Asymmetrical Information

One problem is that "tax-free saving" is not really tax-free. It is tax deferred. You have to pay taxes on IRA or 401k money when you withdraw it.

The traditional response is that a person's taxes will be lower in the future, since retirees will likely have lower incomes than working people.

However, what if taxes are higher? I certainly worry about much higher taxes in the future, since we seem incapable of cutting the
cost of Social Security and Medicare/Medicaid, let alone the general fund deficit or the trade deficit. It will all have to be paid for some day.

So, if taxes are sufficiently higher in the future than they are now, it makes sense to pay the taxes now and save in an after-tax account.

Economists are making a big mistake by calling an investment in a home a consumption. In the worst case, people get their money back if not make large capital gains.

Many retirees are selling their homes and living off the proceeds and renting. Others are trading their homes for lifetime care at an assisted living place. Homes are just as valuable as a 401K

If you add in principal payments on a mortgage, our savings rate is very high.

This despite scads of tax incentives to sock it away.

As the article points out, there is the unfortunate clash with the scads of tax incentives to borrow money against real estate and spend it on consumption.

My HELOC enabled the spending for my wedding.

I think that another factor is that the behaviors that people learned when they were young tend to persist. During the stagflation days of the mid 1970's to the early 1980's, the baby-boomers learned a clear lesson: spend it now. This lesson was reinforced by the dot com bubble/bust. Saving is for suckers.

The gov has been inflating (or debasing) the currency for 75 years and you want people to save a buck now to collect 10 cents in the future?? and if you think I'm exagerating, that was the average rate since 1955...

Making monthly rent or mortgage payments is not saving. It's consumption of housing services. People shouldn't make the mistake of claiming that what they think they do with their paychecks has any similarity to macroeconomic principles.

AT

In what way are we consuming are homes? Are you saying that when you buy a 5 room house, you will have only 1 room left after 20 years?

Building a new house is invesment. When an individual buys the house, he may purchase an asset, and over several years, increase his wealth, but it is not economic saving.

And then there are those like me who were relatively poor for many adult years and only recently have entered the top 5% income bracket. Our philosophy is to do stuff (ski, golf, go on vacations) that we couldn't afford to do before, and we need to do it before we become infirm. Another recent big expense is spoiling the grandchildren.

Saving is for people with extra money.

Which of the following should I not do in order to save for my retirement;

- Pay for my kids activities?

- Pay for their health care expenses (glasses, dental work, etc.)?

- Pay for their college educations?

- Pay for trips home to see the family?

Because by the time I've done these, there is no money to save for retirement.

Personally, I think the idea of savings is over rated. I have many responsibilities. Taking care of myself in old age is a responsibility, but certainly not the most important. And meeting this responsibility does not require savings as I can simply continue to work. True, there may come a day when I cannot work - at which point, I feel I have one last responsibility - to not be a burden to others.

Randy, the problem with a low saving rate isn't that you're not saving for retirement. It's that saving is necessary for investment, which is considered necessary for long-term economic growth.

AT,

Its a matter of perspective. The fact that economists wish that I would save more doesn't give me money to save - or more precisely, doesn't change my responsibilities.

It's that saving is necessary for investment, which is considered necessary for long-term economic growth.

Actually, investment is necessary for savings. (Loans create deposits.) And there is such a glut of savings, worldwide, these days that we are exporting a lot of our investment to fill the demand...

When the bank requires you to do a personal balance sheet, the home goes on the asset side just as cash and 401K balance do.

So all the bankers in America don't know finance? Yes, they do, it is the economists who don't know finance.

Jake:

What are you talking about? The purchase of a house is counted as "residential investment", not consumption.

Perhaps your confusion comes from another important issue -- home equity loans where people borrow money against their home in order to (usually) spend it on consumption.

Ducrider,

How do "loans create deposits?" I thought it was the other way around--I deposit money in the bank and the bank loans it out to businesses to create new wealth.

Jake,

I'm not an economist or a banker, but I think you are confusing personal finances with macroeconomics. Your mortgage payment is going to pay off a loan. That money is tied up in an existing asset (your home). But a savings deposit can be used to create new assets, new wealth.

I don't see what the problem is. I save put 16% (of the first $60,00/year) of my pre-tax salary into a government-mandated savings program. So does almost everyone else in the country.

Why doesn't that show up in the savings data?

People are rational, they just have different prefernces than you think they should (not to mention different information sets over which to make their decisions).

Marshall,

Good point.

Nash:

When people retire or die the money comes out house to create new assets, new wealth.

