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America's Terrible, Endemic Saving Problem
Almost every day I read a column about the economy that drives me nuts. The most recent was the Wall Street Journal’s Vast Household Wealth Could Be a Factor Behind U.S. Labor Shortage. The premise of the article is that Americans saved like crazy during COVID, indeed, so much money that they are opting not to work.
Before considering the article’s main "fact" — that, individually and collectively, we saved like crazy during COVID and are now rolling in enough dough to lounge about playing video games rather than work — let’s start with the title’s two entirely false premises. First, we Americans are supposed to have a vast amount of wealth — wealth we didn’t have in the fourth quarter (Q4)of 2019 before COVID hit.
At first glance, the data seem supportive. The Federal Reserve reports U.S. household net wealth at $110 trillion in Q4 2019 and at $141 trillion in Q1 2022. That’s a whopping increase. But prices have risen by 11.8 percent in the intervening period. Hence, the $141 trillion is only $126 trillion in Q4 2019 dollars, i.e. once you adjust for inflation. Shave off another roughly $8 trillion from the recent drop in the stock market. And then take off another $4 trillion or so due to losses households have incurred in the bond market. Now the $141 trillion looks more like $114 trillion — not far from the initial $110 trillion.
But the $110 trillion Federal Reserve measure of household net wealth leaves out gigantic increases over this period in fiscal liabilities — bills current Americans will, in large part and through the rest of their lives, need to repay in the form of higher taxes or lower transfer payments. The most familar fiscal debt is federal debt. It rose $7 trillion post Q4 2019. Another is the gargantuan $18.6 trillion rise in Social Security red ink (its unfunded liability). This size of this increase is incredibly large, but all a reporter needs do is compare table VIF1 in the Social Security Trustees Reports for 2019 and 2021. (I seem to be the only one who looks at this table, which the “trustees” have conveniently buried at the very end of the Report.)
Once you subtract out these increased obligations and the growth in other off-the-books debts — for future Medicare, Medicaid, Obamacare, defense, gassing up Air Force 1, you name it — and also factor in this year’s 3 percent decline in U.S. real wages, households’ lifetime spending power has surely declined.
Next, consider the title’s second "fact" — the U.S. labor shortage. Earth to WSJ: There is no labor shortage. In April 2019, 60.6 percent of the population was employed. This past April, the share was 60 percent — virtually the same. Moreover, 60 percent is a higher employment-population share than that recorded in most of the postwar period. Plus the unemployment rate is currently only 3.6 percent! Americans are not just participating in the workforce. Almost all are holding, not looking for jobs. Finally, average weekly hours worked are also close to their record peak.
In short, Americans are working at close to peak capacity. Yes, many things cost much more, even given inflation. But overall labor supply is not to blame. Localized labor shortages are to blame. Consider airline flights — their high costs and infuriating cancelations. During COVID, many pilots took early retirement and fewer pilots were trained. This is just one of many sectors that are experiencing difficult structural adjustments that will be smoothed out over the next two years as workers reallocate from industries with labor surpluses to industries with labor shortages.
Another temporary shortage is in the wheat market. A bushel now costs almost twice what it did two years ago. This is thanks to Putin’s war. But Ukraine is the 8th largest, not the largest, wheat producer and the top seven suppliers will surely be bringing more to market in a few months. The U.S. alone has the capacity to increase its production by one-third. And it’s the second largest producer. Consequently, it can fully fill in, on its lonesome, for the drop in the supply of Ukrainian wheat. In fact, the supply response, actual and projected, has already started to lower wheat prices. And, bear in mind, today’s wheat prices, adjusted for inflation, are still lower than we’ve seen in the past.
