American savings last year averaged just 0.8 per cent of disposable income, their lowest level since the Depression. Not only does this look bad, many seasoned observers and policy makers attribute America’s large current account deficit to its insufficient savings.

Basic economics holds that the gap between savings and investment equals a country’s current account position.

The situation is more complicated than it appears, however, and really depends on what is counted.

There are both measurement and conceptual problems with the conventional view. Let’s consider the measurement problems first.

The US has the most developed defined contribution pension system in the world. Employer contributions are counted as income. The payouts to retirees are considered consumption. Yet the payouts are inflated by capital appreciation, which is not registered.

A study by several Dartmouth economists found that this way of treating payouts accounts for over more than 40 per cent of the total decline in personal savings in the 1986-2000 period.

The omission of capital gains from the measure of savings is even more significant. Wealth created by rising home and equity values is not included in the official measure of savings.

Between 1994 and 2004, the S&P 500 rose almost 160 per cent and the Nasdaq rose a little more than 180 per cent as US equity markets outperformed most other bourses.

Equity and home ownership is also more widespread in the US than in most other countries. US household net worth rose by nearly two-thirds over the past decade, while Japan, which enjoys a significantly higher savings rate, has experienced a decline.

Instead of regarding savings as simply the residual of income minus consumption, it might be more accurate to consider the ratio of household net worth to disposable income.

Roger Ferguson, vice-chairman the Vice Chairman of the Federal Reserve, recently acknowledged that this alternative measure of savings has shown a slight upward trend since the early 1950s.

In addition to household savings, the national savings calculation includes corporate savings and the government’s fiscal position. US corporate savings now stand near the highest rate in decades. However, the conventional measure probably understates the amount. The official definition of savings does not include research and development expenditures. Even though R&D is one of the keys to innovation and wealth creation, the government regards it as consumption. Surely it is an investment, which, like other investments, ought to be counted among the nation’s savings.

Another critical aspect of innovation and wealth creation is education. Yet the Bureau of Economic Analysis considers expenditures on education as consumption. In reality, it is an investment in human capital and ought to be included when calculating savings. Overall the US spends about 7.3 per cent of gross domestic product on education. In comparison, Japan spends 4.6 per cent of GDP on education.

Some might argue that only higher education expenditures should be counted as savings. In 2001, the US spent about 2.7 per cent of GDP on higher education. Japan, Germany and France spent closer to 1 per cent of GDP.

The hidden savings of education and R&D expenditures is worth almost 10 per cent of US GDP. France is in second place, spending about 7.8 per cent of its GDP on education and R&D. Canada is next at about 7.5 per cent.

What is considered savings has changed over time. It was not until 1999 that software expenditures by business and government began to be included in the US definition of savings.

The current definition of savings does not do justice to the reality of the modern economy and ought to be re-thought. The US is among the most modern economies in the world, and the antiquated definition of savings penalises it the most.

Even more important than these methodological points is a conceptual issue. Savings were critical in a phase of economic development where infrastructure was being created. However, American historians, like such as Martin Sklar and James Livingston persuasively argue that advanced capitalism is no longer in an accumulation phase, where savings is the driving force. Rather, the modern political economy is in what they call a disaccumulation phase, where consumption is the critical element to economic growth and development.

Livingston’s book Pragmatism and the Political Economy of Cultural Revolution 1850-1940, for example, tries to make sense of the cultural implications of the shift from the accumulation phase of capitalism to the disaccumulation phase.

In earlier times, the pool of savings provided the means for investment. This is increasingly less true. The vast amount of corporate investment is financed through retained earnings – not deferred consumption.

While the labour-saving aspect of business investment is often recognised, the fact that it is also often capital-saving is frequently overlooked. A computer-aided design system, for example, may be able to do more in less time than an earlier system and often costs less as well. The ratio of output to fixed capital has historically risen. This means that it requires ever less additional fixed investment to get an additional unit of output capacity.

The US can and should reduce its fiscal deficit. Federal Reserve Chairman Greenspan has argued that is the most effective way to boost national savings. However, the way savings is measured needs to be re-thought, and the relation between savings, investment and economic growth, and well-being is not as simple as most observers seem to pretend.