David Altig on National Savings – and Why His Critics Have No Point
Our friend David Altig follows up on a post by Steven Kyle:
Steven has pgl around to point out that the most recent data is about personal saving by households – not private saving (which includes business saving) or national saving (which adds government surpluses to private saving).
Thanks for the kind words David, but I was a bit lazy. I should have done the hard work and graphed the net private savings/GDP and net national savings/GDP ratios over time. The good news is David provides this graph from 1970 to the present. So let me chip in a couple of ways. First, notice a couple of things about the national savings rate. Back in 1970, it was almost 10% as the net private savings rate was around 10% and the government was not running massive deficits. Alas, the 1980’s changed the latter and despite certain predictions from the Ricardian Equivalence crowd, private savings did not completely offset the government deficits. The 1990’s saw private savings decline but not as much as the government deficit declined so we enjoyed at least some increase in the national savings rate. However, the fiscal irresponsibility of the Bush Administration changed all of that so we now have a fairly low national savings rate.
David links to several folks who are “reminding us that saving calculated from the National Income and Product Accounts does not really measure changes in the value of assets – a more appropriate measure of saving”. For example, the folks that run the Wall Street Journal editorial page write:
As a statistic, however, the official “savings rate” is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, “income” doesn’t measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts. Think about how you calculate your own personal “savings rate.” Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, “savings” should include your increase in total assets–in other words, your gains in overall wealth. For our part, these columns long ago began to watch a far more instructive figure known as “household net worth.” That number, released by the Federal Reserve, includes all assets (tangible and financial) held by individuals less their liabilities (mortgage and other debt). At the end of last year’s third quarter, U.S. household net worth had climbed to $54.1 trillion. That was an increase of more than $3 trillion over the previous four quarters.
This claim is an old canard that has basically three problems. One is that capital gains are a noisy series and the wealth is exploding crowd tends to crow about periods of capital gains and ignore periods where we have seen capital losses. If we look at table B.100 of the Flow of Funds Acoounts, we do see the household net worth was $54,063.7 billion at least reporting, which compares to the $38,812.9 billion at the end of 2002. You might say – wow, a 39.3% increase in less than four years. But remember, this figure was $42,259.9 billion at the end of 1999. But isn’t a 27.9% increase over a period of only 6.75 years still amazing? Well, not in real per capita terms. Prices rose by 18.2% over this period. Restating these figures in terms of 2000$, net worth was $42,913.3 billion at the end of 1999 and was $46,428.1 billion as of 2006QIII. In other words, an 8.2% increase during a period where the population grew by 7%. So if someone told you that real wealth per capita grew by only 1.1% over a 7-year period, doesn’t that sound like a low net private savings rate? And let’s also remember that real government debt per capita has also grown during this period.