Saver Myopia

Andrew Samwick sees a sunny day with dark clouds on the horizon:

Vox Baby: The End of Personal Saving?: Today's GDP report gives some very good news in the top line number--a real growth rate of 4.8 percent in the first quarter of 2006. As this is the advance report, we'll expect revisions to the number at the end of May with the preliminary report and at the end of June with the final report. But an annual growth rate of 4.8 percent is a very nice place to start.

The GDP report also contains information on personal income and saving, and this continues to be more and more puzzling:

Personal saving -- disposable personal income less personal outlays -- was a negative $50.5 billion in the first quarter, compared with a negative $15.8 billion in the fourth. The personal saving rate -- saving as a percentage of disposable personal income -- decreased from a negative 0.2 percent in the fourth quarter to a negative 0.5 percent in the first. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.

In a free society with a market economy, we have choices about whether to save or consume our resources today, and I don't presume to tell people which choice to make. But it's a very simple truth that we cannot consume the same resources both today and tomorrow, and so it is with an eye toward the ability to consume in the future that economists generally believe that the savings rate should be high rather than low.

I wonder how it can be that with the Baby Boom generation in the high-income and presumably high-saving part of its economic life cycle, we can possibly have negative saving rates for the population as a whole, if we are making decisions with any attention to the amount of consumption we will be able to do in the future.

If households are myopic and are saving too little, the government should offset this and save for them--i.e., we should raise taxes to fund big budget surpluses.

Comments

[howard]

but you see, prof, you just don't understand: the modern view is that savings is just old hat. What matters is asset values, and as long as your house or stocks (or Old Masters!) are going up in value, savings is for suckers.

or something.

yes, i'm worried too: i think the negative savings rate increasing is a sign that my long-feared debt-laden consumer running into trouble is translating more and more into reality. Eventually, you tap out your ability to liquify your real estate, margin your stocks, and borrow on your credit card, and then what happens....

[Rebecca Allen, PhD, ARNP]

See Harold Meyerson's recent American Prospect column, in which he points out that many Americans simply can't afford to save: they're being squeezed by flat to falling incomes from one side, and by rising prices (gas, housing, health care and education, primarily) on the other.

[Derelict]

"If households are myopic and are saving too little, the government should offset this and save for them--i.e., we should raise taxes to fund big budget surpluses."

Ha! Hahahahaha! Oh, that's funny! Talk about your alternate reality!

Obviously, the Republicans will not do this--at least not in any meaningful way. Their idea of "encouraging savngs" is to eliminate the estate tax, thus allowing the heirs of the extremely wealthy to save money. For the rest of the citizenry, Republican bedrock philosophy is to discourage savings as much as possible. Keeping workers up to their necks in debt leads to a new kind of indentured servitude: You will not leave your job or give your employer any guff because financial catastrophe awaits if you do. Your employer demands 80 hours a week with no overtime? Too fricking bad! Suck it up sport! Oh, and keep on shopping!

The Democrats will never take such steps. Having been pounded for the last 30 years as the "tax and spend" party, they will eat their own offspring before they take even the meekest steps toward raising taxes. It is also political death to try to bring such reason to the table. Try to raise taxes on the wealthy (even back to 2000 levels) and you'll have Scaife, the Wylies, the Hunts, and every other right-wing billionaire writing checks to Republican campaigns so fast they'll start fires in their checkbooks. Try to raise middleclass taxes and you'll have open revolt.

Bush's evil plan has worked perfectly!

[wcw]

I'm not worried, but then, I tend to find economic dislocation (including my own) entertaining.

However, there's an awfully good reason not to run a surplus. If the last decade's worth of tax policy isn't enough for you, perhaps you remember a little thing called Prop 13, when California voters were convinced, in part by the existence of "the obscene surplus," (C+P Unruh) to give business property a vast and essentially permanent tax break in return for feeling good about briefly cutting their grandparent's property tax bill.

While I am a fan of countercyclical spending, in which government budgets would go less into deficit during good times, I am also of the view that in order to maintain sane fical policy it is, given the evidence, necessary to run a large-but-stable structural deficit. Otherwise, someone will rouse the people into giving it away -- usually, as in the case both of Prop 13 and of the Bush tax laws, to the highest bidder.

An even-worse tax code is not my idea of a good time.

[wood turtle]

Calling free spenders myopic is an insult to nearsighted people everywhere.

[Tim]

Go for it. I'd just suggest, that if you're after a pile of money, you hit the guys who have most of it.

"The top 10%, meanwhile, accounts for almost 70% of the wealth."

http://www.usatoday.com/news/opinion/editorials/2006-04-26-gas-changes_x.htm

[a different chris]

> Keeping workers up to their necks in debt leads to a new kind of indentured servitude

All together now!