Noah,

Exactly.

Its a matter of perspective. The fact that economists wish that I would save more doesn't give me money to save - or more precisely, doesn't change my responsibilities.

I never said it does. I'm saying personal finances are not macroeconomics.

Actually, investment is necessary for savings. (Loans create deposits.) And there is such a glut of savings, worldwide, these days that we are exporting a lot of our investment to fill the demand...

Actually, there's the I=S identity, but that's moer of a definition than an empirical concept. No, we're not exporting investment. Investment can't be exported. We're importing saving.

What are you talking about? The purchase of a house is counted as "residential investment", not consumption.

No, the *construction* of a new house is investment because it increases the capital stock. The purchase of that house is a capital expenditure not accounted for directly in the GDP. It's like capital expenditures by a firm. When a company buys a new machine, the machine replaces cash as an asset on its balance sheet, or the machine is added to assets while an equivalent loan is added to liabilities, but the purchase does not affect the income statement. Rather, the machine must be depreciated over time as an expense. Simply buying a house doesn't affect GDP; it provides housing services over time, which is what your mortgage payments buy.

I don't see what the problem is. I save put 16% (of the first $60,00/year) of my pre-tax salary into a government-mandated savings program. So does almost everyone else in the country.

Why doesn't that show up in the savings data?

Funny thing, that. You'd almost think it's an incentive not to save.

That's one of the problems with SS--- it takes 15% of people's income and creates the illusion of saving. But it's just going back out the other door and getting consumed by the elderly. And it makes it much harder to really save, and also discourages it.

I save put 16% (of the first $60,00/year) of my pre-tax salary into a government-mandated savings program.

No you don't. That money is spent. All right, it goes into very-low-interest bonds and that money is spent. It is not invested. Oh, and it's actually more like the first $90,000. I always give a little cheer in November or December when I stop paying that.

The 10% I put in the 401(k) goes (mostly) into stocks, which companies used to buy factories and machinery, to increase productivity to produce more wealth. The 16% I pay to the government goes to transfer payments to other people who spend it on consumption. (OK, a vanishingly small amount goes to roads and such, which do help productivity.)

Oh, one more point. It's not truly "pre-tax" in the way that term is usually used. Money to an IRA, 401(k), or MSA is Pre-tax in that your AGI is reduced by the amount you invest. They money paid in SS taxes does not reduce your AGI.

AT:

Are you saying that if I purchase a NEW house, which is what I was talking about, that the money spent is counted as consumption? That can't be right.

Obviously buying and selling an existing house is not counted as consumption nor investment -- just a transaction. That is not what I was talking about.

Gary:

A lot of money that "goes" into stocks is not used by companies "to buy factories and machinery" -- it is used to buy stock certificates from other shareholders. Only IPO's or additional share offerings by the company result in the company raising money.

Jane- I think that irrational part of the equation is called entropy by physisists studying thermodynamics. the rational part, that's the enthalpy term, can describe what happens at absolute zero temperature. best analogy i can guess between temperature in thermodynamics in economics would be inverse of interest rates, by which one could speculate that lower interest rates produce more irrational behavior.

I've got retirement plans. I turn my "on" switch to off.

Erik:

You can't really take any given transaction and place the whole amount neatly in any particular category of the national income or product accounts.

Anyway, the money spent on building new houses nationwide is a component of investment in GDP: residential investment. I think it's about $600 billion. To that extent, yes, it's investment. But you can't neatly match that up with individual expenditures.

On the side, remember there's gross investment, paying for capital goods, and net investment, which subtracts capital goods that wear out, so counts only net increase in the capital stock. That's like 1% of GDP.

For more details on how the accounts are constructed, you could try this: http://www.bea.gov/bea/ARTICLES/NATIONAL/NIPA/Methpap/methpap6.pdf

One problem is that "tax-free saving" is not really tax-free. It is tax deferred. You have to pay taxes on IRA or 401k money when you withdraw it.

The real power of an IRA or 401(k) is that growth is tax free. Over 30 years, 8% annual growth (tax-free) will leave you with 50% more than 6.5% annual growth (after-tax).

Are you saying that if I purchase a NEW house, which is what I was talking about, that the money spent is counted as consumption? That can't be right.

Why not? Investment, in a macroeconomic sense, is the production of goods that facilitate future production, thus enabling economic growth. For example, building a factory. How does a house facilitate future production? If you buy a $300,000 house instead of a $200,000 house, does that improve your productivity?

