August 17, 2005


A Nation of Big Spenders (Robert J. Samuelson, August 17, 2005, Washington Post)

The personal savings rate is derived by subtracting Americans' total consumption spending from their total after-tax income (i.e. "disposable income''). By definition, the rest is "saving." In 1984 the personal savings rate -- savings as a share of disposable income -- was 10.8 percent. It's drifted down ever since. It was 4.6 percent in 1995 and 1.8 percent in 2004. It hit zero in June. These low figures are not inconsistent with huge 401(k) and IRA contributions. Suppose you put $4,000 into a 401(k) account. You think you've "saved." But then you borrow $4,000 to go to Vegas or pay college tuition. Now your savings rate is zero. Ditto if you'd sold $4,000 of stock. Borrowings and stock sales offset much retirement saving.

The trouble with the official savings rate is that it excludes some items that people intuitively count as savings, notes Susan Sterne of Economic Analysis Associates. A big omission is the capital gains -- aka profits -- on housing or stocks, both realized (if you sell) or on paper (if you don't). If your home or stocks increase $10,000, you may feel comfortable borrowing $4,000 to spend. You've still got an extra $6,000 in savings. But the savings statistics ignore these value changes; all they show is that you've saved less by spending another $4,000.

Over two decades, these value changes have soared. Lower interest rates -- mainly reflecting lower inflation -- have driven up stocks and home prices. Stocks became more appealing next to interest-bearing deposits; lower mortgage rates made higher home prices more affordable. From 1985 to March of this year, Americans' mutual funds and stocks rose from $1.3 trillion to $10 trillion; over the same period, real estate values jumped from $4.6 trillion to $17.7 trillion. Once you consider these value changes, most Americans don't look so irresponsible. Sure, they've borrowed heavily. But their net worth -- what they own minus what they owe -- continues to grow. Compared with income, it's higher than in most years since 1950.

Mr. Samuelson sometimes seems like the only responsible economics writer in the MSM. The idea that a nation with a household net worth of more than four times GDP is undersaving is either lunatic or intentional disinformation.

Posted by Orrin Judd at August 17, 2005 7:00 AM

From the link: "Like most government accounting, the monthly statistics on consumer spending and savings bear little resemblance on the way the average household manages its finances....government statistics that fuel this conventional wisdom are seriously flawed." The stat collecting originated in a time when few people had net asset wealth, and savings from current consumption were the only way for people generally to build-up wealth. It's a post-mercantile, post-New Deal world now. Reactionaries in the bureaucracy, economics departments, newsrooms, and minority party caucuses are on a nostalga trip and don't get it.

Posted by: Luciferous at August 17, 2005 11:15 AM

I continue to believe that our treasure is our people.

Posted by: erp at August 17, 2005 3:44 PM

Intentional disinformation. Plus, "the sky is falling" sells papers; "the sky is still where it was yesterday" doesn't.

Posted by: Tom at August 17, 2005 5:38 PM