Is the United States saving rate too low?

Evan Soltas reports:

The conventional story is that the U.S. has undersaved and overconsumed for decades…

Why is that story wrong? It ignores the fact that households and institutions make up only about a third of U.S. gross saving.

Domestic businesses, which do the other two thirds of U.S. saving and are not reflected in that personal savings rate, have been saving far more than they have in the past. That has offset the decline in personal saving. We can see that in a graph of gross private saving over gross domestic income below.

The U.S. saves about one fifth of gross domestic income — it saved a little more than that in the 1970s and over the last few years, a little less than that in the 1950s and the 1990s. The apocalyptic trend towards zero savings is simply not there. What appears to be a long-term decline in the savings rate is in fact a hand-off between households and businesses in who does the saving.

There are useful graphs at the link and basically it means you should have bought those extra Christmas presents.  I would add the cautionary note — for Americans but not for the world — that business savings may be more mobile internationally than are household savings.  You also can view these numbers as a harbinger of greater wealth inequality in our future.

Comments

If he's summing sources of saving he should include government too, to get national saving, the total is on the decline. Also nearly half of households have almost no financial safety net which has broader macro consequences. Corporate saving is not a substitute for household saving.

the relevant figure for the private sector is private saving. Government dissaving = private sector saving, in financial terms.

Only in a closed economy

Who owns the debt of the government? Clue- in this discussion it isn't the "private sector".

The US Treasury owes (directly and indirectly, excluding the FRB 12%) 54% (16+6+12+3+17) of the national debt to Americans.

"Pogo, "We have met the enemy and he is us."

FactCheck.org posted 19 November 2013.

Who are the holders of ($16.8 trillion 31 March 2103) U.S. debt?

A: The biggest are the Social Security trust funds (16 percent), the Federal Reserve banks (12 percent), China (8 percent), Japan (7 percent) and mutual funds including money-market funds (6 percent).

Furthermore, other foreign nations hold 19% resulting in 34% (19+8+7) foreign US debt\holders.

Note that other US federal gov entities hold 12% and state local governments 3% making US and local gov holders 31% (16+12+3).

US individuals hold 17%.

So he's saying that the we're witnessing a huge shift in wealth from labor to capital. Do I have this right?

Well it is possible that the mix of saving matters, even if it all remains in the US ... you could have 'too little' saving by households and 'too much' saving by firms occurring at the same time. Just looking at time series of sub-aggregates is only going to tell you how things have changed over time not whether we have a problem (that is, inefficient/inequitable relative to some other possible outcome).

This is a bit of free association but something in Evan's argument not to worry because household saving is only a portion of private saving struck me like the downplaying subprime's size relative to the total mortgage market. Also I am not so sure his claim "The economy does not care where its savings come from." is actually true, at least over some period of time. Nevertheless, I think Evan was probably right to throw some water on Greenspan's saving "crisis" talk and I liked TC's editorial takeaway to buy "those extra Christmas presents" ... I needed some encouragement to pick up a last one on my way home today.

I guess I get the "buy presents." It is a paradox of thrift thing, right?

Of course, if one believes that savings are a life-cycle responsibility to provide for you and yours, then someone else's savings doesn't really help. I'd think in fact that we should judge savings needs on how much private or public maintenance we expect for you and yours. If grandmother will be sent to a good, comfortable, safe home by the state, then sure, buy those presents today.

actually in my case it was more a paradox of pride, but hey even an ex should get an Xmas gift yolo.

More seriously, I do think your life-cycle point underscores why aggregate time series are a poor way to figure out if households are saving too much or too little. (For example, the Baby Boomers are moving through that time series in a way that is hard to comfortably square with the downward trend in the personal saving rate.) Saving over the life-cycle is a complicated calculus (see some nice technical papers by John Rust on this). I do think the individual has to take the institutions as they are and not make personal saving into a morality play ... it is just a decision about how you spread your resources (and those you can legally access) over time or not. In the end, I doubt it is so important how much and when we save but rather exactly how we spend it (both the money and the time we get).

