A Crisis In Saving?

Dismal saving rates are just about the only bad news from the economic front these days. Government data released on July 29 show that over the past six months personal saving has averaged a negative 0.9% of gross domestic product—the lowest level since the Depression, and the latest step in a long decline from 8% in the 1960s to 5% in 1990-94 to 0.5% by 1998. Although alarms of a crisis in savings have been sounded repeatedly over the past 20 years, the data are poorly understood, and the latest downturn has led to an astonishing variety of contradictory views.

Some analysts think low personal saving signifies dangerously low levels of capital accumulation. At a macro level, this would mean increasing dependence on fickle foreign capital; at a micro level, it raises fears that households are not putting enough away for retirement or other purposes. Other observers think the decline in saving is good news because the accompanying rise in consumption spending has helped fuel the economic expansion in the United States as well as prop up the global economy. They worry that most households are now stretched thin and will soon retrench, driving the U.S. and global economies into a tailspin. A third group of pundits point to the record capital gains of recent years and conclude that both saving and consumption are robust.

All of these views make the mistake of misusing the figures on savings. An accurate read is a little more complex and much less extreme than any of the sides would argue.

To start with, the data on personal savings are part of a broader national income accounting framework whose goal is to measure production and the income arising from that production. This measure is fine for national income accounting, but not very useful for the other purposes for which it is so often used. For instance, personal saving is a poor measure of how much the nation as a whole is saving. National saving is actually up in recent years, because corporate saving and government surpluses have increased by more than personal saving has fallen.

Nor is personal saving even a good measure of how much households are saving. The official measure does not correct for inflation; it treats housing differently from other durable goods; it treats private and government pensions differently, and it does not adjust fully for taxes. The distinction between personal and corporate saving is also arbitrary: Dividend payments and share repurchases both involve corporations shifting funds to households, but they have different effects on personal saving.

These seeming technicalities make a big difference. John Sabelhaus of the Congressional Budget Office and I recently found that while personal saving fell from 5.7% of GDP in the 1970s to less than zero at present, a measure that conformed more closely to economic concepts of saving by including businesses and households and adjusting for the other factors above showed saving at 9% of GDP in the 1970s and 7% in 1998. These findings indicate that although saving has declined, the dropoff is much smaller, and the current level of saving is much higher, than the official figures show.

The official figures also omit capital gains, which have been six to 10 times as large as official saving in the past four years. If accrued gains are included, saving is at its highest level in at least 40 years, not its lowest.

But should gains be included as saving? In some contexts, the answer is obvious. For an individual contemplating his retirement account, it makes perfect sense to include accruing capital gains as individual saving. Likewise, capital gains that reflect increases in a company’s earnings should clearly be counted as saving. Current owners are enriched by the gain, but potential buyers are not made poorer; the cost of buying a claim on a dollar’s worth of the company’s profits has remained the same.

But some capital gains aren’t saving. Suppose the perceived riskiness of stocks—the so-called equity risk premium—falls. This would raise share prices, even if there were no increase in profits. Current shareholders would again be wealthier, but potential buyers would be worse off because the cost of buying a dollar of future corporate profits would have gone up. In a closed economy, potential buyers are worse off by exactly as much as shareholders are better off, so there is no net wealth creation, or saving. In an open economy, the capital gain could represent national saving, but only to the extent that it increased Americans’ ability to purchase goods from other countries.

In practice, there is a great, unresolved debate over why the stock market has risen to such previously unimagined heights. But if even a small portion-say, 20%-of the recent market gains represent increases in expected future profits, rather than changes in attitudes toward stocks generally, U.S. aggregate saving is high relative to its past performance.

A negative personal saving rate is certainly an anomaly, but a careful look behind the numbers shows that, under current conditions, it is not a crisis. Capital formation in the United States is alive and well.