Saving: A Little Brush Fire?

While we have been arguing the last few weeks about tariffs, saving, and trade deficits, the Congressional Budget Office was preparing its Budget and Economic Outlook 2018 to 2028 (www.cbo.gov). It might not seem obvious how the CBO’s work relates to our tariff spat, so I decided to spend a perfectly nice Sunday morning tying the two together. The main idea is that our trade deficits have very little to do with cheating and everything to do with national saving. National saving has a lot to do with government deficits. 

Some of you don’t like the convoluted explanation that insufficient domestic saving (over-consumption) draws in foreign saving, raises the value of the dollar, and creates a (larger) trade deficit. It sounds much too theoretical. And you don’t see how Americans who love their lattes and other luxuries could ever behave like folks in other countries who actually try to balance their budgets.

But that’s all recorded in the past few weeks of blogs. If that hammer wasn’t big enough, I now want to bring the CBO’s latest sledgehammer into the project. Some of you are old enough to remember the world as it was in 2007 before the global recession slapped us around. In those good old days, a cup of coffee cost 20 cents and tasted like tea and most of us drank water from a tap in a thing called a glass. In 2007, the US budget deficit was $161 billion and the net national debt was $5 trillion.

Let’s back up. A government deficit is a one-year measure. In 2007, the government spent about $2.7 trillion, collected revenue of about $2.6 trillion, and sold government bonds to the public totaling $161 billion. Yes, when the government spends more than it collects in tax revenue it must borrow the difference. The $161 billion of 2007 was pretty typical of US government borrowing between 1999 and 2007 though it oscillated from year to year and hit a high of around $400 billion during one of those years.

The government borrows mostly from US savers. Borrowing $200 billion or so per year did not put too much stress on US saving. But imagine what happens when the borrowing rises from $161 billion in 2007 to $1.4 trillion in 2009. You are correct. That’s a 10-fold increase. If households and business firms are trying to borrow from savers at the same time, you can imagine how domestic saving might be insufficient or at least less sufficient to cover the borrowing. In such cases foreigners make up the difference. They bring their savings from countries around the world to the USA.

But wasn’t that $1.4 trillion government deficit a one-time thing? We had a huge and scary recession, and our government did what it was supposed to do to generate more spending in the economy – tax less and spend more. That’s true. And all looked pretty good as government deficits began to get smaller. Then along came two events: the Tax Reform of 2017 and the Bipartisan Budget Act of 2018. Between these two waves of the magic wand, we took the budget deficit from $665 billion in 2017 to $1 trillion in 2020 and $1.5 trillion in 2028.

John Maynard Keynes thought the government should use a deficit in short-term situations with the intent of stimulating output. The fiscal dividend of the rising output would be a surge in tax revenues and a decline in government spending. Viola – a temporary deficit then vanishes into thin air. Keynes would be scratching his head about how nearly a decade after the recession started we are still stoking the fires with larger and larger deficits.

What sorts of things are wrong with this situation besides causing Keynes to roll over in his casket? First, the government is gobbling up our saving in the USA and sucking even more in from abroad. This makes it harder for US firms to borrow, to expand, modernize, and otherwise raise productivity. Economists call this “crowding out” of investment spending. Second, these government deficits that reduce available saving raise the value of the dollar and hurt our trade balance.

Third, these government deficits accumulate. If the US borrows $500 billion one year and another $1 trillion the next, then in those two years it has added $1.5 trillion to the national debt. The US net national debt was about $5 trillion in 2007. By 2017 it tripled to just under $15 trillion. The CBO says it will rise to $29 trillion by 2028. What a ride! In 2007 the net debt was 35% of the national economy. By 2017 it rose to 77%, and by 2028 it will be closing in on 100% of the economy.

Keep in mind that these forecasts extrapolate from current law only. It is possible to imagine this government raising spending (or lowering tax rates) even more during the next 10 years. It is also a sure thing that the US will encounter another recession before 2028. Either of those eventualities will cause the deficits to bleed even more and the national debt to be taller than a giant beanstalk. 

Need I say more? Between households, firms, and our lovely government, we are spending our brains out and the impact is to lower national productivity and competitiveness. We have too little business spending on capital and a corresponding trade deficit. Are we sure we don’t want to tend to this brush fire? Whether it is the government or the consumer, can we not find a way to restore more balance between revenue and spending? I guess we can always start over after the fire ravages our nation. 

