Sunday, September 09, 2007

Is the personal savings rate that important

Some economists worry about the nation's personal savings rate. However, others suggest there may be more to savings, properly understood, than we've been told.
Many of the obvious concerns about the negative personal saving rate may be unfounded. The negative value could be attributable to preliminary data, which the BEA could very well revise upward; a temporary depressing effect brought on by higher energy costs; and a dampening effect owing to the surge in corporate share repurchases. Looking at the private sector on a consolidated basis, we find that saving, while quite low, is certainly neither negative nor remarkably lower than it was in the late 1990s. National saving as a whole has also been low, but it has not fallen recently—indeed, the broadest measure has edged up.

Despite the low personal saving rate, aggregate household wealth has risen sharply in the past few years. U.S. households would not be a lot wealthier today—and thus better able to cope with a decline in asset values—if they had been saving at a substantially higher pace over the past few years. Furthermore, we uncover no strong evidence to suggest that low personal saving today would be associated with lower spending growth tomorrow.

Nevertheless, there are reasons to be concerned about the modest levels of household, private, and especially national saving. National saving flows provide the basic wherewithal to finance U.S. ownership of productive assets. Unless the nation’s investments are unusually productive, low saving levels will ultimately imply a slowdown in the growth of income from capital, and thus work to reduce the quality of U.S. living standards over the long run. Households might then be faced with a painful choice: Respond to slower income growth by accepting slower consumption growth than has been the historical norm—or continue normal consumption growth, which could put additional downward pressure on saving and thus jeopardize income and spending even further into the future.

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