"Saving over the life-cycle is a complicated calculus (see some nice technical papers by John Rust on this). " - or see an early paper by Paul Samuelson, that used complicated calculus.

you're right, Ray. just because a problem has a closed form solution as in Samuelson does not mean it is simple IRL ... no need to go to computational methods like Rust to make the point: life-cycle decision making is complicated. on second thought may not need an economics paper to convince anyone of that.

a. "buy presents"

b. "retirement savings crisis"

Got it!

A family with comfy savings seems a cozy picture. OTOH, a business sitting on a large purse makes me uneasy in more than one ways.

In my naive economic intuition misguided?

No.

The biological purpose of life is to reproduce. Since we're evolved thinking creatures, I would add that it is our purpose to do so serenely and enjoying the trip from cradle to grave to the best of our abilities.

A business is a mean to that end, not an end in itself. And, while a good business may have a longevity superior to any human already born, it is not the express purpose of a business to live or to reproduce.

Thus, too much savings by a business is both philosophically pointless and economically inefficient.

Evan Soltas is simply wrong when he assumes that, as long as private saving is doing okay, it doesn't matter whether it is companies or people who are doing the saving. It matters a great deal.

The only way it wouldn't matter would be if corporate ownership was far more evenly distributed among the population. But I bet that the sheer mention of a greater redistribution of property rights is enough to give conservatives some serious case of cold sweat...

I thought the point of savings was so that business would put those resources to productive work. Dollars on balance sheets doing nothing doesn't grow the economy. You can private individuals to save so businesses can spend because in theory business spending drives economic growth because its in productive capital rather then consumption.

That is exactly what I thought. I suppose I am failing Econ 101 all over again.

We already knew this.

Lord I thought the whole narrative of reasoning behind QE was that companies were sitting on too much cash and needed to be induced to spend it with higher inflation expectations. Now it turns out that companies sitting on too much cash hasn't even been the "conventional wisdom". What the fuck, dude.

Or, that they were previously over leveraged and are building a balance sheet that can absorb more risk, or bear the risk they now have.

Excellent thread!

From an economic standpoint, I don't have an opinion. From a human standpoint, it is my opinion that the fact that payday loan and title loan businesses exist and that credit cards and reverse mortgages and auto leasing and home furnishing leasing exist tells me that we are purchasing more than we can afford and that we are not saving enough - at least families at the lower end of the income scale.

Do economists raise and measure their children in aggregate?

They are all marginal after the first one.

As a small businessman who does business with other small and mid-sized business, I don't doubt that "domestic business" is socking it away like never before. We look out and see nothing but choppy, unpredictable seas. Cash and cash equivalents are the hedge against whatever madness our betters throw at us. Spending is risk, a gamble. Betting your money on the future when it is not controlled by you is foolish, at least is seems foolish. If you want me and my coevals to spend, maybe you should stop trying to force me to do it.

I could point out that the future is never controlled - especially not by you.

Other than that, your reaction is perfectly rational. And it is the paradox of thrift in action. You doing it is rational. Everyone doing it lead to a totally unpleasant macro environment - choppy waters - making your saving decisions even wiser.

We know how to break this loop. We just don't want to.

As to the paradox of thrift, it is pretty much why socialism always ends in a blood bath. The enemies of the revolution refuse to go along with the schemes of the lunatics in charge so they must be eliminated. It is why the folks who drafted ACA went after the self-employed first. They are enemies of the revolution. Then it will be small business. At some point downstream, they either start shooting us or we start shooting them.

'it is pretty much why socialism always ends in a blood bath'

Strangely, what most Europeans call social democracy is what most Americans call socialism. Even more strangely, social democracy has yet to be associated with any bloodbaths. Universal health care and at least partially government owned businesses (ever heard of this car company called VW?) are certainly normal parts of a social democratic society. Wild talk about needing to use violence in a political context? Not so much.

'At some point downstream, they either start shooting us or we start shooting them.'

Somehow, you might want to hook with that other oppressed American minority - I believe they call themselves 'Christians' - if you aren't one already. Because it takes a Marginal Revolution sized amount of delusion, as a self-described small business owner, to talk about the need to shoot people.

Isn't this a good time to remind us, again, that Germany was the first one to have universal health care?
Right before starting two world wars?

Does my outstanding credit card balance count as "savings" by my bank?