Lesson 7 GDP: Hitting on Fewer Cylinders

GDP makes my heart flutter.  GDP is to macroeconomics as corn and oak barrels are to bourbon. Each quarter the Bureau of Economic Analysis publishes data on US GDP along with revisions of many of the numbers for past quarters. These announcements generate a lot of oohs and ahhs. Most of us want a bigger number each quarter because it shows how sexy we are as a nation. A higher GDP means our nation produced more stuff. That usually means more people were employed, companies made better profits, and Donald Trump passed more gas. In quarters when GDP slows or declines, we have sad faces and we ask friends and relatives – what did we do to deserve such a fate?

So when the latest numbers came out recently for Q2 2015, I decided to see what’s up. Like you I know that the US economy is not growing as fast as we want it to grow. I know that because Joe Biden said so. Also the stock market said so and has been side-ways waffling as it tries to decide if we are ever going to grow as in the good old days when Gene Autry rode Lassie. For example, in the 8 years from 2000 to 2007 the average annual growth rate of real (as opposed to unreal) GDP was about 2.5%. Although that was nothing to write home about, real GDP rose by an average of only 1.1% in the following 8 years – from 2008 to 1015. Both time periods included recessionary quarters.

If you are good with numbers you realize that 1.1% is less than 2.5% and that makes for a lot of unsmiley faces on the BEA’s Facebook account. If you are even better with numbers you could proudly announce that our national growth rate was only about 44% of what it was. Clearly we have been experiencing a prolonged slowdown.

This post is not about blame though I do blame a lot of people. You can ask my spiritual advisor/bartender about all that. What this post is about, however, is looking deeper at real GDP to see if we can identify weak spots. The IU football team has a weakness in the defensive secondary such that even when the offense scores 179 points against any opponent, we always lose in the last seconds on a Hail Mary Pass. By focusing on the weak spots we might be better able to understand why we are doing so poorly.

There is more than one way to look more deeply at real GDP. Today I am looking at the buyers of all that stuff we produce. The BEA breaks down the buyers into four groups – shirts, skins, stripes, and plaids. No that’s not right. The four key buying groups are households, firms, governments, and foreigners.

Average values of GDP contribution for the two eight year time periods are found in the below table for key GDP components by purchaser.  These contributions are measured in percents but are not the percentage change for the category. These contributions show how much GDP would have grown in that time period were it only for that one component. 

For example, from 2000 to 2007 of those 12 categories, Spending on GDP for Consumer Services accounted for GDP growing by about 1.14% over those eight years. Since GDP grew by about 2.5% per year, spending on consumer services alone accounted for a little less than half of that growth.  There were six buying categories that made major contributions well above zero percent.

Now let’s see what changed in the next eight years. Recall that real GDP grew by only 1.1% on average from 2008 to 2015. Consumer services alone accounted for .56% of that. That is a healthy share but notice that it is half the 1.14% of the previous eight years.

More strikingly is that only three other sectors were supporting 0.10% or more growth per year from 2008 to 2015. In 2000 to 2007, 8 buying groups accounted for .10% or more points of GDP growth. Growth has become much less balanced from 2008 to 2015. The household is driving the wagon, albeit slower. Business firms are smoking Js in the back. The government seems more willing to increase transfer payments than spend more on goods and services.

Worse, most of these buying groups contributed much less to GDP growth in the last eight years (compared to the previous eight years)

58 points less for Consumer Services

29 points less for Consumer Durable Goods

25 points less for State and Local Governments

21 points less for Consumer Nondurable Goods

18 points less for Federal Government Spending on National Defense

13 points less for Business Equipment
12 points less for Business Structures

  9 points less for Exports to Foreign Buyers

What can we make of this? Economic growth continues to be disappointing because we are not spending.  We are essentially hitting on no cylinders because the weakness comes from households, firms, governments, and foreign buyers. We have this widespread lackluster performance despite strong government stimulus and a central bank that keeps interest rates at zero. As government spending turns away from military and other goods to social programs the impact of government at all levels of GDP seems to be lacking. More worrisome is the behavior of businesses. Why are they so unwilling to bet on a vibrant future? 