Jane:

Avoiding taxes is not equal to ROI. It is simply not taking a 20-40% loss. And as others readers point out, there is a loss of time-value in the money and liquidity that needs to be considered. Taking advantage of the company matching scheme, however, is a great way to get a quick raise.

In some sense, I think the current dearth of American savings is a measure of confidence in the economy. The more stable the system is, the less likely people are to save since they believe themselves more able to predict their financial future.

An economic system shock such as the overpredicted housing drop may cause people to question their dismal nest eggs and start to save more due to an uncertain future.

I would question the .4% savings rate. I've seen enough statistics on 401(k) participation (about 65% where offered) that it alone - factoring in those workers who don't have it offered, etc. - should produce an average savings rate above 1%.
Does .4% net out those who have already retired and are actually liquidating savings? If so, we "need" to see just how much those who "should" be saving are doing.

Does .4% net out those who have already retired and are actually liquidating savings?

Yes. I believe it also takes into account spending on credit.

If so, we "need" to see just how much those who "should" be saving are doing.

Even if all the people who "should" be saving are saving, a low savings rate is still bad, because savings fund investment, and investment drives economic growth.

AT,

I get what you are saying concerning macro-economics, but the topic is only indirectly macro. Jane's question, boiled down, is why don't people take advantage of tax advantaged savings. And that is the question I answered. It is a great deal - but only for people with extra money to save. My income is right at the national average. I assume, therefore, that many if not most people are in a similar situation. It doesn't matter how good a deal tax advantaged savings is, it is simply nowhere near the top of our priority/responsibility list. And as others have said, the whack from Social Security and a multitude of other taxes simply makes it even less likely that it ever will reach the top.

Brandon:

The growth is not tax free, it is also tax deferred. You will have to pay taxes on any money you take out, whether it was "original deposit" or capital gains or dividends.

What I think you are saying is that you will have more money if you keep the maximum amount invested rather than paying some of it out each year in taxes. That is a good point.

However, even so, my point stands. If taxes go up sufficiently over time, you would rather pay the taxes now at the lower rate rather than later at the higher rate.

Also note that one can obtain the same tax-deferred growth by buying non-dividend-paying stocks and holding on to them until retirement, thus deferring capital gains taxes.

As for why spending on a new house is not consumption, it seems obvious. Consumption refers to something that is consumed -- i.e., it is something that loses its utility after being used for a relatively short time. Houses are not consumed in a short time. Houses can last 100 years or more (although some of the ones I've seen going up recently don't seem like they will make a century)

Buying a more expensive house absolutely contributes to future production-- there's room to house more kids, or room to store more shoes and clocks,
or you're closer to your workplace, allowing
more worktime and less commute time. Also,
a part of house price is local school quality,
a strange budling that's hard to account for.

In what way are we consuming are homes? Are you saying that when you buy a 5 room house, you will have only 1 room left after 20 years?

That's pretty much correct, if you don't re-paint the outside every 5 years and the inside very 5-10 years, don't replace the floor coverings every 15-20 years, don't reshingle every 10-20 (or immediately after the odd 100-year storm), etc. The land holds a certain amount of value but any structures on it are consumed, albeit slowly (unless you have termites or carpenter ants undetected for a couple years, in which case you will be down to one room or less at a highly accellerated pace).

When talking about buying "houses" is any distinction made between the land and the structure? The physical house on my lot is valued about 1/3 of the total package deal. While the house may depreciate/be consumed/burned down/be improved/etc... the land value is largely unaffected by what I do to it. It will change with the market and would be very difficult to "destroy".

EI

Not being an economist, I am somewhat confused by the talk of consumption wrt Home Ownership.

I take is more or less for granted
1) that shelter is a need.
2) shelter is traditionally in buildings.
3) housing is not free

So the choices are to own the shelter or rent the shelter. To the extent that the out of pocket cost of ownership is no more than renting (due to rational choice about out ability to pay and/or the tax benefits...), how is owning a home not a savings?

ErikR: One problem is that "tax-free saving" is not really tax-free. It is tax deferred. You have to pay taxes on IRA or 401k money when you withdraw it.

You have to pay taxes on the money you withdraw from Traditional IRAs and 401k's, but not from a Roth IRA. You get a tax deduction on a portion of your Traditional IRA contribution (depending on your income level), and all of your 401k contributions are pre-tax. The latter is a huge incentive (indeed, it can help increase your Traditional IRA deduction).

