Doug to FT: Eye popping

SAckerman sackerman at
Mon May 7 09:09:01 PDT 2001

Doug Henwood wrote:

> Since the beginning of the expansion in 1991, Americans have shown a
> marginal propensity to consume (MPC) of 111 per cent - an eye-popping
> number with almost no historical precedent, almost 20 percentage points
> above the 1946-90 average.

Doug, what do you make of the contrary argument - that realized capital gains and higher pensions aren't counted in conventional savings numbers; when they're counted, household saving has been steady over the 1990's?

Here's one version of that story:

Business Week - May 14, 2001

A Phony Negative Savings Rate

A specter continues to haunt the U.S. economy. It is the fear that the low level of personal savings, which has turned negative for the first time since the Depression, heralds a massive retrenchment in consumption that will abruptly terminate the longest expansion in U.S. history.

Most experts link the huge slide in the savings rate from 5.6% in 1995 to -1% last quarter, to the stock market boom. As soaring stocks boosted wealth, consumers began to spend wildly on the assumption that share prices would move ever higher. Now that nearly $4 trillion in stock market capitalization has evaporated, economic Cassandras say it is only a question of time before households slash spending to get their savings back on track.

Not so, says economist Martin Barnes of the Bank Credit Analyst, an investment publication, who argues that consumers have not been on a spending binge. "Most people have not stopped saving," he says, "and that implies that coming cutbacks in spending will be far less drastic than those who focus on the negative savings rate believe."

In calculating the savings rate, notes Barnes, the government defines savings as what is left over after consumer spending is subtracted from aftertax personal income. For reasons related to accounting conventions, however, some items that households regard as income are not included in the government's income tally, while some that households ignore are. The upshot is a false picture of savings behavior.

A case in point is benefits from private pension plans, which have been growing at a 7% to 8% annual rate for years. Rather than counting such pension benefits as income (as Social Security benefits are), the statisticians count corporate contributions to pension funds. And because such contributions weren't needed as fund assets grew during the equity boom, the official measure of personal income was held down, making it appear that people were spending out of their savings.

Similarly, the government doesn't count realized capital gains as personal income because such gains are not related to income generated by current production. Yet such distinctions have little if any impact on people's behavior. Individuals tend to view capital gains as part of their incomes and to spend or save them as they see fit.

Clearly, counting pension benefits and capital gains as income alters the picture of savings behavior. Barnes calculates that such adjustments would not only add 10 percentage points to last year's savings rate but would also show little decline in savings in recent years (chart).

What's more, realized capital gains on stocks this year will still be significant, since only people who have sold stocks bought in the past two years will have losses. And people continue to rack up capital gains from sales of other assets such as homes.

All of this suggests that the negative savings rate is a red herring. "Spending should slow in response to rising unemployment and the stock market woes of the past year," says Barnes, "but not disastrously."

More information about the lbo-talk mailing list