On Americans' Consumption and Savings

by Don Boudreaux on February 8, 2006

in Myths and Fallacies, Trade

Maybe Americans save too little — or maybe we save adequately — or save excessively.  Who knows?

Who knows?! Sounds like a silly question.  After all, we all know that we Americans are reckless spendthrifts.

Perhaps, though, what we know ain’t so.  Michael Mandel very clearly highlights several of the shortcomings afflicting the method used by statisticians to measure consumption and savings-and-investment.  For example:

Education — human
capital — is surely a long-lived asset, but government and personal
spending on education is mostly put into the consumption bin (the
actual physical plant of educational institutions goes into the
investment bin). Academic and government spending on research and
development also, by and large, go into the consumption bin [that is, counted as consumption expenditures rather than as investment expenditures].

See also here.  (Hat tip to Tyler at Marginal Revolution.)

I don’t know if these measurement shortcomings mask an American savings rate that, in fact, is much higher than it is conventionally believed to be.  Maybe; maybe not.  But I do know that these problems reviewed by Mandel are important enough to cause you to pause before you panic at the next report of Americans’ low, low, low rate of savings.
…….

More fundamentally, one of the greatest benefits of globalization and the economic integration that it creates is that the savings rate of any one group of people becomes less important.  More on this point later.

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{ 7 comments }

Wulf February 8, 2006 at 7:14 pm

If nothing else, I feel better now.

James February 8, 2006 at 8:44 pm

While I think there is a lot of good that can come from inspecting how any of these economic figures are generated, it seems like this misses the real elephant in the room. All of the undersaving worry sneaks in a normative assumption about how much people should save. If people strongly prefer present goods to future goods, I can't see why they shouldn't spend their entire paycheck as they get it.

Wild Pegasus February 8, 2006 at 10:24 pm

The point of savings is to enable future consumption. Savings are valuable both to enable regular future consumption – a down payment on a house – and emergency future consumption – I lost my job and need to pay the mortgage.

So far as I'm concerned, emergency future consumption is way more important than regular future consumption, if we're talking about the prospects of a stable economy. R&D and education investment is great, but you can't trade it for a pound of beef if your company goes under. Hence, I can't really think of it as savings.

- Josh

Morgan February 8, 2006 at 11:20 pm

Josh:

If you're worried about people being able to afford a loaf of bread next year, you should keep in mind that American households added $5 trillion to their net worth last year.

http://yargb.blogspot.com/2006/02/recipe-for-national-disaster.html

The "personal savings rate" misses whatever it is that is causing people to have larger balances in their mutual funds and bank accounts.

Aaron Krowne February 9, 2006 at 9:35 am

What argument is this post actually making?

The issue being debated regarding savings is the US's–and only the US's–anomolously-negative savings rate.

I believe no other developed country (or perhaps no other country at all) has this feature.

How would the precise manner of calculation of the GDP obviate this claim? Don't all countries calculate the GDP in roughly the same way? Don't people in other developed countries buy education too?

Obviously what is going on here is that the enormous "equity cushion" of home ownership has enabled a unique trend, and that for some reason, most consumers have no cash savings to use for spending. I'll leave the causes of these phenomena as an exercise to the reader…

Aaron Krowne February 9, 2006 at 9:43 am

Mandel's article, by the way, misses the point.

Because of the subjective nature of value-creation, GDP is in principle something that can never be precisely measured. You can tweak it and tune it hoping to get a better grip on it in terms of commonly-agreed on aspects of value, but there will always be major flaws.

This is why GDP should never be used as a nominal metric, only as a relative one. It should only be used to compare between countries who calculate GDP in roughly the same way, and used to compare within a country based on time-series of phenomenon that utilize GDP calculated in a similar manner across the series.

There must be an empirical element. For example, is it bad that our debt burden has risen from 30% to 60% of GDP in four years? Perhaps. The answer would depend on what happened in the past when the debt burden for the global-currency-reserve country was similarly situated.

But because of the fuzzy nature of GDP, there is no 100% sure answer.

JABBER February 9, 2006 at 10:00 am

Dumping education into the consumption bin has always bugged me, too. It's a clear investment category.

As far as savings being too much or too little, I withhold judgment. It DOES seem to me, though, that plenty of people are sitting on "paper" savings that won't do them a whole lotta good if the economy tanks, echoing what Wild Pegasus posts above.

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