Contribution to Real GDP

(percent)

       00-0         08-15        Change

0.52	0.23	-0.29	Durable goods
0.37	0.16	-0.21	Nondurable goods
1.14	0.56	-0.58	Services
0.04	-0.08	-0.12	Structures
0.22	0.10	-0.13	Equipment
0.14	0.12	-0.02	Intellectual property products
-0.05	-0.07	-0.02	Residential
0.47	0.38	-0.09	Exports
-0.68	-0.28	0.40	Imports
0.16	-0.02	-0.18	National defense govt
0.08	0.04	-0.04	Nondefense govt
0.15	-0.10	-0.25	State and local govt

   

Hiccup or Real Concern -- April's Drop in Real Consumer Spending

The BEA (www.bea.gov ) published April’s Real Consumer Expenditure (RPCE) with a press release heading that read “Real Consumer Spending Falls in April.” Following this announcement I saw quite a few reactions. Most of them lamented the 0.3% April decrease and worried loudly that the general slowdown experienced in the first quarter might continue into 2014. The Wall Street Journal on May 31 wondered if economists’ projections might be too rosy for the coming year.

Note: This paragraph has changed thanks to an alert reader Danny finding an error in a calculation. See my comment below for more information. The newest data releases contain valuable information. They always do. They are news. But it is safe to say that one month’s spending data can also be highly misleading. For example, while April’s RPCE did fall by .3% it is also true that RPCE rose by .5% in February and .8% in March. If you average over these three months you get an average monthly gain of approximately 0.33%. Dig a little farther. These data are presented in real terms and are one-month growth rates. They have not been annualized. A 0.33% average annual compounded real spending gain amounts to almost 5% per year. If the three month Feb to April annual average gain were to keep up for the rest of the year – RPCE would increase by about 5% more than the inflation rate. That would be a pretty good year. I am not saying that growth rate will keep up. But if you get away from one month and take a longer look at what happened in the last three months – you get torrid growth in consumer spending.

While pessimists have focused on various disappointments in wages, this BEA report for April contained more hopeful information about personal income (PI) change. During the three months from Feb to April, PI rose an average of .4% per month. Removing consumer inflation and taxes you get real Disposable PI rising just shy of 0.3% per month. If you annualize that you get about 4% per year. While not spectacular, a 4% growth in real DPI means households were earning a lot more than inflation and taxes – with room left to spend and save to the tune of 4% more per year. I should also note that the personal saving rate averaged about 4% during those three months.

Monthly data is crazy. Suppose…

·        After a successful 10 month diet where you lost 40 pounds, you gained a pound yesterday.

·        After 22 miles into a marathon run, you averaged a slower pace over the last half mile.

·        After 45 years of marriage your faithful spouse was late for dinner last night

·        After winning 90 percent of their games your favorite sports team is behind its opponent at halftime.

·        After eating seven chili dogs your burp.

Okay, so I had a few JDs. But you get the point. The last observation is only the latest one. It might be a wonderful indicator of what is to come next. Maybe you will gain another 39 pounds. Maybe you will not go on to eat 12 chili dogs and not get your name on a plaque at the Corner Bar in Rockford Michigan. But then again, maybe the last observation is an aberration.

Monthly data bounces around. Stuff that usually happens in April this year might have been done late in May because of holidays, or weather, or because someone forgot! This is why we usually do not make too much out of last month and often either wait and see – or we combine last month with a longer stream of information to get a broader picture. When we do this with BEA’s spending, income, and saving data we get a pretty positive picture.

I am betting on momentum. Look at all the housing and stock market wealth that has been created in the last year. And while much of it went to high income people, a lot of it went to elderly and other people whose income depends on housing and stock prices. Employment gains have been slow but cumulative with a 2.3 million increase in workers on nonfarm payrolls in the past year. Note that while real GDP did contract in 2014 Q1, real consumer spending was up by 3.1% at an annual rate in that otherwise dubious quarter. The down quarter in real GDP came after four quarters with rates of 1.1%, 2.5%, 4.1% and 2.6%.

Betting on momentum and inertia does not translate into a record growth rate for 2014. But it does suggest a year in which overall real GDP and consumer spending will continue to gather steam and grow.  Analysts had fun getting all pessimistic about April’s consumer spending decline. But I doubt it is anything more than a little hiccup in an ongoing and fretful economic expansion.

            

Government Taxes and Spending Threaten Economy This Year

Earlier this year I wrote about momentum being an important factor keeping the US economy rolling along. In a subsequent post I pointed out how the current growth was very unbalanced and why that was a risk factor for sustaining the weak expansion. Today I continue that theme, but this time looking at some details about personal income growth. The bottom line is that little of the economic success experienced this year comes from sustainable gains in the private sector. Government is responsible for much of the temporary improvement last year and at the center of why there is little hope for a stronger rebound this year. The data supporting this conclusion come from a table posted by the Bureau of Economic Analysis at http://www.bea.gov/newsreleases/national/gdp/2014/gdp4q13_2nd.htm

See the bottom of this post for BEA’s Table 10 where BEA breaks down Personal Income (PI). I deleted a lot of the quarters from the original table. The table below shows you figures for the final quarter of 2013 and the percentage change since the final quarter of 2012.  Table 10 is worrisome with respect to future US growth. While most GDP figures reported are in real or deflated terms, most of what you see in Table 10 is nominal, meaning that each item is measured in current prices. The top line shows that PI in the US was about $14.3 trillion in the fourth quarter (annualized). It increased by about $230 billion during 2013. That amounted to a nominal increase of 1.6%. By historical terms that increase was very weak. 