I agree. The notion that the persistent trade deficit is a product of profligacy and dissaving is 180 degrees wrong. The trade deficit is a product of the highly lucrative foreign investments of US corporations. Economic models and accounting that can't easily handle systematic differences between risk-adjusted returns on investment, and thus differences in historical cost and market value lead to difficulty in seeing these issues clearly. Americans are saving through our corporations and investing abroad.

http://idiosyncraticwhisk.blogspot.com/2013/08/stop-hatin-on-trade-deficit-aka-america.html

Many "American" corporations are only American in name. Their revenues and employees are overseas and much of their cash is overseas. Transferring savings from Americans to corporations domiciled in the USA does not sound viable - especially if you consider it in the extreme.

'The trade deficit is a product of the highly lucrative foreign investments of US corporations.'

Along with the need to buy profligate amounts of oil.

Maybe not: http://www.bloomberg.com/news/2013-11-12/u-s-nears-energy-independence-by-2035-on-shale-boom-iea-says.html

What they are buying overseas is politicians.

Let us just look at the some of the information - 'The U.S. will surpass Russia and Saudi Arabia as the world’s top oil producer by 2015'

The funny thing is, we were already a larger producer than Saudia Arabia (for example, between 1982 and 1990), and the Soviet Union (though the figures are extremely unreliable) - http://www.indexmundi.com/energy.aspx?product=oil&graph=production

Even more funny, to get back to that earlier level of oil production, we just need to increase our current oil production by a trivial 50%.

And do note just how carefully written such things in that article are, like the following -

'Soaring shale output in the U.S. is helping the world’s largest oil consumer achieve its highest level of energy independence in two decades, cushioning it against disruptions in Africa and the Middle East.' Because even back when the U.S. had its highest oil production of 9,637,00 barrels a day in 1971 ( http://www.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=mcrfpus2&f=a ), the U.S. had been a net oil importer for a couple of decades.

Or how sloppily - 'U.S. oil production will rise to 11.6 million barrels a day in 2020, from 9.2 million in 2012, as it taps rock and shale layers in North Dakota and Texas with the use of horizontal drilling and hydraulic fracturing, according to the IEA, a Paris-based adviser to 28 energy-consuming nations.
.................................
Over the same time period, Saudi Arabian production will fall to 10.6 million from 11.7 million and Russia slips to 10.4 million from 10.7 million barrels. The figures include natural gas liquids, condensates and crude.'

The EIA says the U.S. produced 6,489,000 million barrels of crude a day in 2012 - http://www.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=mcrfpus2&f=a

But why compare figures that are like to like, seeing how the U.S., any decade now, will become 'energy independent' - which it hasn't been for longer than I have been alive, actually. At least in terms of burning more oil than it produces.

The really sad thing is that U.S. oil consumption in 2012 was 18,554,000 barrels a day - meaning that even if the U.S. exceeds the most optimistic estimates in that article of its massaged oil production figure for 2020, we will only be importing millions of barrels of oil a day - viva energy independence, Bloomberg style.

After achieving energy independence we can start worrying about computer independence, clothing independence, all the way down the line. Then we can start on state-by-state energy independence, etc.

I know a guy who has saved $5 million dollars for retirement. Guess it is ok if his neighbors have saved about $5 thousand. It all balances out.

A lot of that corporate cash is overseas. Compare that to domestic personal savings which are probably nearly all onshore.

So 1) take some type of tax haircut to the total savings by corporations and
2) assume it has a longer timeframe to productive use

He doesn't reference or explain where the numbers on business saving come from. So what do they mean?
If Microsoft is saving but half its stock is held by foreigners that is not the same thing as saving by US residents.

