Inflation-Induced Distortions in Government and Private Saving Statistics

Jeremy J. Siegel

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This study reformulates the National Income Accounts definitions of the government deficit and surplus and gross private saving. These new definitions are based on employing the change in the real value of government debt, due to price and interest rate changes, as a measure of the real deficit rather than the real value of the nominal debt change, as is now calculated by the Department of Commerce. The two definitions are identical if government debt were fully indexed. The major empirical differences in the revised statistics are a larger deficit during the Depression years and a much smaller deficit during inflationary periods, particularly during World War II and recent years. During the last decade the government has actually run substantial surpluses in real terms despite the cash deficits reported by the Department of Commerce. The redefined gross private saving ratio is reduced in periods of inflation and displays the same variability as the national savings rate instead of the significantly lower variability reported by the traditional statistics. In the post-War data, there is a significant negative correlation between the national saving rate and the reformulated gross private savings ratio.

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