Friday, April 28, 2006

The End of Personal Saving?

Today's GDP report gives some very good news in the top line number--a real growth rate of 4.8 percent in the first quarter of 2006. As this is the advance report, we'll expect revisions to the number at the end of May with the preliminary report and at the end of June with the final report. But an annual growth rate of 4.8 percent is a very nice place to start.

The GDP report also contains information on personal income and saving, and this continues to be more and more puzzling:

Personal saving -- disposable personal income less personal outlays -- was a negative $50.5 billion in the first quarter, compared with a negative $15.8 billion in the fourth. The personal saving rate -- saving as a percentage of disposable personal income -- decreased from a negative 0.2 percent in the fourth quarter to a negative 0.5 percent in the first. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.

In a free society with a market economy, we have choices about whether to save or consume our resources today, and I don't presume to tell people which choice to make. But it's a very simple truth that we cannot consume the same resources both today and tomorrow, and so it is with an eye toward the ability to consume in the future that economists generally believe that the savings rate should be high rather than low.

I wonder how it can be that with the Baby Boom generation in the high-income and presumably high-saving part of its economic life cycle, we can possibly have negative saving rates for the population as a whole, if we are making decisions with any attention to the amount of consumption we will be able to do in the future.


Tom C said...

I'm really not trying to be snarky here, but since I'm just going through this phase of life, I feel certain that the decrease in personal savings is tied to the baby-boom-echo generation going to college. Basically, all that borrowed money is going to pay you, your deans, and all those development guys wearing $1000 suits I saw while touring Middlebury, Amherst and, actually, Dartmouth.

Ok, so it is a little snarky.

Andrew Samwick said...

If there is a $1000 suit anywhere on Dartmouth's campus, I haven't seen it. But I'd be happy to have some TomC-lets around here.

So the BB generation would have saved for retirement, but it saved for the BB-echo's college instead? Or is it now the time for them to start thinking about saving for retirement, and depending on how that goes, they'll decide when they retire?

Lord said...

the Baby Boom generation in the high-income and presumably high-saving part of its economic life cycle

I am very sceptical this is the case anymore. With falling labor participation rates in these vaunted high-income years, I think this has become more myth than fact anymore, and declining saving are an indication of this.

PGL said...

Nice post given that consumption growth was greater than output growth. Brad DeLong suggests fiscal restraint. I guess the goods news is that state and local governments are doing so but not the FEDs (see Angrybear).

Tom C said...

"So the BB generation would have saved for retirement, but it saved for the BB-echo's college instead?"

I think that parents 10-20 years ago saved for college and found out it wasn't such a good idea. They'll take any actual dollars any reasonable person can save and, if you happen to have an average 2-person household professional income, demand that you subsidize someone else who doesn't. But if you DON'T save, you pay a lot less for the same education.

Why, in this case, would you save? The optimal plan is a lot like draining your assets before Medicaid takes over...spend like mad on things that don't count towards the dreaded formula, and borrow on your house so you can deduct the interest.

As to retirement, I think most people my age (48) simply think we're going to work part time when we're older. This could be wishful thinking.

And, on the personal note, it's coming down to Dartmouth vs. Middlebury. No telling what the young devil is thinking. At least it's over by tomorrow.

Anonymous said...

tom c,

Your comment is not so much snarky as totally, utterly wrong. College tuition has gone up, that doesn't mean parental contributions toward college have gone up. There is good evidence that the amount parents pay has in fact gone DOWN.

Education News

Parents shifting cost of college to kids
Apr 11, 2006, 4:55 GMT

NEW YORK, NY, United States (UPI) -- Parents in the United States appear less willing to pay high college tuition and are shifting the burden to their children, student aid officers say.

'What I`ve really seen in the last 10 years is a generational shifting of the responsibility,' Ellen Frishberg, director of student financial services at Johns Hopkins University, told The New York Times. 'Our parents helped us pay for school. These parents are not as willing to help their children pay for school.'

