I am constantly amazed by the level and depth of the RWNM econ division's attempts to obfuscate the truth. In reality, it often comes down to simply not understanding (or taking the time to research) what they are talking about (or worse, knowing the difference and not caring). Such is the case with the recent Heritage Foundation's recent pronouncement the US savings crisis is overblown.
First, here is a
link to the article.
Secondly, we should define savings because a definition will clear up many of the Heritage Foundation's "misunderstandings". According to my old (as in barely has a spine left) Economics text written by Paul Samuelson and originally titled "Economics":
To the extent that people are willing to save -- to abstain from present consumption and wait for future consumption - to that extent, society can devote resources to new capital formation.
Here's a really simple example to illustrate. Suppose a person makes $100/week and they spend $70. They have saved (not consumed) $30, or 30% of their income.
Here's the second part of savings that leads to the RWNM's "misunderstanding". By not consuming all present income, savers provide a pool of capital that is stored with financial intermediaries. The intermediaries in turn lend investors the collective savings of the people who have not consumed all their present income. Investors use these loans to create new production capital - manufacturing facilities, new business ventures etc.... that will in turn increase the economy's "production possibility frontier" - the amount of goods and services the economy can produce.
Finally, an inherent element of savings is the ability to access saved funds quickly with little cost or penalty. As an example, standard personal financial management theory states individuals should have at least six months of expenses saved in case they lost their job. The money should be in a bank account or other financial intermediary so the individual can access the money quickly. In addition, the individual is not severely penalized for withdrawing his money. (Compare this to a retirement account where the penalties can be fairly extreme.) This cushion prevents the economic shock of losing a job from destroying someone's financial life.
So let's sum up so far. People save by not consuming everything they make. People store saved funds with financial intermediaries. The financial intermediaries pool individual's savings into larger pools of money which the financial intermediaries loan to investors. The investors use the loans to create new production that expands the economy.
Now, let's move on the Heritage Foundation's "Sloppy Analysis of America's Supposed Savings Crisis."
Since the purpose of saving is to add to wealth, the best measure of saving is the addition to wealth. In the third quarter of last year, the Fed's measure of household net worth amounted to $51.1 trillion -- up by more than $5 trillion from a year earlier
The old Kudlow net worth argument. First of all, Household net worth was 21 trillion in 1993 and 41 trillion in 2000 for a net increase of 95%. Under Bush's stewardship household net worth has increased from 41 trillion to 51 trillion for an increase of 24%. So, using Heritage's metric of measurement, Clinton's economy was much better.
But more to the point, remember how savings is the abstinence from present consumption and how that abstinence is cycled through financial intermediaries to investors? The problem with the net worth argument is people must consume (spend money) to increase their assets. Hence, an increase in net worth directly implies consumption, not savings.
Because such investments as home remodeling and college tuition are miscounted as consumption, they reduce the savings rate.
Again, both of these expenses are a net outflow of funds from consumer's incomes. Now, if a consumer doesn't consume part of his income and places that money in a financial intermediary to use at a later date for college tuition - that's savings.
Making a big down payment on an existing house lowers the savings rate, as does paying cash for a new car. Yet homes and cars are assets
Not much foregoing of consumption here.
Corporate saving is also personal savings because stockholders own the corporations. When corporate profits are retained and reinvested, that increases assets per share and results in greater capital gains for 401(k) plans. Undistributed corporate profits accounted for more than 72 percent of total net private savings in 2004, when total private savings hit a record high despite a drop in so-called "personal saving.
First, corporations are the only economic sector (personal and government being the other two) that are actually saving to any degree. For the last few years, the amount of retained corporate earnings as a percent of GDP has fluctuated between 2-4%. However, Individuals are not foregoing their consumption; corporations are. The author is attributing a corporation's decisions to the individual shareholder. In addition, there is no guarantee a stock price will increase because the corporation retains or increases assets. The market determines stock price and the market may decide that an individual company is wasting money by not spending it on expansion, research and development or other expansion activities. Microsoft had between 48 - 78 billion of cash on their balance sheet for the last 3 years, yet their stock price has been stuck in a trading range between $15 - 28 for the same period of time. Finally, suppose an individual shareholder loses their job and they want some of those corporate savings. According to Heritage's logic "Corporate saving is also personal savings because stockholders own the corporations." So I guess all Microsoft shareholders can drive to Redmond Washington and get some cash. Hell, I finally have a reason to buy Microsoft stock.
A central trend occurring in the RWNM econ division is an attempt to find ways to make a poor situation look better by arguing, "something is different" or "something is new". It looks a great deal like the late 1990s when Wall Street analysts were coming up with the most remarkable valuation models companies to justify outrageous stock prices. The market eventually fell back to standard P/E and price to book levels. The more things change, the more they stay the same.
What makes this situation so egregious is the people coming up with these "policy pronouncements" know better. I would bet at least half the economic writers working at Heritage have a copy of at least one if not more Economics texts on their shelves. All they have to do is look it up. Notice how a simple working definition of savings rebutted most of Heritage's assertions? But the author chose not to use the definition because they are more concerned with politics than facts. And that's where the real crime occurs. These people are counting on a combination of their credentials preventing serious challenges and general lack of economic knowledge on their reader's part.