On Consumer Demand – and Other NRO Misunderstandings
Michael Darda tries very hard to pack a lot of wisdom into an NRO op-ed but he writes too much:
Consumer spending is driven by income growth, which is the function of employment, the capital-to-labor ratio, productivity, and wage and salary rates. These trends remain sound. So we can expect consumer spending to expand at a respectable pace as long as income growth holds up, household net worth remains in positive year-to-year territory, and the level of real short-term interest rates doesn’t climb significantly above historical averages with respect to core inflation.
OK, productivity growth remains strong but he might wish to check with Kash on wages and employment. Given the concern about the Federal Reserve adopting tight monetary policy, we should check here and note that real interest rates indeed have remained low – so far.
But Darda loses it when he tries to argue that national savings is high:
The argument that there is no intrinsic savings in the U.S. also is a myth. Narrow measures of savings, such as the difference between personal income and personal spending, leave out many relevant household resources that could be tapped in times of need. Household net worth (total household assets less total household liabilities) has risen to a record $50 trillion. The ratio of financial assets (which excludes housing but not savings accounts or equities) is 3.6 times the level of personal income, slightly higher than the post WWI average of 3.2 times. What’s more, gross private savings, which includes both the household and corporate sectors, was 13.7 percent of GDP as of the second quarter (the last period for which data is available). While this is below historical norms, it is above the 13.6 percent average rate during the year 2000 when the U.S. enjoyed a fiscal surplus of 2.5 percent of GDP.
Gross private savings are low and I trust Darda knows that national savings is the sum of private savings and the government surplus. If he does not, the following graph of gross savings (GS) relative to GDP might illustrate. GS is defined simply as GDP minus consumption minus government purchases, which were around 14% of GDP in 2000 and fell to around 10% of GDP in 2003. Of course, gross savings fails to deduct for depreciation, which is almost 10% of national income.
I prefer some sort of net savings measure such as the time series provided by James Hamilton. As his graph show, most of our recent net investment has been financed by borrowing from abroad, which means we are saving very little.
As far as the Kudlow-Malpass-Tamny definition of savings, it is truly amazing that we have to keep repeating the point about real per capita wealth, which is still below the level in late 1999.
But there is another thing I don’t get about the free lunch crowd – don’t they understand that as consumption rises relative to income, this means savings declines? Do they teach budget constraints at the economics department of National Review University or have they repealed the law of scarcity?