One problem is inertia. Studies have shown that it boosts the savings rate tremendously if companies merely change the default setup to be that employees contribute to their 401k's unless they say otherwise. The other problem is cultural. There is considerable pressure to spend both from your peers and from companies that want your money.

Randy:

That's basically correct: if you don't have enough disposable income to cover your expenses, you can't save. The end.

Another problem is that rising asset values probably tend to discourage saving; if my house appreciates 20% a year, why would I save? Now that may be somewhat rational for an individual, but it ain't good for the economy.

"Not being an economist, I am somewhat confused by the talk of consumption wrt Home Ownership.

I take is more or less for granted
1) that shelter is a need.
2) shelter is traditionally in buildings.
3) housing is not free

So the choices are to own the shelter or rent the shelter. To the extent that the out of pocket cost of ownership is no more than renting (due to rational choice about out ability to pay and/or the tax benefits...), how is owning a home not a savings?"

I'm not an economist either, but your three points cut both ways. You could as easily say: "To the extent that the out of pocket cost of ownership is no less than renting, how is owning a home a savings?"

I think the idea is that one way or another, you're must and will pay for housing. To the extent you're socking money away for the right to live in a given building, it doesn't matter whether you rent or own. Sure you can sell your house, but in most cases, the only thing you can do with the equity is plunk it down into the next house. (I know that's not always the case, and not so often in this housing environment, but traditionally that is mostly true, isn't it?)

Denise:

Economists treat owning and renting the same in constructing GDP. Othewise, you'd have to say that A, who pays $2,000 a month to service his debt on a new house, is engaged in an entirely different economic activity from B, who pays $2,000 a month to service his debt on an identical existing house, to C, who pays $2,000 a month to rent another identical house.

I'm with Noah -- people are rational. If you think they're acting irrationally, it's probably because you've made incorrect assumptions about their utility function.

It reminds me of folks who say gambling is a tax on stupid people. These folks don't realize that gamblers, like all individuals, seek to maximize utility rather than cash flow.

The "rational actors" model needs no work at all. Here's what's going on: "Spend it while you've got it" because (1) your kids won't get it unless you're super-rich, thanks to the "death tax"; (2) your kids will be forced to take care of you through Social Security (which won't be cut) and Medicare (which will be expanded further as politicians pander to the growing 65-plus voting bloc); (3) at the rate things are going in the world today's investments may be worthless. Those assumptions may be wrong, but they're not baseless. Anyone who makes such assumptions could be judged rational making them and then acting accordingly.

"I don't see what the problem is. I save put 16% (of the first $60,00/year) of my pre-tax salary into a government-mandated savings program. So does almost everyone else in the country.

Why doesn't that show up in the savings data?"

Because the "national savings rate" is an aggregate number combining a bunch of things. Seriously, does anyone look at the source data before going off on this? Here's an OECD document on saving ratios:

http://www.oecd.org/dataoecd/53/48/32023442.pdf

* The savings rate is household saving divided by disposable income.

Now, unpacking that:

* Household income
* That's disposable

So the obvious things to ask are "has saving shifted out of the household income accounts? Has disposable income changed?" You can probably think of a half-dozen things for both - greater retained corporate earnings, enormous foreign investment. Here's some interesting analysis, for example:

http://www.frbsf.org/education/activities/drecon/2002/0202.html

"…substantial empirical evidence to date suggests that to a large extent the low personal saving rate in the U.S. economy is a systematic response of households to changes in its fundamental determinants, most notably the increase in financial wealth. Had the stock market appreciation of the 1990s been the sole reason for the low personal saving rate, its decline would also portend weaker consumption. However, this effect would likely be spread out over several quarters, as some estimates of the wealth effect on consumption suggest (see, for example, Dynan and Maki 2001). Moreover, it may also be the case that a lower personal saving rate will be a feature of the U.S. economy for the foreseeable future. This persistence could be attributed to an increase in trend productivity that induces higher permanent income for households or to a relaxation of financing constraints due to financial innovation. To the extent that these factors are important, the current low personal saving rate would not represent a problem that is overhanging the U.S. economy, but is instead a manifestation of a more efficient deployment of the economy's resources."

I mean, "savings rate falls off a cliff right around the time the stock market goes haywire" seems a bit coincidental, no?

Marshal
If that nearly 16% of earnings in goverment mandated savings you refer to is Social Security plus Medicare payroll taxes, you should be aware that it is NOT saved. You are just paying for other peoples consumption in the hope that there will be someone for you to rip off in the future when you retire :)

The issue in my mind with many tax defered accounts is that they possess really ugly negative characteristics.

