Low Savings Rate: Myth or Scare?
The clown show at the National Review would have you believe that national savings has not been harmed by the fiscal recklessness of the Bush Administration. Its most recent offering is from guest contributor John Tammy who writes:
The Wall Street Journal’s David Wessel wrote last week that “American people, businesses and government don’t save enough.” Citing the Commerce Department’s official U.S. personal savings rate, 0.2 percent, the Los Angeles Times’s Bill Sing wrote, “It doesn’t help that people in the U.S. are spending like there’s no tomorrow.” Sing’s and Wessel’s assumptions are as bogus as the government statistic on which they’re based. To see why, one need only understand how the government calculates personal savings. Not surprisingly, the calculation is a simplistic one that involves a subtraction of cash outlays from disposable income. David Malpass, NRO Financial writer and chief economist at Bear Stearns, recently noted that savings statistics “understate actual additions to savings by excluding cash flow improvements from realized gains on equities, houses, and mortgage refinancings.” Importantly, the government savings rate either cannot factor in, or would calculate negatively, how Americans purchase the instruments of the wealth that Malpass mentions.
So maybe we should look at table B.100 from the Federal Reserve’s Flow of Funds accounts, which reports household net worth. Since the end of 1999, nominal net worth has increased by a mere 10.2% – less than the increase in the price-level. So, Mr. Tammy forgets to tell NRO readers that by his own measure, savings has been negative.
Of course, a Ricardian Equivalence type such as NRO’s Victor Canto would not include government debt held by the public as net wealth. Yet, Canto focuses on the same variables as Tammy even as his most recent NRO oped contradicts itself:
The personal savings rate has been in a secular decline since the early 1980s…What constitutes true net savings? Is it the actual savings (an income statement) or the change in net worth (a balance-sheet item)? When one thinks about it, both will result in a higher net worth. If you take the sum of private savings and the change in net worth as a percent of GDP as the approximation of the true savings rate, by my account, that rate is on the order of 10 to 15 percent today – within the historical range.
So the savings has fallen but it has stayed the same? And isn’t the sum of savings AND the increase in net worth double counting? And of course, a true believer in Ricardian Equivalence might tell us that he’d expect an INCREASE in personal savings as a reaction to the decrease in public savings from the Reagan and Bush43 deficits. Somewhere in the middle of Canto’s spinning, he did sort of mention national savings but only in terms of net savings, that is savings minus investment. But of course, this definition is meaningless as net savings can be zero either high savings = investment (before the Reagan fiscal fiasco) or with low savings = investment (the current situation).
Let’s make this simple for Mr. Tammy and Dr. Canto. Last year, the sum of consumption and government purchases was 89.4% of GDP leaving only 10.6% of GDP to cover depreciation and allow for increase in net worth. This compares with a sum of consumption and government purchases equal to less than 82% of GDP twenty-five years ago. And had Mr. Tammy and Dr. Canto bothered to check the real value of household net worth as of 2004Q3 v. the end of 1999, they would have noticed it had fallen. Not to scare anyone – but the lack of savings is a reality. Any presence you’ll get an honest account of economics from the National Review is the only myth.