Savings and stocks

[Doug Henwood]

Michael Pollak wrote:
>
>I have another dumb question.  Why is putting your money in a 401(k) in
>the stock market not considered "savings" when the national savings level
>is considered?  There has been much moaning of late that consumer savings
>went to 0.5% for 1998 and negative for the last few months, and the
>explanation is always the same, that people feel so chuffed from having
>their stocks jump in value that they're spending like sailors.
>
>But I don't understand.  If a chap like me, who used to have $500 in his
>savings account, now has 50 grand in his 401(k), my savings have gone
>down?  And if the economy is filled with 40 year olds like me, is the
>sudden virtue of our self-tithing leading the savings rate to go down even
>as we think of ourselves as socking it away?  (Especially if the strain of
>stashing away 10% or more of our salaries causes our credit card balances
>to increase by huge percentages that seem small in absolute terms compared
>to our huge mountains of virtue?)

In the national income accounts, personal saving is defined as income less
taxes less consumption. So if there's new money going into a 401(k) - new
in the sense of coming out unconsumed current income rather than just being
shifted from a bank account - then it does count as personal savings.
Employer contributions to pension plans also count as personal savings (in
the national income accounts, the contributions are included in the
category "other labor income").

Capital gains do not count as savings because the concept underlying the
national accounts is that income is the reward of production; all income
must be matched with production. So, conceptually, savings are unconsumed
income, and investment is unconsumed production - or as Keynes said,
savings and investment "are merely alternative names for the difference
between income and consumption." Cap gains don't originate in production,
and any expansion in wealth from cap gains is just the result of existing
assets being revalued; there's no analogous increase in the stock of
physical capital, and no deferral of consumption.

So the point of pointing to the low savings rate is that there isn't a lot
of tithing going on, or, even if there is, the profligate are borrowing
more than enough to outweigh the prudent.

I'm typing this as a Stein Roe ad for a new mutual fund for kids is running
on CNBC.

Doug