But the story is much worse:

·        If we deflate PI for inflation what remains was a 0.6% real increase in Personal Income in 2013.

·        During that same time period real GDP increased by 2.5% and Real Personal Consumption expenditures increased by 2.1%.

·        Thus real PI is not a sustaining force when it comes to driving spending in the economy.

·        At the bottom of the table under addenda you see something called Personal Disposable Income in chained dollars (RPDI).  RPDI is a better proxy for the impact of income of spending since it removes inflation and taxes from nominal Personal Income.

·        RPDI declined by 0.2% in the past year.

I come to two conclusions. First, spending in 2013 was not being driven by real income gains. Second, spending has been driven by more debt or depletion of saving. Near the bottom of the chart you see that the rate of Personal Saving declined from 6.6% of GDP down to 4.5% in just one year. Or if you prefer dollar terms, US Personal Savings declined by $259 billion between the end of 2012 and the end of 2013.

Let’s understand better the sources of the problem. In 2013 PI rose by $230 billion. It sounds impressive that Wages and Salaries accounted for $146 billion of the increase. But also included in the gain in PI was $76 billion in government transfer payments to households. These transfers include money the government sends to us in the way of benefits for welfare, pensions, healthcare and so on. It is remarkable that government transfers were responsible for more than half as much as the entire private sector’s wage and salary growth.

So while government was a main contributor in 2013 to the gains in PI, it was also the main detractor. In 2013 households paid money to the government – money for personal income taxes and also their contributions to Social Security system – or what we call payroll taxes. The combined total of income and payroll taxes in 2013 was about $2.8 trillion – or $280 billion more than in 2012. Say what? PI increased by $230 billion in 2013 while household taxes increased by $280 billion. Now you can more easily see why RDPI decreased in 2013. Although the government is propping up income through increased transfer payments of $76 billion, they were taking it away from spending by increasing taxes by $230 billion.

Bottom line. Wages and salaries grew by $146 billion in 2013. The government added to those income gains by increasing transfer payments by $76 billion (as you can see from the table there are other sources of PI but I am intentionally ignoring that detail here).  So the sum of the increases of W&S and Government Transfers in 2013 was about $222 billion. The government wiped out that entire increase with the $230 billion increase in taxes.

And we wonder why households are not spending more. The result of course is that people have to buy things. Without sufficient income growth they borrow or run down their precious savings. This is bad for a lot of reasons. But the main point of this posting is that household spending is the core of the economy representing 70% of all spending. Our policymakers cannot handle financial planning. Our government deficit is such a problem that we must tax our households to death. To make up for that fact, they give some of us transfer payments but that does little to support spending. Worse yet, because of government debt, there is pressure to reduce transfer payments and raise taxes. Under current budget and taxation policy it is hard to see how the engine of the economy will be coming back anytime soon.

Table 10.--Personal Income and Its Disposition
[Billions of dollars; quarters seasonally adjusted at annual rates]

	2013Q4r	%Chg
Personal income1...........................	14303.4	1.6
Compensation of employees................	8968.8	2.1
Wages and salaries.....................	7232.5	2.1
Supplements to wages and salaries......	1736.3	2.1
Proprietors' income with inventory
valuation and capital consumption
adjustments.............................	1356.2	8.7
Farm...................................	112.9	51.5
Nonfarm................................	1243.3	6.0
Rental income of persons with capital
consumption adjustment..................	602.7	8.5
Personal income receipts on assets.......	2030.6	-1.6
Personal interest income...............	1240.9	1.8
Personal dividend income...............	789.7	-6.5
Personal current transfer receipts.......	2463.6	3.2
Less: Contributions for government
social insurance, domestic.............	1118.5	15.6
Less: Personal current taxes...............	1681.9	8.3
Equals: Disposable personal income.........	12621.5	0.8
Less: Personal outlays.....................	12056.3	3.1
Equals: Personal saving....................	565.2	-31.4
Personal saving as a percentage of
disposable personal income..............	4.5
Addenda:
Personal income excluding current
transfer receipts, billions of
chained (2009) dollars2.................	10997.0	0.3
Disposable personal income, billions of
chained (2009) dollars2.................	11723.1	-0.2