401ks are a great example. So with a 401k I can save dollars and grow them tax defered. But I can only invest them in the instruments that my plan allows me to. I don't know what your 401k plan looks like, but I find my investment options there to be lousy, and mine are much better than most of my friends at other companies. And also note that the caps on IRA and Roth IRA contributions rule those out for many moderately to highly successful households. So basically about the time you *actually* start to develop enough disposable income to really start socking it away, all your tax free options evaporate.

If you want savings and investment, support the FairTax, it will encourage savings and investment...

First off, a good many people grossly misunderstand taxes. Case in point: "'Spend it while you've got it' because (1) your kids won't get it unless you're super-rich, thanks to the 'death tax.'" The federal estate tax and most state estate taxes affect only the rich, because the first half-million or more is exempt. It's true that it doesn't have as much effect on the super-rich as on the people with only a few million who can't afford all the tax dodges, but if you've got it, you can leave your kids enough to make their lives considerably more comfortable, free of estate tax.

As for the argument about whether mortage payments = savings, things look very much different whether you look at the overall economy or at the finances of one family. The things that make us all richer, economic growth and productivity improvements, are driven by savings invested in businesses, to create them, expand them, and make their operations more efficient. Stocks, bonds (from private companies, not governments), and bank accounts is money that usually gets invested in businesses.

Money sunk into your house doesn't do that. Neither do municipal bonds nor burying jars of gold Krugerrands in the backyard. But from the personal viewpoint, all of these are savings - you can dig up the gold and sell it later, cash in the bonds, and eventually sell your house to pay the nursing home. And the portion of your mortgage payment that goes to paying the capital probably has the best long-term ROI of anything available to the median-income American. OTOH, it doesn't make all Americans richer the way building a business does - besides yourself, it just makes a few contractors and bankers richer.

markm:

Building new houses DOES "make us all richer". Most people want a house in which to live. If you increase the average number of dwelling square feet per person, surely you have increased the average quality of life.

Your argument seems to apply to buying an existing house, but not to a newly built house. However, there may be an effect even for buying an existing house. By supporting demand for houses, you would tend to raise the average house price, which would attract more house builders and tend to result in more new houses being built.

Another way to look at it is that houses "produce" the "good" of having a place to live, in analogy to an automobile factory producing the "good" of being able to drive around to where you want to go. Both houses and car factories take resources (investment) to build before they can produce their goods. Both houses and car factories are capable of producing their goods for decades after they are built.

My line of argument is subjective, of course. Almost anything one buys could be said to "make us all richer" by supporting the production of that item. That ice cream I just bought "made us all richer" since I am contributing a little bit to the future production of ice cream.

I'd argue that this is taking it too far, though, for two reasons. One is that ice cream doesn't last long, but houses can last for decades or centuries. Second is that houses are much more important than ice cream (I'd rather be ice-cream-less than homeless)

The conversation AT and I were having brought a couple of thoughts to mind.

1. The middle class doesn't save to invest, they save to spend later. Perhaps what we are seeing in this decline of national savings, is a generation of savers now retired and spending down their savings - added to a generation that has never saved.

2. If no one is saving, where is the money coming from to finance the housing boom? Perhaps the housing boom represents the current generation spending down its future savings.

Randy:

2. From east Asia, mostly. Hundreds of billions of dollar of trade deficit.

Erik,

Good point. Next thought; If there were a shortage of investment capital, wouldn't we expect to see rates of return for lenders (savers) go up, thus attracting more lenders? As this is not happening, can't we assume that there is no shortage of investment capital? And if there is no shortage of investment capital, is the low national savings rate anything to worry about? Perhaps Americans are able to maximize consumption and minimize savings because foreign investors are more than willing to invest in America. In what way is this a bad thing? It seems to me that we are being perfectly rational.

In the national accounts housing is treated much like a machine or other capital good in a business accounts. It is depreciated and the consumption is smoothed over time. So in personal consumption data there is an assumption that a certain share -- I do not know what percent -- of the housing stock is consumed each quarter. That is one of the reasons services are more stable then goods.

But we do have a good issue here, for 25 years we have been encouraging savings by creating vechicles to provide tax advantages for savings.
Obviously, it has not worked, or at least the increased savings from the programs has been offset by other factors reducing savings.

so the question is should we continue to expand programs that have not worked or shift to some other approach?

