Wednesday, February 01, 2006


Oroborous was kind enough to send this my way recently:

By Brian S. Wesbury and Bill Mulvihill

We are not sure which economic “old wives tale” is the most damaging. But right up at the top of any list is the idea that the US has a negative savings rate.

Yes, it is true, that the Bureau of Economic Analysis (BEA) says that US consumers spent more than their after-tax income in 7 out of the last 8 months and through November 2005, and had a savings of negative $39 billion.

To get these figures, the BEA adds up sources of income - wages, salaries, interest, dividends, rent, proprietor’s profits, social security, and unemployment insurance benefits. It then subtracts taxes to arrive at disposable income. The BEA then subtracts total consumption to calculate savings.

There are many reasons to discount these statistics. For example, when a car, home appliance, or computer is purchased, the entire expenditure is immediately subtracted from income, even if it is paid for over time. Spending on education also counts as consumption. But, these expenditures are investments and on a set of corporate books would be treated much differently.

While 401k’s, IRAs, and other savings plans are accounted for, capital gains on these assets or on a home do not count as income. However, taxes paid on capital gains subtract from disposable income, a downward bias.

As our population ages, a growing number of retirees spend out of savings, which also biases the statistics downwardly. In addition, the government has a difficult time separating business spending from personal spending because so many small (and large) businesses buy office supplies and construction materials at retail outlets (such as Office Depot, Staples, Home Depot and Lowes). To the extent that government counts business spending as consumption, savings will be undercounted.

To top it all off, personal income, wages and salaries can be significantly understated because income statistics are gathered from data collected by the Establishment Survey, which undercounts employment. In March 2005, for example, wages and salaries were revised upwardly by 1.8%, or $92.7 billion. If the same type of revision occurs this year, the negative savings rate will be revised away. This, by the way, is highly likely.

The best measure of household savings is calculated by the Federal Reserve in its quarterly Flow of Funds Accounts. This data shows that US households had $62.5 trillion in assets at the end of September, $11.4 trillion in liabilities and a net worth of $51.1 trillion. This is a record level and $5 trillion more than a year earlier. Of the increase, $3.3 trillion was in financial assets, suggesting that US households are one of the best savers in the world. Contrary to popular belief, the US does not have a negative savings rate.

Right off the bat, I wondered just how wide of the actual mark the Headline Savings Rate (HSR) might be. So, following time-honored journalistic tradition, I decided to generalize from personal experience. Why not? Either everyone is like I am, or they are wrong.

Besides, it avoids all that annoying research stuff, which often gets in the way of extrapolating from a single data point.

In a few brief paras, Messrs Wesbury and Mulvihill manage to raise few interesting questions, intentionally or otherwise:

Just how far off might this statistic be?

According to the BEA, after dividing what was left over after consumption by my disposable income, my HSR is just shy of 13%. However, one of the biggest components of consumption over the last year was rent. Well, in my case, mortgage, which the BEA treats just like rent -- a transparently silly notion. Depending upon how far along a homeowner is in paying off the mortgage, a greater or lesser portion of that mortgage payment is money in another form, real estate, going into the owners pocket. The HSR is completely unable to explain the existence of the single greatest store of wealth for many people: their own homes. Someone who has paid off their mortgage is in possession of a substantial asset that, according to the HSR, simply came out of nowhere. Given the rate of homeownership in this country, roughly 65%, that is a significant downward bias in the savings rate.

In my particular case, six years into a 30-year mortgage, including the contribution to principle moves my savings rate to 16%.

Aside from the transparently silly, there is the hopelessly contradictory (as in "Islam" and "tolerant"). The IRS is happy to tax investment income, but the HSR is treats that income as if it doesnt exist. I have no idea what proportion of Americans have 401k plans, stocks, or mutual funds. But giving in to the above mentioned time-honored journalistic tradition, I'll say it is 100%.

In my particular case, including reinvested income, after the attendant double taxation, my savings rate jumps to 26%.

And what about those taxes? How much do you want to bet the HSR includes only those things that show up on a W-2? That is easy to collect information, but leaves out two significant taxes that significantly detract from disposable income: sales and property taxes (see above: homeownership, rate of).

