The Savings-Rate Myth (Bogus assumptions based on a bogus government statistic)

NRO Financial ^ | Dec 23, 2004 | John E. Tamny

[Toddsterpatriot]

The Wall Street Journal’s David Wessel wrote last week that “American people, businesses and government don’t save enough.” Citing the Commerce Department’s official U.S. personal savings rate, 0.2 percent, the Los Angeles Times’s Bill Sing wrote, “It doesn’t help that people in the U.S. are spending like there’s no tomorrow.” Sing’s and Wessel’s assumptions are as bogus as the government statistic on which they’re based.

To see why, one need only understand how the government calculates personal savings. Not surprisingly, the calculation is a simplistic one that involves a subtraction of cash outlays from disposable income. David Malpass, NRO Financial writer and chief economist at Bear Stearns, recently noted that savings statistics “understate actual additions to savings by excluding cash flow improvements from realized gains on equities, houses, and mortgage refinancings.” Importantly, the government savings rate either cannot factor in, or would calculate negatively, how Americans purchase the instruments of the wealth that Malpass mentions.

To begin with, 401(k) accounts have become highly popular investment vehicles for Americans over the last 20 years. Since 401(k) deposits come out of pre-tax income, the significant savings built up within those accounts would not factor into government calculations of money saved over outlays.

As for home ownership, mortgage payments are not deducted from pre-tax income, and often are paid out of disposable income. While no one would deny that home ownership is a form of saving, Commerce Department math would put money used to pay down a mortgage into the same basket as money used for everyday consumption.

Even if we didn’t know how savings were calculated, it would still be obvious that a savings rate of 0.2 percent is wildly inaccurate. To see why, consider a variety of statistics about wealth in the U.S.

For starters, the members of the latest Forbes 400 have a combined net worth of $1 trillion, up $45 billion in twelve months. In Merrill Lynch’s 2004 World Wealth Report, the U.S. experienced the biggest jump of any country in terms of high-net-worth individuals, with the number rising 14 percent to 2.27 million. If American’s weren’t savers, the wealth statistics in each case would have fallen.

Someone might reply that the above statistics describe rich people, and that non-millionaires don’t have the means to save like the rich do. Unfortunately, a host of other statistics would also prove an assumption like that wrong.

Indeed, the Securities Industry Association reports that individual participation in the stock market has jumped from 30.2 million in 1980 to 84.3 million in 2002. As the number of investors has grown, so too have stock market returns, with the Dow Jones Industrial average trading at roughly 14 times its low of 743 in 1982.

Home ownership? The rise in home prices is increasingly on the minds of many Americans. That this is so has a lot to do with the fact that at 69 percent, the supposedly “spendthrift” United States has the highest rate of home ownership in its history.

Despite all of the above evidence suggesting a strong culture of saving in the U.S., it can be expected that the “Americans as bad savers” canard will continue to be thrown out by the major media to explain “good” (consumption) and “bad” (trade deficits) economic news.

An optimist would say the mainstream media’s obsession with saving might be a happy signal that its members intend to write more positively about private Social Security accounts, stock options, and other opportunities to save. Sadly, they’ve already demonized stock options, and presumably have only just begun to start scaring readers about the perils of investing their own payroll taxes. Here’s hoping readers start to notice these paradoxical stances, and tune them out altogether.

[Toddsterpatriot]

Should the resale value of the car be counted as savings by the government?

No.

(This is a carry over mind you, when this began it was about houses not cars)

Actually, it started when you claimed Americans are over leveraged. What did you base your assertion on?

[Toddsterpatriot]

An asset at zero does not have a positive value.

Please give me a list of assets at zero.

[x5452]

Enron stock for instance.

It was an asset, it is now worthless.

[expat_panama]

An asset at zero does not have a positive value. It has literally 'no value' it ceases to be an 'asset'.

Rush was just mentioning how the Democrat press is trying to spread the old "America's unhappy" lie.  That's old news.  What amazes me is how many voices on this forum are singing the same song.  

It is true that fed stats on saving are down (fed econ definition:: savings =  income - consumption).  It's also true that America's privately held wealth (in inflation adjusted $) has quadrupled in the last half century and is now soaring to an all time high.

Americans can be accused of many things, but to say we aren't amassing extraordinary wealth is a lie or just down right crazy.

[1rudeboy]

Let's say a car has a scrap value of $25.00. If the bank repossesses it because of an outstanding loan balance of $100.00, the cars value is, you guessed it, $25.00 to the scrap dealer (seeing that he's willing to spend $25.00 for it), and $-75.00 to the bank.

[x5452]

Americans ARE overleveraged. And further they are overleveraged to largely foreign owned banks.

Should the resale value of a primary residence be counted, independant of the expenses on the house as savings without proof of the status of it's value?

[Toddsterpatriot]

How about cars at zero?

[expat_panama]

Enron stock for instance.   It was an asset, it is now worthless.

So it's not an asset and it's not on the ledger.  Only possessions that do have value are listed as assets.  We have $50trillion more in assets than we have in debt.  That's good.

[Toddsterpatriot]

Enron stock for instance. It was an asset, it is now worthless.

Wrong, again. It's getting to be a habit.

Last traded at 10 cents.

[x5452]

"amassing extraordinary wealth".

In what? Stock?

The problem Enron employees ran into was they invested heavily in Enron's stock, which was tied to enron's business.

This is the same problem American's have. They are over invested in American stock, which is tied to American business.

Do no confuse holdings with wealth.

[1rudeboy]

And further they are overleveraged to largely foreign owned banks.

Oh no, here we go. So these cars that are liabilities will be repossesed and shipped to a vault in Dubai?

[1rudeboy]

Ouch. Thanks for reminding me that I shouldn't have taken that cash advance at 20% from my Visa card to buy Enron stock. [chuckle]

[x5452]

On the OTCBB?

You realize when it's eventually delisted (as it will when all is said and done) you can do absolutly nothing with those shares right? They cease to exist after reorganization.

[x5452]

Those who lost their shirt in the depression were somewhat less chipper than you.

[Toddsterpatriot]

Americans ARE overleveraged. And further they are overleveraged to largely foreign owned banks.

Based on what, your feelings? How about some facts from someone more credible than you? You know what a fact is, right?

Should the resale value of a primary residence be counted, independant of the expenses on the house as savings without proof of the status of it's value?

Proof of value can be estimated by similar houses recent sales. Are you saying we should ignore the $19.1 trillion in household real estate? Can we ignore the $8.2 trillion in home mortgages too?

[x5452]

Only though fuzzy math and bad accounting.

[1rudeboy]

Damn, and Cro-Magnon man wasn't very bright on his future either, but things worked out.

[Toddsterpatriot]

You realize when it's eventually delisted

Somewhere over the rainbow. Sorry, sometimes I just break into song.

It's worth money now, it is an asset. Thanks for playing.

[1rudeboy]

This is the same problem American's have. They are over invested in American stock, which is tied to American business.

Any investor anywhere, that puts all his eggs in one basket has a problem. Your comment is so broad as to be essentially meaningless.

[expat_panama]

Americans ARE overleveraged. And further they are overleveraged to largely foreign owned banks.

That's not true of average Americans.  Your error could be caused by a number missteps.  One possibility is that you're relating anecdotal or personal experiences in which case, we can't help you.   Americans on average, have a lot more in the black (on the plus side) than ever before.   

Another possibility is that you're confusing public debt (or the national debt) with private debt.   It's true that the bite that public debt took out of private wealth rose during the 'malaise days', but for years even that's been going down.