January 31, 2006

Bizzy’s AM Coffee Biz-Econ Links (013106)

Free Links:

  • US Savings Rate was a negative 0.5% last year — This is the lowest rate since the early 1930s during the Depression, and this number is more troubling than it first seems. That’s because, as I have always understood it (Pending Resolved — see comments 1 through 4 below), it includes money put into retirement plans such as IRAs and 401(k) plans as positives. Since hundreds of billions of dollars go into those plans every years, that means people are negatively saving (i.e., borrowing) more than what they’re saving for retirement. This would not appear to be sustainable unless everybody decides that retirement is not necessary.
  • This bit of info seems inconsistent with the tiny 1.1% increase in 4th Quarter 2005 Gross Domestic Product, though it ties in to the previous item — “December Spending Surges as Consumers Dip into Savings”
  • Tony Blair Says Global Warming is Advancing — though it’s not necessarily contradictory, he should explain what he said on Sunday in light of what he said about nobody being willing to accept the Kyoto Protocol’s limitations back in September.
  • I find it amazing how often statistics that don’t even pass the stench test, let alone the smell test, get by the people who transmit them and, when they’re around, their bosses. Eugene Volokh noted that an Oregon college paper reported that 2,000 rapes occur in the US every 5 minutes, when the truth is it’s 2,000 rapes each day, or one every 5 minutes (of course anything more than zero is unacceptable). Oops.
  • Oil execs take cue from high-tech heads (HT Drudge) — I asked why they didn’t consider doing this yesterday (2nd item). I didn’t know they visited here (ha).
  • Exhibit A — Americans are divided ideologically on their perceptions of the economy. People on the left think it stinks, people on the right are generally pleased. CNN television reported that situation, and, within a half-hour, brought on an “analyst” with ideological biases that weren’t disclosed. Ken at The Free Market Project reports.
  • Balloons instead of towers for remote-area wireless service — If it works, bring it on.
  • The fastest-growing economy in the world last year was ……. IRAQ, at 52.3% (HT Don Luskin). More details about where the country stands in comparison to the rest of the world is here.
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10 Comments

  1. http://www.bea.doc.gov/bea/DYK/personal_saving_dyk.htm
    **********************************************
    Personal saving is the amount of current after-tax income that is not used for consumption expenditures.
    **********************************************

    http://msnbc.msn.com/id/7421288/
    **********************************************

    How can savings be falling and net worth rising? Because this widely quoted savings rate overlooks some major sources of American wealth. For one thing, gains on stocks don’t count. Neither does the increase in the value of your house which for many Americans represents a major portion of their net worth.

    When it comes to pension plans, the savings numbers get even screwier. For example, money set aside in a 401(k) plan at work doesn’t count as savings because those are pre-tax dollars and not considered part of your disposable income.
    ***********************************************

    Comment by Bill — January 31, 2006 @ 9:22 am

  2. Bill, thanks for the link. I’m going to CALL someone at the BEA who puts out the report to confirm. I actually called BEA about 10 years ago on this, and got the “as I understand it” answer that I documented above.

    Assuming the MSNBC writer is correct, the personal savings number is nearly worthless, and surely not an indicator of financial distress as it’s usually portrayed.

    Comment by TBlumer — January 31, 2006 @ 10:22 am

  3. Your welcome, I would love to hear what the BEA says and why.

    Comment by Bill — January 31, 2006 @ 12:43 pm

  4. #3, Bill, I called BEA at about 1:30 PM and confirmed that the reported savings rate effectively includes EMPLOYEE contributions to retirement accounts (401k, IRA, etc.) as positives.

    The link to the latest report is here:

    http://bea.gov/bea/newsrel/pinewsrelease.htm

    The thing to note is that there is NOT a line item deduction from income for personal contributions to retirement accounts.

    Therefore, the following one-person scenario (simplified, and obviously not in the same format as the BEA report), would lead to a 0% reported savings rate:

    Gross pay — $500
    Taxes — – $75
    401k — – $ 50

    Take-home pay — $375

    All Consumption spending — -$425

    Net cash flow for month — -$50

    This person, according to how the government calculates the savings rate, had a 0% savings rate. $50 went into 401(k), but $50 had to be obtained from elsewhere (by reducing existing other savings or borrowing), which is considered negative savings, netting out to a savings rate of 0%.

    If the BEA issued their report for just this person, it would read (again, simplifying) $500 Gross Pay; $75 taxes, Disposable Income $425; Consumption $425; Saving $0.

    The person I spoke to at the BEA, a Curt Coonsey (not sure on spelling), was familiar with the MSNBC article and specifically told me that it was, and is, wrong.

    This confirms what I learned about 10 years ago. I’m glad I cleared that up. It’s good to recheck once every decade or so. :–>

    It also indicates that my take on the big picture is correct. Yes, people are putting hundreds of billions into 401(k) and the like every year, but they are borrowing so much in the rest of their lives that it’s offsetting (actually last year more than offsetting) the positive impact of 401(k), etc.

    The fact that the savings rate is zero or a small negative actually masks the seriousness of the problem a bit, because 401(k) is (supposed to be) long-term money. And while borrowing against home equity can be seen as long-term, a lot of other borrowing (credit cards, cars, etc.) is short-term.

    Comment by TBlumer — January 31, 2006 @ 2:58 pm

  5. Thanks, you would think that in the last 10 years they could have included that information in the FAQ’s. Well at least I can consider myself a big saver again. :)

    Comment by Bill — February 1, 2006 @ 8:31 am

  6. The whole calculation is real screwy and has long been considered one of the least credible numbers coming out of the government. I think it gets revised up and down significantly pretty often.

    Comment by TBlumer — February 1, 2006 @ 9:30 am

  7. Tom:

    You misread the BEA press release
    http://bea.gov/bea/newsrel/pinewsrelease.htm

    It shows personal income minus personal current taxes to come up with disposable income. Its personal outlays are consumption, interest, taxes and charities. The difference is then expressed as a “savings rate.” Very clumsy. No line in there covering employee contributions to pension plans.

    Please re-read it.

    Comment by don surber — February 3, 2007 @ 10:46 pm

  8. #7 Don, “personal income” is AFTER employee contributions to 401(k) have been made (they are withheld from paychecks), but before taxes. It is very clumsy, but the walkthrough in comment 4 is dead on, and was confirmed with BEA at the time.

    Comment by TBlumer — February 3, 2007 @ 10:52 pm

  9. Re-reading your No. 4 comment, re-reading the charts, re-reading the long-term, I can only conclude 401K is NOT considered savings under this report. We have $3 trillion tied up in 401K, IRA, etc., and yet the government is telling us we have a negative savings rate.

    BEA screwed up

    Royal

    Comment by don surber — February 3, 2007 @ 10:58 pm

  10. #9, No, go see what I said at your post.

    Comment by TBlumer — February 3, 2007 @ 11:13 pm

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