In my particular case, subtracting those taxes from disposable income moves my savings rate to 27%.

Then there is the matter of what the spending is for. Due to the ravages of time, this year my house needed a new driveway and deck. Both had deteriorated significantly, and would have detracted from the resale value of my house. Never mind leaving me vulnerable to personal injury lawsuits. If I was allowed to expense that over 5 years (IIRC, typical for businesses), then my savings rate goes to 31%

So, in the instance of one real world example, the consistent with Econ 101 savings rate is nearly three times the HSR. And while my specific numbers may be on the high end of the range -- thank goodness, for the economy would tank, otherwise -- the reasons for the significant difference are not unique. Quite the contrary, they are characteristic of an economy with widespread home ownership, as well as mutual fund/401k/IRA holdings.

Given its apparent manifest shortcomings, why does the MSM keep citing this number (see also, Male v. Female pay studies)?

Many reasons, of which lazy and stupid, while probably on the list, are not particularly near the top.

1. The MSM has operated as an oligopoly. The relative absence of competition has allowed certain "objective" measures of the economy to become entrenched as accepted wisdom. The CPI is yet another example.

2. Any given example of the MSM is going to have a relatively limited staff; hence, there is unlikely to be significant specialist knowledge at any news organization. For two examples, I doubt, say, CBS, has technical/engineering expertise anywhere near what AOG (frequently seen at BrosJudd) can bring to a problem. Similarly, on legal issues, David Cohen will put to shame anything from the MSM. Steve den Beste referred to this effortless accumulation of expertise as the "Hive Mind" (no link, but I think I have the essay if anyone is interested).

3. Reporters are often so unsurprised at numbers confirming accepted wisdom that they don't ask the obvious question: is this number consistent with its consequences? On the face of it, a household savings rate ostensibly slightly less than zero is competely unable to explain a 10% increase in household net worth over the same period. One of those numbers has to be barking mad, but uncritical acceptance of the alarmist number stands four-square in the way of asking even obvious questions.

Given its apparent manifest shortcomings, why does the BEA keep citing this number?

Dunno, although lazy and stupid would probably stand out in the lineup of usual suspects. At the very least, the systematic downward bias in the HSR should get someone's attention. You would think.

What does this have to do with Darwinism?

No one questions that the US economy is obviously capable of unplanned self-organized complexity. Equally, no one would deny that measuring even a simple element of it is fiendishly difficult. My personal example is one thing, but aggregating it over an entire economy something else altogether (ignoring for the moment entrenched silliness).

So why should self-organized complexity be prohibited to such a densely interconnected and dynamic a system as Natural History?


Blogger Duck said...

Great post Skipper.

Another reason that the HSA continues to report this meaningless number is that it is a government bureacracy, and as we know, meaningful results are not required for government work.

Another area of expertise that the MSM lacks is that of military hardware. I've seen reports where they are talking about the F18 but showing pictures of an F15.

February 03, 2006 1:42 PM  
Blogger Bret said...

Hey Skipper,
Are you sure that the BEA considers payments of principal on a mortgage (or any loan for that matter) as rental? I was looking through the BEA's definitions (for example, here), and it's not at all clear to me that's the case. In fact, it rather looks to me like only the interest portion of a mortgage is consider an expense. In addition, there's a column for asset depreciation which I assume would apply to a house as well.

February 03, 2006 2:40 PM  
Blogger Hey Skipper said...


No, actually I'm not sure. One of the reasons I put fingers to keyboard on this was to enlist the hive mind to relieve me of some ignorance. When I was in DC (1995), I was at a seminar at Georgetown Univ, with some economists on the panel.

They, to a person, insisted the US savings rate was far too low. During Q&A I asked them the mortgage question, and not one of them knew the answer.

So, if I'm ignorant, I'm not alone.

To some extent I have sympathy for the measurement problems involved. When I was putting together a spread sheet just to analyze my individual savings rate, I quickly saw how including even a few adjustments leads quickly to multiple plausible outcomes.

