In my Myopic Squirrel post I focused on over-spending and I concluded with the following, “Clearly all this spending reduces the nation’s saving and its ability – like the squirrel – to do what’s best for the future.” While spending and saving are two sides of the same coin, it helps to put spending/saving changes into perspective by focusing now on the saving side. To continue the squirrel analogy (is this driving you up a tree?) I find in this post that it might NOT be so much that squirrels want to over-eat in the Fall – it is more like nuts have become too easy to find and chew. Does the American consumer want to buy more or do they buy more because credit is so much easier to obtain than it used to be?
Household saving will be my focus in this post but it is good to remind you that it is just one part of a nation’s saving – which includes saving by households, businesses, and federal, state, and local governments. Right now the government is a massive dis-saver so solving the household saving problem won’t guarantee a return to normalcy. But you have to start somewhere to build the full story.
While squirrels are fun to watch and talk about (no offense intended to woodchucks and next-door-neighbors) they illustrate the general notion that if a nation doesn’t save enough today it may starve itself tomorrow. In Macro courses we emphasize two problems caused by insufficient saving. First, a low level of saving means that a business firm will find it more difficult and more costly to gain credit to purchase new capital and equipment. If this goes on for years, then firms will reduce how much they spend on productivity enhancement and this will slow output growth, raise prices, and harm competitiveness. Second, if lower national saving is insufficient for investment spending, foreign money will flow into the country to augment it. This process tends to raise the value of the dollar and increase the country’s trade deficit. Whether you focus on the first or second point – the result is a general reduction in domestic and international competitiveness and a slower growing economy. In a nutshell, domestic saving adequacy is very important!
I start by reviewing what most of us know – the saving rate in the USA has fallen dramatically over the years. To make valid comparisons over time, we look at the ratio of saving to disposable income (income less taxes). In 1952 the personal saving rate was 8.4%. That is, of the amount of after-tax income that we can choose to spend or save, households saved 8.4%. If you take the time period from 1952 to approximately 1988, the saving rate varied quite a bit but stayed in a band of between about 6.9% and 10.7%. It averaged about 9%. After about 1988 the saving rate started on a downward trend. Starting at 10.9% in 1982 it generally fell until bottoming at 1.4% in 2005. The rate recovered and was 5.9% in 2009. The rate has gone in the right direction since 2005 but it appears that temporary factors are at work. For example, we will show below how important debt is to our calculation of saving rates. As households walked away from mortgages and other debts and as other families paid down their debts, this led to the increase in recent saving rates. But those debt pay-downs can only last so long. In sum, the following table describes the average annual saving rate since 1952. If 8% is considered a normal rate for the US, then the pattern since 1998 is to be well below that rate.
1952 to 1970 8.2%
1970 to 1982 9.8%
1982 to 1998 6.7%
1998 to 2007 2.8%
2007 to 2009 5.0%
There are many sociological and economic explanations for this distinct trend change in saving behavior. We can, perhaps, pursue some of those in a coming post. Here, I want to focus on what we can learn by looking deeper into the components of saving. Luckily the government calculates saving in two ways. The first and most popular way is what I explained above – saving equals income minus taxes minus spending. This is often called the NIPA definition of saving where NIPA stands for National Income and Product Accounts.
The second definition of saving focuses on the uses or forms of saving. It is called the FFA or Flow of Funds Accounts definition of saving and it is published by the Federal Reserve. Data for both NIPA and FFA can be found at http://www.bea.gov/national/nipaweb/Nipa-Frb.asp . These two measures of saving can sometimes differ. For example, in 2000, the NIPA Personal Saving Rate was 2.9% while the FFA version was -2.4%. That’s a big difference. But I don’t want to emphasize the differences. Graphing both series from 1952 to 2009 shows the same general patterns – saving rates rising through 1988 and then falling thereafter. Both rates show higher saving rates in 2008 and 2009.
The value here in using the FFA Saving series is in what its components tell us. Quoting from A Guide to the NIPAs, “personal saving may be viewed as the net acquisition of financial assets (such as cash and deposits, securities, and the change in life insurance and pension reserves), plus the net investment in produced assets (such as residential housing, less depreciation) less the increase in financial liabilities (such as mortgage debt, consumer credit, and security credit), less net capital transfers received.
That is a mouthful so let’s boil it down to something simple. The FFA Saving figure is a net figure since it looks at how much is being added to or subtracted from what we might call their net worth or net wealth. We say a household has positive net worth if the value of its assets (stocks, bonds, house value, etc) is larger than the value of its liabilities (consumer loans, mortgage loans, etc). We say there is an increase in Saving in a given year when changes in assets and liabilities imply that the value of its net worth would increase. This could happen if asset contributions increased, liabilities decreased, or if assets increased more than liabilities increased. Accordingly, a nation’s saving falls if the value of assets fall, liabilities rise, or if the assets rise more slowly than liabilities.
The main FFA Personal Saving categories are shown below in the table. Consider the main causes of the high average saving rate between 1952 and 1970 – the net acquisition of assets was almost $80 billion per year while net increase in liabilities (including mortgages) averaged only about$28 billion. The increases in assets was almost 3 times the increase in liabilities. Thus, saving rose. In the next period, the saving rate rose again. Notice that net acquisition of financial and real assets averaged about $348 billion from 1970 to 1982 – greater than a four-fold increase compared to the almost $80 billion in the previous time period. Although liabilities increased by 5.5 times – the value of liabilities was small enough that the effect on saving was swamped by the much larger increase in assets.
You might think that the saving rate would have continued increasing after 1982 by virtue of the very large increases in net acquisitions of financial and real assets—at least doubling in 1982 to 1998 and then again in 1998 to 2007. But it didn’t because the value of liabilities was catching up with the assets. The net increase in liabilities averaged over a trillion dollars during 1998 to 2007 – a huge increase compared to 1982 to 1998. A large part of that swing was attributable to increasing mortgage debt – but at least 40% of that increase in household debt beyond the financing of homes.
Here is one way to summarize and gain perspective on what happened to saving over the last 55 years, much of this since 1982. While personal incomes grew about 42 times and assets held increased about 40 times – liabilities grew by 97 times (mortgage liabilities 104 times).
So we see two things going on in the US. Consumer spending is growing very fast relative to disposable income and we see households taking on much more in the way of mortgage and other debt. My father, a product of the Great Depression, bought our home in Miami in 1950 with cash. But the baby boom generation started a trend of buying houses and other things with credit. Did the desire for housing create a love for credit – or was it something in the acceptance and love of credit that created a spending and housing boom? The way you answer these questions underpins how you approach the problem. For example, in my Squirrels post I suggested that households would need to cut $840 billion annually from future spending. Do we constrain spending by using policy to reward saving? Or do we restrain spending by making credit harder to obtain? Or do we do both?
52 to 70 | 70 to 82 | 82 to 98 | 98 to 07 | 07 to 09 | ||||
Saving Rate NIPA | 8.2 | 9.8 | 6.7 | 2.8 | 5.0 | |||
Net acquisition of financial assets | 43.9 | 236.8 | 525.0 | 940.3 | 261.1 | |||
Plus: Net investment in tangible assets | 35.9 | 107.3 | 277.9 | 671.2 | 296.0 | |||
Less: Net increase in liabilities | 27.9 | 151.5 | 370.3 | 1263.7 | -161.2 | |||
Mortgage debt on nonfarm homes | 12.7 | 64.5 | 198.5 | 761.5 | -146.5 | |||
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