:111Francisco!
nor of the Board of Governors of the federal
Reserve System.
°
down in the 1970s. Butthere is an alternative
argument -fiscal authorities in all three
countries simply acted in response to depressed business conditions and slack investment activity during the 1970s. From this
perspective, the widening of the publicsector borrowing requirement was a consequence, and not a cause, of reduced investment activity.
On the basis of these higher reported savings
rates, we wou Id expect that Germany and
Japan would outperform the U.S. in terms of
capital formation and labor productivity. And
indeed, in the past decade, the ratio of gross
private fixed capital formation to total output
averaged 23 percent in Germany and 25 percent in Japan-well above the U.s. ratio of 15
percent. Reflecting this higher level of capital
formation, labor productivity increased at
average annual rates of 3.4 percent and 4.5
percent in Germany and Japan, respectively-compared with the U.S. average annual
rise of 1.1 percent. (In the manufacturing
sector, labor productivity registered average
annual increases of 5.2 percent in Germany,
7.4 percent in Japan, and 2.4 percent in the
U.S.) Nonetheless, the trend growth rate in
the capital/labor ratio fell in all three countries, leadingto declines in labor productivity
growth. In relative importance, the declines
in Germany and Japan stemmed from a business-investment slowdown, whereas the
u.s. decline reflected rapid labor-force
growth. Between the two decades, the annual
average increase in output per worker-hour
dropped by 1.0 percentage points in Germany, 5.0 percentage points in Japan, and 0.9
percentage points in the U.S.
Productivity and competitiveness
Whatever the source ofthe declines in private
business investment and labor productivity,
there is a clear association between the two.
The question that now needs to be addressed
is whether or notthe lower labor-productivity
growth in the U.S., relative to Germany and
Japan, has led to reduced international competitiveness. We should note, however, that
higher labor-productivity growth and its beneficial effects on competitiveness may be
more than offset by higher nominal wage
settlements.
In fact, hourly compensation in manufacturing from 1 970 to 1 979 increased at annual
rates of 14.5 percent in Japan and 10.9 percent in Germany, significantly higherthan the
8.3 percent recorded in the u.s. over the
same period. As a result, labor costs per unit
of manufacturing output rose faster in Japan
than in either Germany or the U.s., despite
the higher productivity growth of Japanese
workers (see chart). Any relationship between labor productivity growth and cost
competitiveness is almost totally overwhelmed by the more moderate wage demands of American workers compared with
their German and Japanese counterparts.
The business-investment slowdown in both
Germany and Japan reflected a myriad of
factors, including an accelerator response of
investment to changes in output levels. The
diminished growth in economic activity,
stemming in part from OPEC price hikes,
helped account for the fall-off in investment
expenditures in both Germany and Japan
during the 1970s. Many would argue, in
addition, that enlarged fiscal deficits in all
three countries contributed to reduced investment outlays. The ratio of the publicsector borrowing requirement (PSBR)to GN P
reached 2.8 percent in Germany, 2.7 percent
in the U.S., and more than 9 percent in Japan
in the 1 970-79 period-considerably
above
the average of the 1960s in each case. Because of this "crowding out" of private investment, all three countries experienced, in
varying degrees, a capital spending slow-
Of course, these cost comparisons implicitly
assume that changes in the prices of raw
materials are the same across cou ntries. U nti I
recently, the unwillingness ofthe U.S. to
allow the domestic price of oil to rise to the
world-market price would have provided
domestic firms a competitive edge. But more
importantly, these costs are measured in
domestic currency units. The depreciation of
the dollar against the Japanese and German
2
imports rose faster than exports by a difference of 33 percent.
currencies duringthe 1970s should have
greatly enhanced the cost competitiveness of
American firms in world markets. Between
1 970 and 1980, the German mark nearly
doubled in value vis-a-vis the dollar, whereas
the Japaneseyen rose by two-thirds against
the American currency, leading to a tripling
of German qnd Japanese unit labor costs,
measured in U.S. dollars. This compares with
a 66-percent rise in U.S. unit labor costs over
the same period (see chart).
Competitive factors
Why, then, is it sometimes maintained that
American industries have difficulty meeting
the test of foreign competition? Our exportvolume figures indicate that U.S. manufacturing in the aggregate has met the test, despite
some well-publicized exceptions to the rule.
The popular impression of deteriorating U.S.
competitiveness is not supported by the facts.
That impression is based either on out-dated
information pertainingto a period of an overvalued u.s.dollar, or on partial information
pertaining to certain industries and not to
others.
Consistent with these movements in costs,
the price competitiveness of U.S. manufacturers improved during the 1970s, as measured by the ratio of U.S. to foreign wholesale
prices, adjusted for trade-weighted changes
in exchange rates. According to this measure,
the prices of u.s.manufactured goods in the
1970s fell by 13 percent against foreigngoods prices denominated in U.S. dollars.
Partly as a result, the volume of U.S. manufactu red exports rose by 86 percent from
1970 to 1 979, while import volume increased by 70 percent. Overthe same period,
Japanese import growth roughly matched
export growth, while the volume of German
These conclusions should not be interpreted
as arguments against a policy of promoting
incentives for personal savings and capital
spending. Indeed, higher productivity growth
resulting from greater capital accumulation
should certainly lead to increased real wages
and, hence, improved living standards for
U.S workers.
Kenneth Bernauer
UNIT LABOR COSTS IN MANUFACTURING
1970=100
200
1970=100
300
National currency
180
260
160
220
140
180
120
140
...
o ,.
.' . . .-- ..._ .....I!II. . . . . . _.
1970
'72
'74
'76
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_ ..
1 00
F----
0'
,
-II
'78
U.S. dollars
1979
3
..
1970
,
'72
•
,
'74
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,
'76
,
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'78
II
1979
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C\J)
BANKING DATA-TWELFTH FEDERALRESERVE
DISTRICT
(Dollaramountsin millions)
SelectedAssetsandliabilities
largeCommercialBanks
Loans(gross,
adjusted)
andinvestments*
Loans(gross,adjusted)- total#
Commercialandindustrial
Realestate
Loansto individuals
Securities
loans
U.s.Treasury
securities*
Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- total
Timedeposits- total#
Individuals,part.& corp.
(Largenegotiable
CD's)
WeeklyAverages
of QailyFigures
MemberBankReserve
Position
Excess
Reserves
(+)/Deficiency(- )
Borrowings
Netfreereserves
(+ )/Netborrowed
(-)
Amount
Outstanding
Change
from
2/25/81
146,445
124,075
36,624
51,144
23,568
1,237
6,689
15,681
39,162
27,673
29,227
77,338
67,890
29,836
2/18/81
317
298
87
78
4
255
10
9
-3,614
796
274
440
474
250
Changefrom
yearago
Dollar
Percent
8,100
8,093
2,322
6,429
889
187
238
245
3,010
- 2,825
1,373
17,563
16,823
8,379
Weekended
Weekended
2/25/81
2/18/81
n.a,
n.a.
87
119
n.a.
n.a.
5.9
7.0
6.8
14.4
- 3.6
17.8
3.4
1.6
- 7.1
9.3
4.9
29.4
32.9
39.1
Comparable
year-ago
period
9
126
135
* Excludes
tradingaccountsecurities.
# Includesitemsnotshownseparately.
Editorialcommentsmaybeaddressed
to theeditor(WilliamBurke)or to theauthor.... Freecopiesof this
andotherFederalReserve
publications
canbeobtainedbycallingor writingthePublicInfonnationSection,
FederalReserve
Bankof SanFrancisco,
P.O.Box7702.SanFrancisco
94120.Phone(415)544-2184.
@FedFRASER