Definition and measurement of saving flows

A.5.1 What we include in saving

In addition to wealth and capital stock data, the main ingredient needed to estimate the capital accumulation equations is of course saving data.

Our saving series directly come from counties’ national accounts, and we follow the SNA guidelines in determining what is to be included in saving and what is not. The guidelines are consistent at the flow and stock levels. So in particular, consumer durables are not treated as investment since they are not assets; contributions to social security pay-as-you go pension schemes are not counted as saving, but contributions to private pension funds are. We always measure saving net-of-depreciation, since wealth is also net-of-depreciation in the balance sheets.

We add net capital transfers to reported saving flows. The main capital transfers are capital taxes (D91 in ESA95 classification) and investment grants (D92). In both cases, including net capital transfers in saving is justified, because these transfers add (or subtract) to the amount of resources that can be used to accumulate wealth. Capital taxes are mostly estate and gift taxes received by the government and paid by households. Failure to subtract them from private saving would lead us to over-estimate the personal saving flow (hence record slightly too low residual capital gains), and under-estimate the government saving flow. Investment grants are mostly paid out by the government and received by corporations. Again, they help corporations accumulate capital, so including them in corporate saving is justified. A third category of capital

74However, progress is being made in this area, as R and D expenditure are starting being treated as investment (rather than consumption). BEA fixed assets statistics now include intellectual property products. However, this is only part of corporations? intangible capital (see our discussion in Section A.2.3).

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transfers, “other capital transfers” (D99), includes cases in which the ownership of an asset is transferred from one sector to the other, and debt cancelled by mutual agreement between the creditor and the debtor. We also include them in our concept of saving for simplicity – an alternative would have been to include them in “other volume changes” (see discussion below), but practically this does not make any noticeable difference.⁷⁵

Since we are interested in estimating the relative importance of capital gains and saving flows, we do not include any identified capital gain in our measure of saving. For some questions, it might make sense to include some form of capital gains in saving flows. Auerbach (1985), for example, argues that capital gains should conceptually be included if an asset has become more productive, because in this case the capital gain reflects a gain in future production, but should not be included if the price change results for instance from a shift in tastes (e.g., change in the rate of time preference or risk aversion that affects the price of land). Practically, however, identifying the source of capital gains is fraught with difficulties, and in this research we do not attempt to make such distinction. Note, however, that in principle we would like to include in saving flows all those capital gains those are caused by the imperfect measurement of saving and investment (e.g., un-measured investment in intangibles). We cannot do this in our baseline decompositions that rely on published saving and investment series, but when we decompose wealth accumulation we provide a number of supplementary results in which we add rough estimates for the amount of unmeasured saving and investment, in order to check the robustness of our findings.

Lastly, we measure saving in nominal terms. That is, if the flow of national saving is 10 and national income 100, the national saving rate of 10%, whatever the inflation rate. For some purposes (e.g., if one is interested in understanding the determinants of personal saving rates), it is better to measure saving in real terms (see Gale and Sabelhaus 1999 pp. 187-188 and the reference therein). The decrease in personal saving from the 1970s to the 1990s, in particular, may partly owe to the drop in inflation. For our wealth decomposition analysis, however, nominal saving is the correct concept, since our key objective is precisely to estimate the role of capital gains and losses in wealth accumulation.

75The SNA makes a subtle distinction between debt debt cancellation by mutual agreement (which is to be recorded as a capital transfer) and debt write-off (which is to be included in other volume changes). Debt cancellations seems to mostly concern international debts (e.g., cancellation of poor countries external debt), but the distinction made in the SNA is quite obscure to us.

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A.5.2 How we account for R&D

As explained in Section A.2.3., in the 2008 SNA R&D is to be included in saving flows. However, only Australia so far applies the 2008 SNA. In our baseline decompositions results, therefore, we use saving flows that exclude R&D. But we also provide a number of supplementary results that include rough estimates of R&D expenditure in saving.

In particular, in Tables A99 and A104, we decompose the increase of national and private wealth-national income ratios under a number of scenarios on the amount of R&D expenditure.