You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don't you call me cause I can't go
I owe my soul to the company store

This was a COUNTRY song, sadly enough. Yet somehow the Dems can't get rural voters anymore. How things change - and yeah there was the whole Southern Strategy thing, but I don't think anybody votes race over paycheck. They vote race over being completely ignored.

[Ken Houghton]

Flat to negative earnings, a listless stock market, limited other savings options (savings account yield's that would take 36 years to double are not a good investment), and increasing corporate control which has led to all of the earnings going to management, who have not--with all due respects to the Economist's lauding of Lee Raymond, which is to say none, since the piece was detail-less--created anything near the value they've taken.

a different chris and I have been singing the same song for the past several days, I see.

[kharris]

To the extent that wealth is mobile, the notion that we have not had tax cuts, but rather tax deferments, is not a problem. When the government dissaves on behalf of wealth holders, wealth holders can then move their taxable assets outside the realm of the debt-burdened state. Tax dodgers fleeing to Canada is the wave of the future. Or maybe Argentina, if what ya see in the press is true. Big adverse selection problem, because those who are not constrained to earn a living can be far more mobile than us wage lackies.

[anne]

No; this has actually been a terrific time to save and invest, which makes for more of a puzzle. There is a profound international bull market in stocks and real estate, that may not have been properly attended to in this country. International stocks have been well valued and have given excellent returns from both developed and emerging markets, virtually every market. American larger companies, especially growth companies, have lagged international markets seemingly because valuations have been less attractive. But, what a time to have saved and invested.

[Neil S]

Ken Hougton said:
"Flat to negative earnings, a listless stock market, limited other savings options "

I'm not sure what stock market you've been investing (or more likely not investing) in.

Here are some Vanguard index funds you apparently missed:

Developed Markets Index Fund - avg. annual return of 31.02% over the last three years.

Institutional Index Fund - avg. annual return of 17.21% over the last three years.

Extended Market Index Fund - avg. annual return of 28.71% over the last three years.

Were you looking for better returns than that?

On a serious note, I would appreciate some clarification. if personal savings is defined as -- disposable personal income less personal outlays, how do incestments play into this picture.

If my investments increased by $50,000, does that have any effect on personal savings under this measure? (I think not)

If I sell $20,000 of the investments and spend the money, does that reduce personal savings by $20,000? (I think so)

This seems to me to produce a distorted perspective - in that successful investments can only ever be counted as a decrease in personal savings when thos investments are sold to finance the purchase of desired goods. What am I missing?

[Peter]

Well, it will be "interesting" in every sense of the word when the first big wave of interest-only-mortgages start switching to interest-plus-principle in mid/late 2007. It is a little early to tell what will happen, but it appears foreclosures are up significantly from last year.

[anne]

There is no chance a Republican Congress and Administration will allow a visible tax increase, but we should be quite bothered about the middle class tax increase that will take place this year unless the Alternative Minimum Tax is set aside. Democrats should be pushing to set aside the AMT.

As for saving, Republicans who pretend to care never ever mention that we could save $10 billion a month by leaving this needless occupation of Iraq immediately. Yes; the President chose guns and butter and borrowing has given us both for now. Wish for butter or a saving for future butter, then leave Iraq immediately.

[Tom C]

It makes no more sense to save for retirement than it does for to save for old age healthcare or college...it would be very difficut to save enough from a normal income to pay for it, and if you did, you not only pay for yourself, you wind up subsidizing the people who didn't bother (see "Financial Aid" for more details); yes, even those who spent like drunk sailors on huge houses so that they could complain about how squeezed they are (what, me jealous?)

Why then, would any rational person save? And isn't this an easier explanation than either penury or conspiracy to conscript the masses? (NOTE: I have no debt whatsover, because it is indentured servitude. It's just not a plan, any more than a flock of geese flying in a "V" is a plan.)

[anne]

Remember, even though the bond market is finally weakened, the period from January 2000 to December 2005 was among the strongest of bull markets in long term bonds. Saving and investment opportunities have been ample, including, of course, in housing.

[anne]

Please, of course saving and investing, as far as you can, make sense. Good grief.

[Live Wire]

"If households are myopic and are saving too little, the government should offset this and save for them--i.e., we should raise taxes to fund big budget surpluses."

Excuse me Brad, but wasn't this exactly what the Greenspan Social Security Commission did for us back in the 1980's?

I've dutifully been paying my offsetting wage tax to the government so that they could have a large social security surplus. But when I go to withdraw my "savings" I'm told that we're bankrupt... better luck next life.