Which is why the Darwinism angle isn't as OT (in my mind anyway) as it seems. A spider web is about as easy a thing to model on a computer as you could hope for. Yet trying to understand the design tradeoffs is amazingly difficult.

I've seen reports where they are talking about the F18 but showing pictures of an F15.

How hard can it be to get the simple stuff right? Any Border's is going to have any number of books on aircraft, any one of which would solve that problem for them.

Never mind Google.

It seems that in any subject area within which I have any expertise, no matter how slight, I can easily detect MSM miasma.

Which, courtesy of the anti-halo effect, lays serious debitude at the feet of all the other stories.

So if I want the authoritative answer, I go to the weblog hive mind.

One particularly trustworthy neuron of which is Greatguys.

Muchos Gracias, Bret.

February 03, 2006 3:13 PM  
Blogger Bret said...

hey skipper wrote: "During Q&A I asked them the mortgage question, and not one of them knew the answer."

How pathetic. I just love it (NOT) when people spout off with such certitude and it turns out they don't even really completely understand the data they're using to support their position.

hey skipper also wrote: "One particularly trustworthy neuron of which is Greatguys."

Thanks for the very kind complement.

February 03, 2006 5:49 PM  
Blogger David said...

The number as reported has some uses. It more or less tells us what people are doing with their cash and has implications for inflation (a negative number is consistent, cateris parebus, with an expected increase in inflation) and economic security (it is also consistent with, ironically, feelings of economic security). It should be treated gingerly and it obviously is not.

The problem is that reporters and government bureaucrats have an impossible time distinguishing between income and wealth. They more or less assume that wealthy people are high income people, and vice versa. Neither is necessarily true. This causes lots of problems, most notably in elder law and policy. The old tend to be low income, but even so can be moderately or very wealthy. After all, what else are we saving for. (Note, for example, that the savings rate number will always fall as the population ages, again cateris parebus.)

At a three percent real income rate, for every $250,000 a retiree has saved, he can earn $7500. But if that person has a 20 year life expectancy, he could liquidate his savings and, along with interest income, have use of more than $16,600 every year for every $250,000 saved. The excess spent above interest earned would be counted as dissaving, and a crisis.

Every once in a while I run across people who believe that it is an injustice not to have an inheritance tax, and an injustice for medicare to force seniors to sell their house to pay for nursing homes. I just shake my head and move on.

February 04, 2006 9:02 AM  
Blogger Harry Eagar said...

I don't get too concerned about savings rates or how we arrive at them.

The purpose of having savings is to do something with them, right?

If that goal is -- nationally speaking -- investment to maintain or increase output, then for the past 20 years we have had way too much savings, so much it cannot find a home. So who cares, aside from the very interesting question of how that happened, where it came from?

For years, the Wall St. Journal has argued that national deficits etc. are totally bogus because the U.S. government operates on a cash in/cash out accounting basis.

The Journal editors would like to use GAAP practices, which would help keep Republicans in office.

I have as little patience with this approach as David does with people who want an inheritance tax.

The Statue of Liberty may be a valuable asset, but it doesn't generate enough revenue to maintain itself. So, contra WSJ, it ought to be carried as a liability.

Same with all the gold in Ft. Knox.

And you want to be very careful how you count real estate. Orrin likes to treat it globally, as wealth that makes us rich enough to do anything.

But residential real estate has value only if it is treated piece by piece. I can sell my house and use the residue for a round-the-world cruise, but we cannot all sell our houses and use the residues for cruises.

This is a little easier to see on an island where real estate prices have been rising about 25%/yr for the past four years.

It started out as a cautionary tale but quickly came true: People sold their houses for huge profits and became homeless (in the sense they were demoted from owners to renters) because they couldn't find any other house they could afford to buy.

Skipper, your analysis of news organizations is acute. Sometimes outsiders see better than insiders.

However, time counts. I like to use the example of the time I came into the office at 7 a.m. and was required to know -- by 8:30 a.m. -- the immigration policies of Kiribati. Hive minds are not that helpful then.