My two cents, since we all know how the wisdom of the crowd is superior to one person, and how my wisdom is superior to the crowd :-) (no I'm serious):

(1) this author is a bulls hitter. In other posts: he argues how selling permits on whale hunting will magically solve problems (yes permits are more efficient than quotas, as the goods go to the party that values them most, so less waste, but it won't solve anything: overfishing is overfishing); he argues in an August 9 post that the trade deficit is no big deal, yet fails to cite the 2006 paper by Ricardo Hausmann and Frederico Sturzenegger (see http://tinyurl.com/m4rs54q and compare to http://www.economist.com/node/5408129); he argues in http://tinyurl.com/kqw4omo that there was no housing bubble ("We didn't overbuild housing; we just accommodated the baby boomer preference for single family homes"); and that was just THREE RANDOM POSTS I looked at. This guy is one of those "freakonomics" economists who is too clever by half. Another example: do seatbelts save lives? No. Because people consume risk. Yet, unless we all agree to do away with seatbelts (see here for a place in Germany where they did something like that: http://tinyurl.com/m4c8tct, patterned after the Dutch town of Drachten) seatbelts today DO save lives, since if you are the only one without a seatbelt in a crazy risk consuming highway of seatbelt users, you will die in a crash. So the answer is both true and false.

(2) Soltas does not source his material, so it's not verifiable. Therefore, it's not proveable therefore not scientific therefore not a fact according to Popper et al. I think the data may be bad, compare Soltas' graph with http://tinyurl.com/l7d2qno

(3) Rebecca Wilder at http://tinyurl.com/l7d2qno makes the claim (see link therein) that corporate savings is correlated and caused by civilian unemployment: more savings is just evidence of more unemployment. So the increase in savings is not a good thing in this scenario, hence, even if Soltas is correct, Greenspan, who Soltas criticizes as being wrong, has it right after all, if Wilder's claim of causation is correlation is correct. That was a complex sentence but if you are a chess player, you would understand it. It's like a chess combination, you have to think in a chain and like balancing plates on a stick be able to do this without breaking the chain.

(4) This is related to (3): If I told you that innovation in terms of patent filings correlates nicely with patent law changes, which in turn correlate with economic booms and busts in the following manner, would you think that's good or bad?: changes in patent laws to make patents more easy to obtain result in more patent filings, and these periods happen to coincide with increased business activity and increasing GDP in the USA; by contrast, restrictive periods in patent law tend to result in busts in the business cycle. Sample time periods (boom = when both patent laws were liberalized to make patents easier and GDP was above trend): early 1800s: boom, late 19th century: boom, 1930s: bust, 1950s: boom, 1970s: bust, 1980s: boom, 2000-today: bust. Yet, even though this is a true fact, and I've argued that there's a correlation (so that making patents easier to get will increase GDP), even I in my heart of hearts knows that this is just a statistical artifact or at best coincident indicator (akin to how, during booms, civil laws are relaxed, like for example Glass-Steagall being partially abolished in the late 1990s during the financial boom; antitrust relaxed during the 1980s, etc). Same here: Soltas' artifact may be much ado about nothing

(5) as another poster said upstream, what about government dissavings? Add that to the mix, then what do the data show? Just like in Japan, it changes the composition (in JP for example, adding consumer savings to government net deficit lowers the debt-to-GDP from 220% to something like 120%, which is just at the Rogoff et al. 'limit'; so JP is not so bad after all, contrary to hedge fund manager and JP short Bass)

(7) Internationally, how does this finding hold up? For example Japan consumers have been saving less over the years, now their savings rate is the same as Americans. Is this finding universal or just an artifact? Re artifact, see above on the Ricardo Hausmann and Frederico Sturzenegger paper.

In the bad old days on this blog, this post would have disappeared since there were some technical glitches, and 15 [10] minutes of work would have vanished. Even today if you include forward and/or backward slashes and angle brackets in your reply the post will not be published, due to the arcane backend that powers this site. So Cntrl + A, C and V were necessary. And still are. So let me save the above and now hit the ENTER key...

I bill at $1000 an hour as an expert. This post is worth $250 [$166.67], and you are getting the full coin of my mind for free. You are welcome. Another case of how Walras marginal economics explains the price of turnips but not important stuff like why Nobel Prize winners invent (unless they are raging egomaniacs, like chess players), why chess players spend so much time on a seemingly trivial pursuit, why programmers code for free, irrational exuberance, or this post. Speaking of expert, I'm almost there... 100 points away from the magical 2000 Elo!

So, with all the business saving, they must be preparing to restore pensions for workers who have reduced spending as public policy has been to require workers to save to fund retirement and emergencies so employers and government doesn't need to fund retirement and emergencies.