Saving for a Rainy Day

Larry – eat your vegetables, read a book, and save some of your allowance.  How many times did my mother advise me of the basics of a good life? It is not easy to argue with any of these recommendations. We wouldn’t need this kind of advice, of course, if it was easy to follow. Most people struggle to find time in the day to read and learn; to prepare healthy meals; and to not spend every penny. It is this spending and saving issue I want to focus on in this post. The bottom line is that the US squandered decades of opportunities to prepare for an economic crisis like the one we have been experiencing. It didn’t have to happen this way and it was caused largely because we cannot control our national spending.

Wants have no bounds. We can want more goods and then when we have enough of them we often want better ones. In either case this satisfaction requires more income. Not all of our money is spent on our own material satisfaction as most of us share our incomes with our relatives, friends, and members of our community. There is no real end to what we could spend in any given month or year. Yet, we all know that we should save. We save for predictable future events like our kids’ college educations. Of course we all know that Social Security is not enough to provide for our needs in retirement so we save for our golden years. We save for unpredictable events so that we can weather unexpected disasters, an illness, or a job separation.

If we don’t save then we take risks. Every month that finds us spending as much or more than our incomes means that we incur risks. This is not ALWAYS bad. If your future income is higher than expected you and your children can borrow money  at that time to finance a college education. Or you might be lucky and never encounter an unexpected layoff or firing.  Your employer might offer you a great retirement package that supplements your Social Security payments. You might win the lottery or receive a major gift from a relative or friend.  In those cases it turns out that you probably could have saved less. But then again, many of us may not be so lucky and therefore it is very important that we save. If we do not save and if we are not so lucky, then we suffer unnecessary consequences. Our child may not be able to afford college. A lack of saving means that you might have to sell your car or house after you lose your job. It could also mean that you have to borrow money or move into the home of an unpleasant relative. 

You get the picture. Another way of saying this is that there is a clear TRADEOFF between spending today and spending tomorrow. It is tempting to not save today. There is so much we need.  There is so much good we can do with the money right now. But this preference for the here and now clearly and definitely has a cost in terms of the risk of severe difficulties in the future.  By saving a little bit each month you reduce these risks. You sleep a little sounder and there is less probability of an economic disaster in the future. This is what my mom meant.

We are all human and therefore it is easy to understand human failings. But we should, I think, have a higher standard for countries and governments. While we could debate forever the appropriate extent of government spending and saving, I think most of us agree that there should be a government and we should pay taxes to that government so that it can perform important services.  A government is just like a person or household in the sense that it receives income (tax revenues) and it spends (outlays).  And just like us, a government can spend more or less than its current income. When it spends more than its income we call that a government budget deficit or government dis-saving. When it spends less than it receives we call that a government budget surplus or government saving.

Most of us expect our government to be prudent. Some countries have VERY prudent governments that routinely save.  Singapore is one of those countries. The Singapore Investment Corporation takes the country’s saving and invests it on the behalf of the people of Singapore.  We do not all share the view that governments should always save. To many of us, a prudent government would be one that saves in some years, dis-saves in other years, and routinely has some balance between deficits and surpluses. Notice that if a country follows this flip-flopping saving pattern that it never acquires much of a national debt. In years of deficits countries must borrow and acquire debt. In years of surpluses they do the opposite. Debts rise in some years and then are paid off in future years.  This behavior is sensible for me and you and most of us believe this is good for our government as well.

This means that we understand that countries, like individuals and families, have “bad years” where they need to spend more. We even have things called “automatic stabilizers” that enforce that outcome. When a country grows slowly, spending automatically rises and tax revenues fall without any legislation. Of course, when a country enters a very bad economic period, the government will sometimes augment these automatic stabilizers with discretionary fiscal policies that are designed to generate even bigger deficits. While the latter is controversial, I think it is safe to conclude that most people think this is government business as usual. 

Many of us believe it is the right and the responsibility for the government to spend more than it receives in revenue during slow growth and recessionary periods.