The same is true for oil. The price has skyrocketed, but, after inflation, it’s still below the peak levels we’ve seen in recent decades. Importantly, energy companies are increasing their supplies. Oil production in the U.S., Canada, Mexico, and Venezuela is up by 1 million, 300,000, 100,000, and 300,000 barrels, respectively, per day. Drilling more wells mean, of course, hiring away workers from other sectors and then training them for a job they’ve likely never done. This is, to repeat, a sectoral and temporary labor shortage. It’s not evidence of pervasive sloth.
In short, COVID, China’s production disruptions, the shipping bottlenecks, sanctions on Russia, loss of Ukrainian grain, up to 80,000 U.S. restaurants closing during COVID, shortages of chips, and the list goes on — have produced enormous dislocations that will take time to sort out. But the fact that restaurant prices, inflation adjusted, are crazy high doesn’t mean the country has an overall labor shortage or that those prices will remain crazy high.
Now to the article’s key mistake — the notion that U.S. saving rose dramatically during 2020 and the unstated proposition that Americans are otherwise saving sufficiently. Yes, personal consumption expenditures took a big hit during the first quarter of COVID. At the same time, personal disposable income rose due to various COVID relief payments. The difference between disposable income and consumption is personal saving, which temporarily soared.
But disposable income is a number in search of a concept. It’s entirely dependent on how you label receipts and payments. For example, we could just as well call Social Security payroll taxes "loans" to Uncle Sam and call the future benefits he’s promised in exchange “return of principal plus interest” (with the difference between the benefits and debt service called a “transfer payment.”). This would dramatically raise disposable income and the personal saving rate, not just this year, but every year in the past. It would also make official debt about four times larger! Does this mean that official debt is a figment of language, not economics? You’re getting the point.
The labeling problem, which I described decades ago in a Science article and later in a formal paper with Harvard theorist, Jerry Green, is akin to the problem in physics whose math doesn’t define everyday measures, like time and distance. Your direction and speed through space (your frame of reference, i.e. language) determine how you report time and distance. Like models in physics, models in economics are mathematical. Their equations don’t tell us what words\language to use to discuss them. Consequently, disposable income, the personal saving rate, and a good 40 percent of the data financial writers take seriously are content free.
There are, however, two measures of saving that are well defined (They don’t depend on how one labels government receipts and payments.) — the net national saving rate and the household saving rate. (Net references after depreciation.) The former is just net national income less total (household plus government) consumption divided by national income. The latter is the share not consumed by the household sector of its true disposal income — national income less government consumption. This mathematically well-defined disposal income measure is the income left over to the household sector to consume or save after the government has eaten its share.
As the table below shows, both the household and net national saving rates fell in 2020, not rose as the WSJ article suggests, and by a lot, compared to 2019. More important, both rates have dropped dramatically since the 1940s. We have, in short, a terrible, long-term saving problem. But commentators will never recognize the true saving problem if they keep looking at meaningless numbers, which can be instantly transformed — both their past and current values — with a different choice of fiscal nomenclature. The postwar decline in our well-defined U.S. saving rates coincides with what we know about the amount of resources retirees are bringing into their "golden" years. They are dismally small.
One last point that’s based on the last row in the table. It shows our gross national saving rate, which inappropriately ignores deprecation in measuring how much our country is saving. Depreciation is a huge deal as you can see by comparing the gross and net national saving rates. Ignoring it is pretending we have much higher income and do much more saving than is the case. Unfortunately, use of this badly off-base measure underlies the thesis of former Fed Chair, Ben Bernanke, and former Treasury Secretary, Lawrence Summers, that the world has been and continues to experience a "saving glut." Both Bernanke and Summers rely on gross saving data because neither the World Bank nor any other organization reports country-specific net national saving. But the net national saving rates in other developed countries, like Japan, France, and Italy, have dropped dramatically over time. So, what valid evidence we have on global net saving provides no support for a saving glut. In short, the Saving Glut proposition and its cousin, Secular Stagnation, appear to represent theory without measurement — a practice that’s as professionally troubling as its obverse — measurement without theory.
US savings BEA.GOV