Economic Report President

Government plus saving by households, businesses (in the form ofundistributed after-tax profits), and State and local governments.Since 1992, net private and State and local government saving hasdeclined slightly as a share of GDP, but the surge in Federal receiptsrelative to expenditures has more than offset that dip (Chart 2-9). Overthis period, net national saving has more than doubled as a share ofGDP, rising from 3 percent to 6½ percent—its highest level since 1984.(Net saving equals gross saving less the consumption of fixed capital.)Chart 2-9 Net National Saving and Its ComponentsNet national saving has increased substantially since 1992, owing entirely to anincrease in saving by the Federal Government.Percent of GDP1510Private and State and localgovernment saving5National saving0-5Federal Government saving-1080:Q1 82:Q1 84:Q1 86:Q1 88:Q1 90:Q1 92:Q1 94:Q1 96:Q1 98:Q1Source: Department of Commerce (Bureau of Economic Analysis).An alternative approach to evaluating the availability of externalfunding is to focus on the price or cost of those funds—the interestrate—rather than the quantity. Both price and quantity depend onbusiness investment decisions. A high level of desired investment createsstrong demand for loanable funds, pushing up their cost and perhapsincreasing the quantity of funds supplied by savers. Therefore, ifsaving and desired investment for any given interest rate bothincrease, the equilibrium interest rate can either rise or fall. Thisambiguity makes movements in the cost of borrowed funds an unreliableindicator of shifts in the supply of funds. As already noted, however,the increase in the supply of loanable funds during the past severalyears came entirely from a reduction in government dissaving,which is largely independent of investment demand. (It is not entirelyindependent because part of the improvement in government finances72