Luckily for most countries recessions are infrequent. So while we encounter deficits in the recession years, we have plenty of years to offset the debts incurred. Between 1990 and 2010 there were a total of 21 years in the US. Of those 21 years we had recessions that spanned about four years. After the recession in 1990 we did not have another recession in the USA until 20001. The next one came at the end of 2007. That means there were roughly 17 years when we did not have a recession. It is not unthinkable that during those 17 years our government would have been saving for a rainy day. How might things have been different during the global economic recession of the past years had government’s taken Marge Davidson’s advice to save a little?

Saving is made easier during years where economic growth is stronger. Automatic stabilizers raise tax revenue as they reduce government spending. So the automatic tendency is to increase government saving during these non-recession y ears. During all the non-recession years between 1960 and 2010, you find exactly that – tax revenues not only rose but they rose as a percentage of GDP. That is, taxes rose even faster than GDP in each between-recession time period. But here is the interesting thing about the USA – in only one of these time periods between recessions did the USA budget balance turn to surplus. Between 1991 and 2000 the USA government budget went from a deficit of 3.6% of GDP to a surplus of 1.9%. But even in this case lasting 10 years only three of those years showed budget surpluses. Thus the entire between-recession decade had a very large deficit and managed to add about 18% to the USA national debt.

The recovery and expansion after the 1960 recession lasted about seven years. The first five years had surpluses followed by two years of deficits before the recession of 1969/70. That was the last between-recession time period which cannot be characterized by rising national debt. In that one case, government debt neither increased nor decreased. In a half century of US history we therefore find that our government has not been prudent.  We have added greatly to our national debt during recessions and added even more to the debt during the best times.

You might say that there were between recession time periods when the deficits were made smaller and I would agree with you. The data shows that the US budget deficit fell between 1976 and 1979, 1983 and 1989, and between 2002 and 2007. But notice that in these three episodes the lowest yearly government deficit as a percent of GDP was respectively, 0.5%, 2.4%, and 1.7%. In one sense that is good news. 

During those between-recession years, government deficits as a percentage of GDP did decline. But please notice that during each of those time periods, the national debt rose respectively by 7%, 26.3%, and 14.4%. It is not enough to reduce the deficits in those strong growth years – a country needs to provide surpluses to pay down their debts. Otherwise the debts get larger and larger.

Last month I spent $4 of my $2 allowance. Mom, I only spent $3 of my $2 allowance this month.  It is true that I did better this month and while my debt per month got smaller – my total debt increased from $2 to $3. This is no way for little Larry to get ready for college and it clearly is no way to run a country.  With more saving and less borrowing the onset of the world financial crisis might have been less impactful. More importantly, with more saving and less borrowing, the ability of countries to positively deal with the impacts of the crisis would have been much stronger. Clearly one lesson we should learn from this crisis is the importance of sovereign saving. Of course, we might also eat more vegetables and read a book or two!

I end this with a comparison of the US against 29 other countries – countries that are compared in a publication called Annual International Economic Trends published by the Federal Reserve Bank of St. Louis. Using a recent edition and an earlier one dated 1999 I was able to cobble together annual government budget balances (as a percent of GDP) for 30 countries from 1986 to 2007 – a time period encompassing 22 years. 

I rank these 30 countries in terms of how many times they saved – or how many times* they had budget surpluses in those 22 years. A brief summary follows:

·         Out of those 30 countries, the US ranked 19^th in number of budget surpluses.

·         The US had four surpluses in those 22 years. Those surpluses came back-to-back between 1996 and 1999. During those 22 years there were four recession years. The US government should have been able to save in 18 of those years and managed to save in only four of them.  In 14 years of growth taxes as a percent of GDP rose. Thus in the US we found ways to increase spending even more than taxes during the good times.

·         5 Countries were the best savers with S. Korea and France leading that group having surpluses in all 22 years. The other three countries Malaysia, Chile, and Norway had at least 19 surpluses in the 22 years.

·         Another 13 countries were middle savers – with government surpluses in 5-14 of the 22 years.

·         The bottom group of government savers consisted of the remaining 12 countries – countries that had surpluses in 0 to 4 of the 22 years. Five of these 13 had deficits in all 22 years (Austria, Greece, Israel, Italy and Turkey. The US was part of this group.

*I admit that this evidence is not exhaustive. I have not accounted for the size of the surpluses and deficits. But my main point has to do with spending habits and habits have something to do with frequency.  The US government saved only 4 times in 22 years while most countries routinely saved much more frequently. Since the median number of years saved by these 30 countries was 8 years – the US was well below the median. 

The US is in the company of several countries that have had the most dire choices and consequences because of their inabilities to withstand the financial impacts of the recent world economic recession. 

Do we love debt or do we love spending? It makes a policy difference

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