I would like to say something both angry and pithy at the same time, but words escape me at the moment.

[Tom C]

Anne, truly, it doesn't make sense. What you want to do is buy assets that are not liquid in order to hide them from the "financial need" calculations. This shows up as spending, but is really like putting the money under your mattress.

[anne]

Tom

Ah, I understand. Repeatedly, friends have been talking about both significantly increasing the number of public universities and lowering tuitions. I am completely in favor of presenting new opportunites in public universities.

[howard]

Neil S., since no one else has addressed your question, i'll take a small whack.

The first part is the easier part, and it's what i alluded to at 10:22 a.m. This measure of "savings" doesn't reflect a growth in net worth from existing assets appreciating, whether it be real estate or stocks or Old Masters.

So there is a reasonable question on how to judge the negative savings rate (my opinion is that when long-kept stats start showing something they don't normally show, the first assumption should be we're looking at a potential problem and not to say the stat is out of date) because even while net negative savings is going on, net worth is increasing in aggregate.

The second issue i'm less certain of, but i believe that if you sell your asset, the cash is in "personal income" and the expenditure is debited against that, and therefore, there is no impact at all on national savings if you sell $20K and then spend it (and, of course, pay the capital gains tax): the income and the expenditure offset.

on the other hand, sell $20K, spend $15K, and national savings will increase by $5K; sell $20K, spend $23Kk by accident, and national savings decreases by $3K.

[anne]

Ah, nicely done, but there is a trick. A household with investments that have appreciated but not been sold still has "saved" as much as the assets are worth in full. But, the value of the appreciated assets is only added to national savings when the appreciation is realized. There is no distortion here for the country, because we would wish to have saving from all our fresh realised income to continually prepare for the future as a country. We really do need to save more :)

[matt]

It just occurred to me we may be misinterpreting the savings data -- a light went off with the economist's view that we can either consume today or tomorrow. Perhaps people somehow either intuit or have been listening to the predictions of a weaker dollar/higher inflation. If so, what could be more rational than to spend expensive dollars today, and pay them back with monopoly money tomorrow?

[Neil S]

Howard and Anne: thanks for the response. In looking at the BEA web site

http://www.bea.gov/bea/newsrelarchive/2006/pi0206.xls

Table 1 breaks down how Personal Income is calculated. I don't see a line on there which covers the realization of appreciated assets. If appreciation is never counted as personal income, then I think this measure does distort the overall savings picture. In particular, the negative net savings could be achieved if average individuals were saving at an unchanged rate while some wealthy individuals were selling appreciated investments and buying durable goods.

Please note...this is just a possible hypothesis. I'm just seeking clarification.

I agree that the interpretation Howard and Anne lay out is logical, but I think it may be incorrect.

Any economists able to help?

Regards,
Neil

[anne]

When a home appreciates in value and we borrow against the appreciation and spend what we have borrowed there is no addition to national saving recorded :) Also, we have spent from what would have been personal saving.

[Neil S]

anne,
But the appreciation on the home is never counted as personal savings at all. Here is the scenario I'm interested in:

I invest $1,000 in cattle futures in 2005.
Through my brilliance, I make $100,000 in 2006.
If I invest $20,000 of hte proceeds in a long term bond fund, pay $30,000 in taxes and spend $50,000, how does this affect the GDP report?

Is this:
a) net savings of $19,000?
b) net savings of -$50,000?
c) something else?

Again, just seeking clarification and very strongly agree with your point that almost everyone should save more.

Additionally, does anyone know a publicly available source for figures regarding household net worth and changes over the last 20 years or so?

Regards,
Neil

[piotr]

I am trying this idea again:

people save little because many borrow instead of saving. And borrow in a risky manner: from credit cards, or "equity only" house loans etc. Clearly, there is a lot of supply of credit for risky loans.

People would save more (or dissave less) if the access to credit was diminished.

Bancruptcy law, as reformed, decreases the risks of the lenders.

Solution: increase the risk of the lender, enact very consumer friendly bancruptcy law. Is it a political looser?

[howard]

Neil, all i can say is that i'm quite certain, but not positive, that "personal saving," as we are talking about it here, is based on "disposable personal income," which includes only assets where you've realized the gain.

So in your case, your "disposable personal income" went up $70K (after taxes), and you spent $50K of it, so "personal savings" increased $20K.

