Thanks to Doug for the response and clarification of my examples (and apologies, as usual, for the delayed response). I believe Doug would agree with the 2 main points (the shakiness of the savings rate figures and the financing of the transition to the New Inequality by Asian surpluses which will lead to yet greater pain for the "losers" in the New Inequality). [Right Doug?]
I am not sure which of the measures of savings Michael P. was using in his brief question -- NIPA, CPS, SCF, gross or net, etc. Different ones measure "income" differently and I couldn't recall any that matched Michael's number - although they all broadly support his point that personal savings is declining. My point has been that each of these standard government statistics have design flaws (apparently driven by concepts\ideology) that fail to show us clearly why savings (for workers) are declining (or that savings\wealth for the well-off are rising). Doug is correct that one measure (NIPA), unlike some of the other measures, does include 401ks as stated in the BEA paper I attached (see page 4). A different example does, at least, illustrate the retirement savings point using NIPA accounting: NIPA does NOT count defined contribution pension plans as income at the time of payment to the retiree, so as the pension funds are raided by the companies it LOOKS as if personal savings are drying up at that moment (bad worker!) Again, see the BEA paper. [Michael P. would probably want me to add that any figures of net savings must estimate depreciation which is fairly arbitrary.] Thanks to Doug for clarifying my examples. The treatment of capital gains that Doug mentions creates serious distortions and is a larger example of the problem in a NIPA context (as well as CPS, but not SCF - as Doug shows, it pays to be specific). Since capital gains are not counted as income, *realized* capital gains are not income (just don't say that to the IRS). Sell assets to the Japanese and the realized capital gains don't show as savings. At a time when realized capital gains are proportionally going up, the personal savings rate is increasingly understated. An important point in all these examples: our statistics do not seek to separate clearly profit income and wage income into two separate classes and track all of both. (Showing two separate classes with two separate sources of income is not a popular cause in American economics.) But we need that distinction to know WHO's savings rate (workers) is going down and WHY (the New Inequality). That in turn *helps* explain why we are borrowing abroad and why we will find ourselves in a painful "adjustment crisis" (and maybe a flashy currency crisis). Without the two class distinction in our income statistics we will be more likely to see future developments as requiring either a conventional IMF-style adjustment program, or that program merely combined with stronger international financial regulations. Paul P.S. How to define and account for income (and then savings) is an old debate in economics where the participants usually line up along the expected political lines. Michael P. could probably tell us more about the Institutionalists vs. Irving Fisher debates. NIPA claims dependance from Hicks and two early American neo-classicals (hence sort of a Keynesian-neoclassical heritage). Ajit Zacharias at the Levy Institute points out that there is no really Hicks-Keynesian tradition in NIPA and the like at all - just neo-classics http://www.levy.org/pubs/wp/342.pdf Doug H., citing me, responding to Michael P., writes:
Eh? What are you referring to? 401k contribs are included in personal income, and I'm pretty sure employee stock option exercises are too. Capital gains are excluded, but that's conceptually right, since savings, like investment, are measures of foregone consumption - diversions from current production and income earned in production. Oddly, the Fed considers purchases of consumer durables as savings in the flow of funds accounts.
Michael P. asked
is the 1.1% negative savings rate unprecedented?
Paul responds:
Certainly, considering the circumstances (no Great Depression or World War). I am not sure which figures you are using for the -1.1%, (off the top of my head, I thought the NIPA figure was less dramatic, cf the NIPA tables at http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid ). BUT, one should also add that these often-quoted numbers are misleading since the personal savings is as a percent of current *income* only. For the better off, lots of things that were considered income, and really are income, are now channelled through the expansive tax and regulatory loopholes and bypass being counted as "income" and go straight into "savings" as wealth (401k, stock options, etc). So, to get a full picture of how things have changed one needs to stitch together income savings and wealth accumulation figures (and leave out retirees). Lots of other technicalities also come into play but I think you will find them less interesting for your purposes. It only gives charts back to 1980 but see, for example, 'Alternative Measures of Personal Saving' by BEA economists www.bea.gov/bea/ARTICLES/2004/09September/PersonalSavingWEB.pdf ) And of course, to get the full-full picture of how things are truly bad...the figures should be broken down by class. You can imagine what the savings rate and wealth accumulation looks like for the bottom 80% over the last two decades. (A while back I fiddled with a CD from the Fed of the SCF and I recall the change was a shock. And I reported to Pen-l previously about Wolf's work on changes in wealth.) Essentially half of the New Inequality has been "shielded" from the American working class - they are borrowing (or drawing on inflated asset values) to postpone its impact (which will of course make things all the more difficult in the end). China et. al are financing a slow adjustment to a new American inequality and a 1920's society. When that foreign financing ends and the crunch hits, "we" will have to "adjust" (i.e. the 80% will have to lower its standard of living to match current income minus the debt). The Neoclassics will say "we" recklessly lived beyond our means/lost international competitiveness, etc. Less hard liners will declare it an international financial crisis that calls for greater international collaboration-intervention, or even to Keynes' never implemented Bretton Woods vision of symmetric adjustment etc. But that crisis will actually be the direct result of the greed (and subsequent politics) that imposed this new emerging yet more unequal society and found the financial overextension a necessary convenience to that ends. [Sorry for the tirade of the obvious] Paul