In the U.S., the BEA reports that cumulated 1970-2010 net R&D expenditure have amounted to about 20% of national income. Given the limitations in the measurement of R&D discussed above, we see this as an extreme lower bound. Under this lower bound scenario, the share of the increase in the national wealth-income ratio in rich countries that can be attributed to saving is about 40-50% on average, and the share of capital gains about 50%-60%.⁷⁶ If we now make generous allowance for R&D – cumulated expenditure worth about 50% of 2010 national income on average in rich countries – then the fraction of the increase of the national wealth-income ratio explained by saving is a bit higher than 60% on average, with significant heterogeneity across countries.

We should stress that these computations are merely illustrative. We have not attempted to take into account differences in R&D spending across countries, nor potential trends over the 1970-2010 period. Our point is simply that with reasonable allowance made for R&D, saving explain a large fraction of the 1970-2010 increase of the national wealth-income ratio – at least 40%, and more probably around 60% on average. The average order of magnitude is robust to any plausible assumption (in light of available evidence) one can make on R&D. Conversely, whatever the exact amount of R&D spending in rich countries, we find that capital gains (not caused by R&D) explain on average a non-trivial fraction of the rise in wealth-income ratios over the 1970-2010 (at most 60%, and more likely around 40%). Looking forward, the systematic inclusion of R&D expenditures in saving will make it possible to better isolate the exact role they play in the accumulation of wealth in rich countries.

76This can be seen in Table A99 by changing the R&D assumption to 20% for instance for the additive decomposition.

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A.5.3 Other volume changes

The accounting framework presented in the paper isolates two sources of changes in wealth only:

saving and capital gains. National accounts isolate a third source: “other volume changes”.

Other volume changes capture the effects of war destructions, disaster losses, and the discovery of new assets (e.g., subsoil resources) – and more generally of all changes in wealth that cannot readily be accounted neither by investment nor by identifiable valuation effects.

Other volume changes also include the effects of reclassifications across sectors or instru-ments, as well as the statistical discrepancy that exists between the two available measures of financial saving in the national accounts: that originating from real accounts (i.e., basically income minus consumption minus fixed capital formation) and the one that originates from financial accounts (the increase in financial claims as reported by financial companies).⁷⁷ All of this sounds innocuous enough, but other volume changes can play a substantial role in the wealth accumulation of some countries, especially for some sectors of the economy where mea-surement issues are important, such as the foreign sector.⁷⁸ They can be quite large: in the U.S., for instance, on average total other volume changes have been +0.4% per year over 1946-2010.⁷⁹ So we have paid close attention to them in our analysis.

In the SNA, other volume changes are presented in the accounts that attempt to reconcile the flow side of national accounts (saving) with the stock side (wealth). Those accounts have two parts: “other volume changes” and “revaluation” (i.e., capital gains and losses). Not all countries publish such reconciliation accounts, but for the countries that do, we provide in the country-specific files detailed decompositions of wealth accumulation that isolate saving, capital gains/losses, and other volume changes. By construction, by doing so the capital gains that we compute as a residual are exactly equal to the capital gains/losses series published in the official

“revaluation” accounts. When we summarize our results (e.g., in the main text of the working paper), unless otherwise noted we include other volume changes with saving flows – so that in effect those flows measure all identifiable volume changes, either coming from saving or from

77This statistical discrepancy is the analogue of the “net error and omissions” line in balance of payments, i.e. the difference between the current and capital account balances (foreign saving from the real side) and the financial account balance (foreign saving from the financial side).

78Other volume changes, for instance, are at the heart of the debate on the exact magnitude of the “exorbitant privilege” that the U.S. enjoys by being able to earn higher total returns on its assets than on its liabilities. See Gourinchas and Rey (2007) and Curcuru, Dvorak and Warnock (2008).

79The bulk of those come from the statistical discrepancy between the two measures of saving (+0.3%), the rest (discovery of new assets, etc.) accounts for +0.1% per year on average over 1946-2010.

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other sources.