While much of the evidence is anecdotal, one measurable trend is the growth of private educational loans, which went from $10.4 billion in 2003-04 to $13.8 billion last year. These are likely to be taken out by students to borrow beyond the limits set by government programs, because parents could get more favorable rates under the federal PLUS program.

Some parents told the Times they have given their children a choice: they can attend an in-state public college or university or pay their own way at a private or out-of-state institution.

imjustbigboneddammit said...

> But it's a very simple truth that we cannot consume the same resources both today and tomorrow.

A simple truth, yes, but it infers a Malthusian universe that simply doesn't exist. Spending today doesn't necessarily mean the inability to spend tomorrow, if assets appreciate or income grows.

TStockmann said...

Amid the complaints about the low savings rate we keep hearing praise of high consumer confidence numbers, something like Augustine's "Give me chasitiy, Lord, but do not give it to me yet."

Dave Schuler said...

Andrew, I've given this explanation elsewhere but let me try it again. Don't focus on the age cohorts. Look at the income quintiles. Almost all of the real income growth over the last generation has been in the topmost quintile. Other quintiles have seen their incomes stay roughly the same or even decrease. Pragmatically speaking you can't expect saving from those quintiles. Saving needs to come from the topmost quintile because that's where the income (and even more importantly the increase in income) is.

The topmost quintile is very, very confident that their income will stay high come what may. So why save?

donna said...

Who can be bothered to save when there are all those SUVs to buy? And then you have to buy gas for them, and well, the mortgage just went up again on the arm, and, well, I have to go get my weekly manicure and pedi and get my hair done again, which is now $150 for the color and cut, and we simply have to go to Europe again this summer....

Heh. Save. Boomers. Funny...

As a younger boomer myself, suffering in our little 1300 sq ft house surrounded by overpriced, oversized McMansions in SoCal and run over by the behemoths on the road, practically literally at times (and then the bitch yells at me for not looking at her driving 40 mph in the parking lot while I crossed in the cross walk..) I can only wait for my retirement when I blissfully pass them working their part times jobs in the stores... but, at least our own retirement funds are stocked, AND there is money in the bank.

Anonymous said...

But it's a very simple truth that we cannot consume the same resources both today and tomorrow, and so it is with an eye toward the ability to consume in the future that economists generally believe that the savings rate should be high rather than low.

It's possible that the United States is basically consuming the resources of foriegners right now - without necessarily honoring the promisese to return those resources later on. The US is like a hedge fund - The fed and other central banks keep the financing costs low while US residents buy stocks and real estate and go short dollars (debt). At some point in the future we'll just print more dollars and pay all those debts off - meanwhile the real value value of the assets we own will still be there.

The only problem is we can only do this once. So in the meantime the trick is to convince the suckers financing us that we will not default through inflation or outright.

James Kroeger said...

Let's go over this one more time:

The BEA calculates the Personal Savings Rate based on the assumption that:


Total Savings is calculated from Income and Spending numbers. The Personal Savings Rate is the percentage of total income that is saved:




Note that---all else equal---a higher calculated INCOME number will result in a higher calculated Personal Savings Rate.

One big reason why the BEA's calculated Personal Savings Rate does not provide us with useful information on national savings is because BEA economists do not include in their calculation of total personal INCOME the income that households earn from capital gains. They have their reasons for doing this but they are not ultimately good reasons, for capital gains income can be either (1) saved or (2) spent on consumption, just like any other kind of income.

If BEA economists were to include capital gains income as part of total personal income, the result would be a significantly higher calculated PSR. From this, we can see why the calculated PSR has declined while the Republicans have been running the Federal government.

As they have cut the income tax rates of the wealthy, a greater share of the nation’s total income is comprised of capital gains income. This is because the very wealthy are most likely to use the huge gifts of disposable income that the Republicans have given them to buy assets, like stocks and real estate. The result, a lower calculated PSR due to a technicality.

The Misunderstood Relationship Between Savings & Investment