On the Propensity to Save

Actually, I’m not on summer vacation which is alas why I have not been keeping up with the news. As I try to catch-up, I see that Mark Thoma is a great source even if he may have the concept of marginal propensity confused with average propensity (hat tip to Kash for the second news article):

WASHINGTON (MarketWatch) – The U.S. personal savings rate fell to 0% in June, only the second time since the Great Depression that Americans have spent as much as they earned in a month, the Commerce Department said Tuesday.

To be fair, Mark and MarketWatch both mentioned the increase in housing wealth, which CalculatedRisk featured.

In earlier 2001, one of the explanations as to why we needed a tax cut was a concern that the weakening of the stock market was not only a sign that investment demand would be weak but also that the decline in stock market wealth would dampen consumption demand. As it turns out, consumption demand has grown faster than overall aggregate demand – in part because of the housing boom.

Even though the recent news discussions are rightfully worried about the lack of U.S. savings, regular readers of CalculatedRisk are aware of the possibility that housing wealth may erode. Of course, stock market wealth has been coming back. So whether this wealth effect, which had shifted the savings schedule downwards, will reverse itself is not clear. But even if consumption demand moderates, some of us might see such a development as good news if that somehow translates into more investment demand.