I have a column coming out Tuesday (I hope) which confirms Skipper's view, though. It concerns the Oprah/James Frey romance, which has still not, so far as I know, been accurately reported anywhere.

February 04, 2006 10:16 AM  
Blogger David said...

Skipper: Thanks for the kind words. You've given me impetus to work on the post on presidential power I've been toying with for a couple of weeks.

February 04, 2006 8:15 PM  
Blogger Hey Skipper said...


Thanks for the link.

After having looked at the relevant bits, I'm no better informed than I was before I started.

It seems clear that sales taxes, as I suspected, are not part of their calculation.

Dividend income is, but capital gains are not. (My example lumped both together, so decrement accordingly). That still leaves the glaringly obvious question as to why one tentacle of the government treats both as income, while another doesn't.

As far as mortgages go, the definition of personal saving explicitly states that net investment in residential housing is included.

You clearly deserve the award of Trusted Neuron, First Class. Left to my own devices, I would never have tracked that down.

All hale the Hive Mind.


I agree the number has some uses, so long as the underlying bases systematically track the economic fundamentals. Even if the magnitude is suspect, so long as the error is consistent, then trend information is available. Given the trend away from passbook savings to more productive investments, it may well be that the economy has evolved away from the accepted criteria.

In that case, the error itself has an error, so that trend information is no longer available.

The problem is that reporters and government bureaucrats have an impossible time distinguishing between income and wealth.

A distinction I would not likely have made, despite personal experience. I am not wealthy by any means, but making and sticking to some prudent decisions early on (all coming under the heading of "Delayed Gratification"), my wealth, such as it is, is beyond what my modest income would otherwise suggest.


In the late 1990s I read an article in The Economist that summed all nations' trade balance figures.

Presuming, with respect to trade, the Earth is a closed system, that number should have been zero.

As it turned out, it wasn't, by a long shot. It seems that the bases for trade balance calculations don't include services. Talk about not keeping up with evolution!

February 05, 2006 2:44 PM  
Blogger Harry Eagar said...

Ah'm jes' a pore ol' redneck from the peckerwoods, and all this figgerin' is way beyond me.

But it's obvious to anyone that there's waaay too much capital chasing waaay too few worthwhile investments.

How we got there is a mystery wrapped in an enigma, but get there we did.

The Reagan economic advisers counted borrowing as savings, too. I guess it makes the books balance, but somehow borrowing your way to prosperity seems like a bad bet over the long run.

I'm no Keynesian and, unlike, say, Orrin, I don't believe it was the Reagan deficits that set off the economic boom.

But durned if I know what did do it.

February 06, 2006 5:17 PM  
Blogger Hey Skipper said...


But durned if I know what did it.

One word: PATCO

(Full disclosure: Heck, I don't know either, but having been in a heavily unionized industry that is doing the exact opposite in an otherwise booming economy, that would be my best bet.)

February 07, 2006 5:29 PM  
Blogger Harry Eagar said...

PATCO had a lot to do with allowing Volcker to restrain inflation despite Reagan's deficits.

But I cannot see how that, in itself, led to the overcreation of capital.

A sorta stable currency may be (usually or even always) a prerequisite to capital formation, because with inflation you eat up your new capital as it's formed.

And one of the few other times where there was a runaway capital formation, Britain during its laissez faire era, was also a period of rampant deflation.

But you don't have to look around very far to see that rampant deflation does not itself favor capital formation.

I have a nagging suspicion that the excess capital came about because of purely imaginary, unconscious consensus in the securities markets, which for a time agreed to consider vast amounts of securities as having solidity that no rational person would have assigned them.

But I don't know enough to follow the thought, and, besides, I might be fulla crap.

February 07, 2006 8:18 PM  
Blogger Hey Skipper said...


But I cannot see how that, in itself, led to the overcreation of capital.

Well, in and of itself, it didn't.

But turning the tide against trade unionism was the sine qua non for huge increases in productivity practically ever since.

Which might very well be responsible for the abundance of capital.

Or, I could be full of crap.

February 08, 2006 5:00 AM  
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