The point here is that some people say we shouldn't be looking at the savings rate at all but rather at net worth, which incorporates both savings and assets, marked to market. From that perspective, if net worth continues to rise, it's irrelevant that consumption is using up income, because the "savings" is going on through asset value increases. (Indeed, a critical component of household finance in the middle and upper-middle classes has been the extraction of home equity through lines of credit to sustain consumption as a means of utilizing the asset value increase as the functional equivalent of savings.)

piotr, surprisingly few people gave a hoot when the bankruptcy law was being made more consumer-unfriendly, but i bet a lot would support making it friendlier in the future. And from a market standpoint, yes, let's let the credit card companies do their job correctly: assess credit-worthiness, not give everyone a card and then extort onerous interest and penalties....

[piotr]

I return with this idea periodically. Wife of my friend works for a major credit card company (it used to be Dicover, but after all the takeover I have no idea) doing exactly that. The big guys have excellant idea about creditworthiness, at least in statistical sense. Then big shots make decision what is the optimum percentage of customers driven to bancruptcy --- people just short of banctuptcy are ideal customers, pretty much like serfs in the old times (not so easy to escape to a more humane lord, or, in this case, less usurious credit card company).

In any case, how often one can be an economically correct populist demagogue? Of course, big credit card companies rival Big Oil and Medico-Industrial Complex in their profits and political influence.

[ferd]

If a 30-year-old saves a dollar today, how can she be assured that the financial intermediaries who invest her dollar will focus on her actual retirement needs as they put the dollar to work? A huge pile of cash for retirement will heft nice, but she'll go through it fast if what she actually needs winds up being scarce and, thus, pricey.

[Tim Worstall]

"If households are myopic and are saving too little, the government should offset this and save for them--i.e., we should raise taxes to fund big budget surpluses."

Well, we could also leave taxes where they are, cut spending and run large budget surpluses as well.

No, I agree, this crew won’t do that, but it’s a theoretical alternative at least.

[anne]

Actually the only way in which we could significantly pare the budget deficit without raising taxes, even if we decimate social benefit programs, would be to lower military and military related spending beginning with saving $10 billion a month by leaving Iraq.

[wkwillis]

Worstall, Anne
Remember, the budget deficit is not just the public deficit, or the public deficit plus all the "trust funds", but the taxes collected on the increased economic activity caused by the deficit spending.
If we fired the people benefitting (on payroll and off payroll) from the 700 billion dollars worth of budget pork that is deficit financed, we would diminish tax receipts by a huge amount. So we really have to cut 900 billion dollars out of the budget.
We are going to need to have more taxes even if we do fire the army and the beltway bandits.

[anne]

Agreed :) though a wonderful wish would be to think what might be done with the resources were we simply to leave Iraq. The trade of butter for guns, even with all our borrowing to finance war and occupation in Iraq, is a trade in imagining what might be done for ourselves and others. We might give grants to states for expanding public university education and lowering tuition, while the cost of a couple of days in Iraq would fund malaria prevention in Africa for a couple of years.

[No von Mises]

Bill Kristol said today that Dems will probably win the House in '06. He smiled that such a win would give Pelosi, and other GOP pinata's, a higher profile which the GOP seems to be salivating over. He continued that if the Dem's have the House for 2 years, the GOP would win the White House again in '08.

Nonetheless, it seems as though even the best possible '06 Dem result won't be enough to raise taxes.

[dilbert dogbert]

I think people today think buying = saving. I don't know why except that is a constant theme in advertising. My wife bids on things on ebay and if she is the person who bids too high she Won!!!
Completely bonkers.

[ilsm]

As I remember from long dusty accounting books net worth accounting is related but different from cash flow accounting.

I make my decisions on net wroth issues rather than cash issues.

[Arne]

I am with Neil on the need for help understanding how savings rate is calculated.

Investments are already a problem, but how is Social Security handled?

Social security income is counted as income, but social security taxes do not get counted as savings? The $12K (employee and employer) I put in is not counted, but the $20K my dad gets out is counted? In 15 years, when I am retired and spending my 401K and getting social security payments and my personal saving rate really is negative, the existing methodology will be overwhelmed by the demographics. The national savings rate will go way negative.

Where did I go wrong?

[Ninjaplease]

Most people should start saving more?

you mean, the same most people who now pay 5x more for gasoline and heat?

The same people who make the same amount of money as in 2001, but whose expenses rise every year, most notably if they have kids in school?

The same people who are offered 0.01% interest in checking accounts, 1% on savings accounts (unless you consider an internet bank a real bank,) and whose mailboxes are stuffed with pre-approved credit applications & refinance & home equity loan applications?

Our wages didnt rise.

Our bills did.

Getting credit has never been easier, especially with low home equity loan rates.

And you wonder how this happened?

I wouldn't worry about the AMT being a problem for working people, since their wages aren't rising, and the new jobs created pay much less, sometimes 50% less. The people who wrote the language of the AMT must have known what was going to happen with globalization---It's a feature, not a bug.