Sep

5

Savings, from Gordon Haave

September 5, 2007 |

PiggyIt's a myth that US households have negative savings rate as a whole. Simply not true. Turn on the TV — all you see are ads for the investment industry. Minus the past few weeks, investments has been as big a boom industry as tech. How can it be that the savings rate is negative, yet the amount of money pouring into mutual funds and banks is so huge? The answer is that the data are no good. The savings rate is in fact very positive.

Riz Din adds:

General thinking on this issue amongst economists is considerably less alarmist than the journalists' version. Importantly, the official savings calculation completely ignores capital appreciation of household assets (housing, stocks), of which there has been much in recent years. This has a balance sheet effect of increasing households' net worth and also encourages further consumption; only the latter is caught by the savings calculation. Also, taxes paid on capital gains are included in the calculation with the effect of lowering disposable income. Oops!

Furthermore, work by economists has revealed that in the US, most debt is distributed amongst the better off segment of society, and it is these people who have experienced the greatest capital gains in recent years. All in all, if we incorporate measurement problems into our thinking and account for the distribution of debt across the population, we should be able to sleep better at night. One fewer 'end of the world' gremlin to worry about.


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