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The Savings-Rate Myth (Bogus assumptions based on a bogus government statistic)
NRO Financial ^ | Dec 23, 2004 | John E. Tamny

Posted on 02/01/2006 8:49:13 AM PST by 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.


TOPICS: Business/Economy; Government
KEYWORDS: liberalwsj; myth; savings; wsjliberal
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To: Toddsterpatriot

It's also the post where you tried to insinuate it was not simply an asset but a smart investment.

There are folks who sell an image of Christ on toast. That doesn't make toast a great investment either.


41 posted on 02/01/2006 10:09:18 AM PST by x5452
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To: x5452

I agree that they shouldn't be considered the same thing as a "hard" savings. The statistic should be left as it is. I am merely saying this explanation does provide some perspective about the situation.


42 posted on 02/01/2006 10:09:36 AM PST by Paradox (Liberalism IS a religion.)
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To: 1rudeboy

Post the whole thing and I'll show you.


43 posted on 02/01/2006 10:09:43 AM PST by x5452
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To: x5452
You claimed : Americans are overleveraged plain and simple.

Looking at American's debts without taking into account American's assets is just plain stupid.

44 posted on 02/01/2006 10:10:25 AM PST by Toddsterpatriot (Why are protectionists so bad at math?)
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To: Toddsterpatriot
Forget it. All cars sold for $50 mil, huh? Where does this x character think he is?
On some forum that does not have a track-back feature?


45 posted on 02/01/2006 10:11:09 AM PST by 1rudeboy
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To: x5452

The whole thread? [hoot]


46 posted on 02/01/2006 10:11:37 AM PST by 1rudeboy
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To: Toddsterpatriot

Money market accounts might be tolerable, but why get into splitting hairs. The savings amount should be regarded as the capital in the account not invested.

The only alternative would be to average the daily balance across 365 days and call that savings. Selectivly calling part of the plan savings and part of it not only further destroys the integrity of the data.


47 posted on 02/01/2006 10:12:53 AM PST by x5452
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To: x5452
The way I see it, there are only two ways to interpret the data that America's savings rate is near an all time low:

1. That Americans are getting poorer (based on this data) or are somehow worse off than they've ever been. If this is your point, your wrong.

2. That Americans have changed the way they save and now have an extremely high amount of their net worth in non-liquid assets, which by their very nature tend to be more risky than cash in the bank. If this is your point, you could have a point... but US tax policy, combined with low interest rates has encouraged just this kind of behavior.
48 posted on 02/01/2006 10:13:08 AM PST by conservative physics
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To: 1rudeboy

The whole post including his link to a car that sold for 50 million dollars.


49 posted on 02/01/2006 10:13:35 AM PST by x5452
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To: 1rudeboy
Is this one of those "doom and gloomer arguing with a notion that exists only in his imagination" occasions?

He claimed we were overleveraged. We linked him to the Fed report showing household net worth was $51 trillion. He claimed the government stats were wrong. Then he claimed a car wasn't an asset. Assets are only those things that give you positive cash flow, doncha know?

He's been ranting ever since. He even posted the correct definition and then ignored it. He's a slightly more unbalanced than average doom and gloomer.

50 posted on 02/01/2006 10:13:37 AM PST by Toddsterpatriot (Why are protectionists so bad at math?)
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To: x5452; Toddsterpatriot

Dear x5452,

I asked where someone called a car "savings." You gave me a link where Toddsterpatriot sarcastically says cars are never assets.

Is there a post anywhere where someone calls a car "savings"?

Thanks again,


sitetest


51 posted on 02/01/2006 10:15:21 AM PST by sitetest (If Roe is not overturned, no unborn child will ever be protected in law.)
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To: Toddsterpatriot

"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."

That's a joke. Home ownership is not really ownership if the bank owns the house and you pay them a mortgage!

The percentage of Home Equity has gone down and the article forgot to mention that.


52 posted on 02/01/2006 10:15:51 AM PST by webstersII
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To: Toddsterpatriot
Assets are only those things that give you positive cash flow?

Yikes. Must be a huge fan of the Matrix movies.

53 posted on 02/01/2006 10:16:13 AM PST by 1rudeboy
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To: conservative physics

look at it this way...

if the federal government abolished the income tax and replaced it with a 30% property tax that didn't exclude your primary residence...

20 years from now liberals would be screaming that homeownership is at an all time low !

People adjust their lives to avoid paying more taxes than they have to, it's a fact of life.


54 posted on 02/01/2006 10:18:38 AM PST by conservative physics
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To: webstersII
The percentage of Home Equity has gone down and the article forgot to mention that.

Yes, the percentage has plummeted to 57.1%.

Federal Reserve, page 110 of 124 pdf

55 posted on 02/01/2006 10:18:39 AM PST by Toddsterpatriot (Why are protectionists so bad at math?)
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To: conservative physics

I think Americans have changed where they've put their money however I would not call it savings.

I'd say a good percentage have put it into things of little or no future value which they are convinced have great value.

I'd also say that yes many are putting them into certain investments however I don't see how one could call the potential future returns of a poorly educated investor 'savings'. Most are investing in something highly tied to volatile markets. It's financial suicide to presume returns on non liquid investments are savings.

People used to get pension plans, now they're all getting retirement plans which are held in investments (thanks to ERISA). None of them are getting extra training how to keep that money growing or at least from shrinking. Yes there is value in these plans but I don't agree with modifying the method used to calculate saving to try to account for this value. Nor do I agree with the notion of folks calling that savings, or being encouraged to do so.


56 posted on 02/01/2006 10:20:05 AM PST by x5452
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To: Toddsterpatriot

You clipped half the definition, and responded only to a portion of it calling IT the definition.


57 posted on 02/01/2006 10:20:47 AM PST by x5452
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To: sitetest
Don't bother. You've probably seen it before on economics threads. Someone too lazy to construct a strawman argument, thinking that he can create an opposing view from thin air, and then attributing it to his opponent instead.

Voila! Cars become savings, free-market capitalists favor illegal immigration, blah, blah, blah. It never ends.

58 posted on 02/01/2006 10:22:57 AM PST by 1rudeboy
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To: 1rudeboy

Calling something which gives you a monthly expense, and is constantly decreasing in value is stupid. It's like the folks pre-87 buying money losing properties to write off the loss on their taxes. Those were really great assets.


59 posted on 02/01/2006 10:23:02 AM PST by x5452
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To: 1rudeboy

I am quite opposed to ilegal immigration thank you.


60 posted on 02/01/2006 10:23:39 AM PST by x5452
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