We always hear that the personal saving rate is low and that this is bad.
This is a data artifact: we really ought to know better than to talk about this without knowing more, but the fact is that most reporters and pundits don’t.
It shouldn’t take a rocket scientist to figure out that there’s no way we can have the wealth we do (and until last summer the growth in wealth we’ve had) without a lot of saving supporting it.
What we really have here is a number called the “personal saving rate” which ought to be renamed: it misleads people because it misses most saving. No wonder it’s low.
This piece from the Federal Reserve Bank of San Francisco goes over some of the details, and shows that the low personal saving rate can be predicted fairly tightly as a response to increase in real and financial wealth, and declines in the rate of return on saving. Here’s another one from the Federal Reserve Bank of Chicago indicating we should worry less.
Most of these are technical. They’re light on the big picture. People save because:
- They lack insurance
- They lack social security
- They lack a pension
- They lack material possessions
- They’re more worried about the future than the present.
The top 4 operate in the U.S. at all times, and the 5th one generally. So, we probably shouldn’t be too surprised that savings is low.
An additional factor is our target wealth. If we have a target in mind for wealth, and we exceed it, then we lose interest in saving. This is why we should see lower saving in financial and real estate booms.
An additional problem with thinking about this is that our current rate is often compared to a reference point that was higher. The problem is cherry picking those reference points. One commonly used is the U.S. in World War II. Another is the current saving rate in China. A third is the current saving rate in other developed countries. The problem with these is that consumption is like “anti-saving”: if we’re not savings we must be consuming. But what we forget is that consumption requires two things: 1) available and worthwhile stuff to consumer, and 2) a place to put it. Going back to these three examples, it shouldn’t be surprising that saving was higher in the U.S. during World War II (when there was nothing to buy), is higher in China currently (where there isn’t much worthwhile to buy away from the ports), or is higher in Japan and Europe (where smaller homes mean bigger consumption of intangibles like vacations).
A last factor is purchases of new homes. In all countries national income and product accounts this is counted as investment. But, since there is a lot more of this in the U.S. than most other countries, it means that what many families regard as their big wealth vehicle – their home – isn’t counted as saving. Try telling them that sometime …
The bottom line is that you should roll your eyes and harumph when you hear someone complain about the low saving rate in the U.S. Saving is the part of income we don’t consume (after allowing taxes and government spending to go through the circular flow). If we’re only consuming 70% or so of GDP, we’ve got to be saving 30%.
I have in mind pieces like this one from MSNBC: the level of discussion here could have come out of the mouth of a 17th century Puritan.