It can not be encouraging to see individual savings fall over the three plus decades the public policy has been driving changes requiring individuals to save many times what they were saving back in the days of the welfare state.

Your lack of ideological purity is worrying. You're lucky that the powers-that-be in our allegedly free market economies don't have re-education centers and goulags. You'd be first on the list to be deported.

Remember, "Work makes you free".

The savings we are discussing here is the mirror of investment. The BEA estimates income, then the portion of income not used for consumption.

Business savings is retained earnings; it is the property of the shareholders and is reflected in the rising price of shares.

BEA does not count capital gains as income. So you should be wary of what you are counting twice. These savings are already in some workers ledger in his pension plan or savings.

Anyways soltas gets many things wrong. Americans are not saving enough for a long lived retirement. Business investment has been steady only because foreigners are contributing capital.

My two cents, since we all know how the wisdom of the crowd is superior to one person.

(1) this author is sensationalist. In other posts: he argues how selling permits on whale hunting will magically solve problems (yes permits are more efficient than quotas, as the goods go to the party that values them most, so less waste, but it won’t solve anything: overfishing is overfishing); he argues in http://tinyurl.com/kqw4omo that there was no housing bubble (“We didn’t overbuild housing; we just accommodated the baby boomer preference for single family homes”); and that was just two random posts I looked at. This guy may be one of those “freakonomics” economists who is too clever by half. BTW another freakonomics example: do seatbelts save lives? No. Because people consume risk. Yet, unless we all agree to do away with seatbelts (see here for a place in Germany where they did something like that: http://tinyurl.com/m4c8tct, patterned after the Dutch town of Drachten) seatbelts today DO save lives, since if you are the only one without a seatbelt in a crazy risk consuming highway of seatbelt users, you will die in a crash. So the answer is both true and false.

(2) Soltas does not source his material, therefore it’s not verifiable, therefore, it’s not proveable therefore not scientific therefore not a fact according to Popper et al. I think the data may be bad, compare Soltas’ graph with http://tinyurl.com/l7d2qno

(3) Rebecca Wilder at http://tinyurl.com/l7d2qno makes the claim (see link therein) that corporate savings is correlated and caused by civilian unemployment: more savings is just evidence of more unemployment. So the increase in savings is not a good thing in this scenario, hence, even if Soltas is correct, Greenspan, who Soltas criticizes as being wrong, has it right after all, if Wilder’s claim of causation is correlation is correct.

(4) This is related to (3): If I told you that innovation in terms of patent filings correlates nicely with patent law changes, which in turn correlate with economic booms and busts in the following manner, would you think that’s good or bad?: changes in patent laws to make patents more easy to obtain result in more patent filings, and these periods happen to coincide with increased business activity and increasing GDP in the USA; by contrast, restrictive periods in patent law tend to result in busts in the business cycle. Sample time periods (boom = when both patent laws were liberalized to make patents easier and GDP was above trend): early 1800s: boom, late 19th century: boom, 1930s: bust, 1950s: boom, 1970s: bust, 1980s: boom, 2000-today: bust. Yet, even though this is a true fact, and I’ve argued that there’s a correlation (so that making patents easier to get will increase GDP), even I in my heart of hearts knows that this is just a statistical artifact or at best coincident indicator (akin to how, during booms, civil laws are relaxed, like for example Glass-Steagall being partially abolished in the late 1990s during the financial boom; antitrust relaxed during the 1980s, etc). Same here: Soltas’ artifact may be much ado about nothing

(5) as another poster said upstream, what about government dissavings? Add that to the mix, then what do the data show? Just like in Japan, it changes the composition (in JP for example, adding consumer savings to government net deficit lowers the debt-to-GDP from 220% to something like 120%, which is just at the Rogoff et al. ‘limit’; so JP is not so bad after all, contrary to hedge fund manager and JP short Bass)

(7) Internationally, how does this finding hold up? For example Japan consumers have been saving less over the years, now their savings rate is the same as Americans. Is this finding universal or just an artifact?

