Transcript The Declining U.S. Saving Rate

The U.S. Saving Rate
The U.S. Saving Rate
• The U.S. personal saving rate declined
throughout the 1980s and 1990s
• Personal saving/disposable personal
income
• Does it matter?
Concerns
• Fed vice-chair Roger Ferguson: “The fall
in the personal saving rate could have
important implications for the ability of the
country to finance investment in plant and
equipment, for future growth in productivity
and real incomes, and for our growing
economic dependence on other countries
to finance our spending patterns.”
Concerns
• Cleveland Fed researcher Jagadeesh
Gokhale argued that “low saving by U.S.
households may adversely impact their
ability to maintain their living standards
during retirement—a challenge that will
only gain in difficulty with lengthening life
spans.”
3 Reasons Not to Worry
• private saving, not personal saving, is the
relevant measure of saving
• the personal saving rate may be revised
upward in the future
• the personal saving rate ignores the
capital gains that people earn, and is thus
a misleading measure of the increase in
their net worth.
Look at private saving
• Private saving, not personal saving, is
more appropriate
• Private saving = business saving +
personal saving, since people own
businesses and thus own their saving
Look at private saving
• Looking at private saving
– The decline in the 1980s and 1990s is not as
steep as in the personal saving rate
– Recent increases in business saving are large
and drive the private saving rate almost as
high as in the 1960s
Data revisions
• The personal saving rate is revised
substantially
• In August 1999, I said “The personal
saving rate turned negative recently for the
first time ever”
Data revisions
• In May 2002, I said “The personal saving
rate turned negative recently for the first
time ever”
Data revisions
• In May 2007, I said “The personal saving
rate turned negative recently for the first
time ever; but I am getting this strange
feeling of déjà vu”
Data revisions
• The personal saving rate is revised
substantially
• Today, I say, “The personal saving rate
has never been negative!”
Data revisions
• Why is the personal saving rate revised so
much?
• Income is not measured well at first:
government tends to underestimate it
• Since saving is measured as income
minus consumption, then underestimates
of income lead to measured savings that
are too low
Data revisions
• On average the personal saving rate is
revised up by 3 percentage points!
• So, if you think it is 5% initially, it is
probably 8%.
Capital Gains
• The biggest problem, though, is that the
personal savings rate ignores capital gains
(and thus changes in wealth)
• This is by design, since NIPA is designed
to deal with economic activity (production)
• But then we shouldn’t use it to estimate
changes in a stock variable, such as
wealth
Capital Gains
• What we should really care about is the
change in people’s wealth, not their saving
• In the 1990s, people had huge wealth
gains, and consumed more, which showed
up as a declining savings rate, since their
spending increased faster than their
incomes
Capital Gains
• The group of households whose personal
saving rate declined in the 1990s is
exactly the same group of households who
received capital gains from owning stock—
those in the top 20% of the income
distribution.
• Poorer households, those in the bottom
40% of the income distribution, increased
their saving rate in the 1990s
Capital Gains
• Milt Marquis: “To a large extent the low
personal saving rate in the U.S. economy
is a systematic response of households to
changes in its fundamental determinants,
most notably the increase in financial
wealth.”
Implications
• Changes in the saving rate over time mainly
reflect changes in the net worth of households
• The decline in net worth/disposable income from
6.3 in mid-2007 to 4.7 in early-2009 led
households to save more
• Households are in about the same position
today that they were in the early 1990s; it would
not be surprising if this level of savings persisted