It's Not Structural Unemployment, It's The Corporate Saving Glut

Mark Thoma rightly points out the hypocrisy of the deficit hawks’ intent to cut spending while approving military spending in the same sentence. Ryan Avent furthers the dicussion by stating that Washington has used the ‘dire fiscal’ rhetoric to sell short-term cuts that were unwarranted, given that the fiscal problems are structural in nature.

Me, I’d argue that the fiscal deficit is simply the consequence of corporate America’s excess saving: the corporate saving glut – no I didn’t mean the ‘global saving glut’. Furthermore, the corporate saving glut is manifesting itself into the labour market, creating high and persistent unemployment. Some economists are wrongly referring to this as higher structural unemployment.

Exhibit 1: The 3-sector financial balance model demonstrates elevated excess private saving (firms and households) keeps the government deficit in the red. For a discussion of the 3-sector financial balances, see Scott Fullwiler and Rob Parenteau; and I’ve written on this as well.

The excess saving rate for the public sector, external sector, and household sector is constructed using the Federal Reserve’s Flow of Funds accounts as: (Gross Saving – Gross Investment)/GDP. The excess corporate saving rate is the residual of the Current Account (external saving) net of government and household excess saving. If the corporate excess saving rate is positive, then investment spending falls short of asset purchases (financial or tangible).


 * In Q4 2010, the household excess saving rate dropped to +3.5% of GDP
* In Q4 2010, the government excess saving rate dropped to -10.4% of GDP
* In Q4 2010, the current account deficit dropped to -3% of GDP
* In Q4 2010, the corporate excess saving rate jumped to 3.9% of GDP – this is the Corporate Saving Glut because while firms are investing, they’re saving more., thereby breaking the positive feedback loop.


The positive feedback loop remains broken: higher demand increases sales rates, revenues and production which grows firm profits that are NOT translated into wage and income gains, only to drive demand further upward. It’s broken right between ‘grows firm profits’ and ‘translated into wage and income gains’.

The funny thing is, too, that economists sell this broken feedback loop as rising structural unemployment. Actually, unemployment is not structurally higher, it’s that when firms do not reinvest corporate profits, the lack of income flow manifests itself into the unemployment rate.

Exhibits 2 and 3. It’s not structural unemployment, it’s the corporate saving glut!

The chart below illustrates a simple univariate regression of the corporate saving glut and the unemployment rate. The correlation is very strong, 71%, and suggests that the structural unemployment rate is less than 5.8%.

If the corporate excess saving glut just equaled zero, i.e., firms invested and saved at the same rate, the unemployment rate would be 5.8%. Now, if the corporate saving glut fell below zero to -2%, i.e., firms reinvested in the economy by way of capital investment in excess of saving, the simple model implies an unemployment rate of 4.7%.


The government doesn’t need to add jobs, per se, the government needs to figure out how to get corporate America to drop the saving glut and re-invest in the economy.

Rebecca Wilder

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