In the bad old days on this blog, this post would have disappeared since there were some technical glitches, and 15 [10] minutes of work would have vanished. Even today if you include forward and/or backward slashes and angle brackets in your reply the post will not be published, due to the arcane backend that powers this site. So Cntrl + A, C and V were necessary. And still are. So let me save the above and now hit the ENTER key…[TURNS OUT I WAS REJECTED...A TECHNICAL GLITCH...SO THIS IS AN EDITED REPOST...made it a bit tigher in logic, less inflammatory, so a bit more boring] I bill at $1000 an hour as an expert. This post is worth $250 [$166.67], and you are getting the full coin of my mind for free. Another case of how Walras marginal economics explains the price of turnips but not important stuff like why Nobel Prize winners invent (unless they are raging egomaniacs, like chess players), why chess players spend so much time on a seemingly trivial pursuit, why programmers code for free, irrational exuberance, or this post. Speaking of expert, I’m almost there… 100 points away from the magical 2000 Elo!

Oops, I did not catch that Kevin Erdmann is not Evan Soltis...so scratch point #1 .. and I see my first post did escape the moderator-bot, lol!

There must be a deflationary spiral in Ray Lopez Land if this counts as 2 cents. Soltas posted two hours before you commented that his data came from the BEA via FRED. Further, he is addressing a very narrow point: the claim that private savings has declined and therefore knocked 10% off of potential real GDP. He's not addressing more complicated concerns than that. He's implicitly using a simple Solow model where the aggregate savings rate does most of the work.

In the NIPAs, both DC and DB pension plans are included in the personal sector. In the past DB pension plans were common and employees were forced to save for retirement. In the present DB pension plans are rare. No more forced savings. Savings rate is declining as DB pension plans are phased out. It is common knowledge that contributions to DC plans are too low to be preparing people for a similar level of retirement to historical norms.

Soltas is wrong to sum corporate and private savings as he does in his graphs. Corporate savings has been rising due to the favorable tax treatment of retained earnings. However, there are net-capital inflows into the US to offset the current account deficit. Soltas is making a mistake simialr to confusing GDP and GNP. Savings is growing in some sectors but the savings is not accruing to US nationals.

Lets look at the right chart:
http://research.stlouisfed.org/fred2/series/W207RC1Q156SBEA?cid=112

Here we see savings has been crashing over time. The great recession was particularly painful and costly.

Jon,

Aren't we addressing two different issues regarding savings.

The first is whether there are sufficient savings for firms to invest. When the source of savings was private lending, rather than retained earnings, perhaps there would be an issue. But, if the source of savings, for investment, is retained earnings and private savings, and the purpose of measuring savings is to finance investment, I don't see your criticism of Soltas as valid.

The second use of personal savings is for smoothing the consumption curve. For that purpose, personal savings may or may not be adequate. But, the biggest determinant of personal savings is income level...so, are you saying that we should increase income levels so we can increase the personal savings rates.

Not much savings from a McDonald's worker making minimum wage.

Yeah, the DB thing is a bit exaggerated. DB plans never covered more than half the private sector workforce. Social Security has historically been, and will continue to be, the retirement workhorse for most people, along with home equity for the middle class.

Working an extra couple years, or part-time for several years during retirement does wonders for retirement math. This is in fact what people are doing.

To be clear, I think Soltas is being a typical silly lefty here.

The braying comes in all different flavors, but the message is always "SPEND MORE!". Making consumption into virtue still seems like a peculiarly American project.

Who owns the retained earnings of the "domestic" businesses? As a commenter above points out, Microsoft has a ton of retained earnings, but who owns Microsoft? Like Jon above, I think the right metric is going to be the net savings as a fraction of national income.

A lot of this debate seems to me to be the mirror image of the debate from last year about how the government's debt is meaningless because we owe it to ourselves.

If the marginal propensity to invest declined, then wouldn't we expect returns to rise?

Look at Japan, they save more but they're much poorer than us because those savings have been largely wasted -- i.e. the returns were lower.

Investment shortfall is funded by foreigners. That's the mirror image of the trade deficit. No trade deficit, low savings rate, we'd be seeing that you describe.

A lot of American corporate retained earnings are presently holed up in foreign tax shelters awaiting another tax holiday to repatriate them.

dirk is exactly right. This is a framing wrinkle on the Willie Sutton philosophy of taxophiles. Like a bloodhound, they will sniff out their prey wherever it resides.

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