Randy:

It is not bad as long as it continues. Unfortunately, it is not sustainable. The US is a debtor nation (50 years ago we were a creditor nation -- not anymore). The NIIP (net international investment position) of America is about -$3 trillion, which is about 25% of GDP. But perhaps more relevant to foreign investors, it is (IIRC) about 250% of gross exports. In other words, to pay off the NIIP deficit would take about 2.5 years of America providing exports "for free".

Would you loan money to someone if it would take them 2.5 years of giving you all their disposable income to pay you back? Yes? Okay, how about 5 years? 10 years? At some point you wouldn't loan the money because you doubt whether you will get it all back.

When the foreigners stop loaning to America, the US will have to drastically reduce consumption and start investing in the production of the things that the foreigners were supplying. Unfortunately, the US economy doesn't turn on a dime, so this will be a big problem. Probably a serious recession.

Spencer:

I'd be a lot more bullish on tax-deferred savings vehicles if:

(1) Social Security and Medicare/Medicaid looked to be in long-term balance

AND

(2) the budget were balanced or credible plans were put in place to ensure that the budget would balance over an economic cycle

The reason being that these two items would lead me to believe that future spending will be kept under control, and therefore future taxes will be reasonable.

Since neither of the two is the case, deferring taxes does not look like a great deal to me. On the other hand, a Roth IRA looks very good. I'm not sure why more people who are elgible do not take advantage of the Roth IRA.

Spencer,

Shift to some other approach. The current programs are targeted at people who won't save anyway (at or below the average income) - because, as previously mentioned, saving is not a primary objective/responsibility for this group. If the purpose of pumping up national savings is to increase investment, then take the direct approach and reduce taxes on capital gains.

But then again, I question that there is any unmet demand for investment capital. Certainly the interest rates don't show it if there is. Which brings up a new question - What is the cause of the low demand for investment capital? That there is sufficient capital already available? That there is a lack of entrepreneurial initiative or incentive? That there is nothing new to produce? I suspect the latter is the greatest contributer. We are between booms. Investment is down because there is nothing to invest in - thus the rush to real estate.

Erik,

I agree that there is some danger of a fall off in foreign investment, but in my opinion it is not great. The reason is that, though our economic situation could be better, it is still the best available. Foreigners will continue to invest here as long as we are the best game in town.

We don't have to be completely non-socialist, we just have to be less-socialist than everybody else.

Randy - it seems to me that the lack of demand for investment capital is the result of asian economies like china that are greatly focused on export markets, rather than providing for their own people. This leads to lower demand (and lower standards of living) than there ought to be. imagine if china refunded the total accumulated reserves from their trade surplus to their people in the form of a check. people there would suddenly be richer and want to buy nice houses and ice cream and other investment minded people in the country would invest in ice cream shops and construction companies to serve their own people, rather than the current state of affairs which essentially takes the entire $ reserves generated from surplus trade and invests it in u.s., thereby lowering our interest rates and motivation for americans to save.

Jim,

Interesting point. I read an article along that line recently, the main point of which was that what we need to be doing is putting pressure on China and others to increase wages. Sorry, can't remember where I read it.

There may be another side to some of these questions. Per Steve Forbes ("Fact and Comment" 05/23/05) "...in reality, consumers added $590 billion to their savings last year, while the government reported total consumer savings to be a paltry $100 billion." "The idea that Americans are overspenders and undersavers and addicted to debt is all myth". Anyone read this and have comments?

Anyone read the new book by Mike Mandel, who is BusinessWeek's chief economist? He argues that saving is over-rated as a source of economic growth, and that saving in the absence of technological change has remarkably little impact on economic output.

It reminds me of folks who say gambling is a tax on stupid people. These folks don't realize that gamblers, like all individuals, seek to maximize utility rather than cash flow.

It doesn't take much turning of that paragraph to say the same thing for binge drinkers. That doesn't make binge drinking any less stupid (which touches on the fact that most people who make the tax-on-stupid-people observation are probably making a social or moral observation, not performing a strict economic analysis).

It seems to me the first comment hits the nail on the head. Tax deferment is not the same as tax avoidance and the assumption that your taxes then will be lower ain't necessarily so.

Randy:

That is not quite true -- the last refuge of an investor is consumption!

What I mean is, an investor will not necessarily choose the least bad investment if all of the choices have negative expected returns. The investor can instead choose to not invest at all in order to increase consumption.

At some point, as America's NIIP deteriorates further, the foreign lending will slow or stop. I don't see how the current pace is sustainable. The current account deficit will be about 6% of GDP this year. If real GDP grows at 3%, then the NIIP deficit will deteriorate by 3% or more of GDP. Less than 10 years of that and the NIIP deficit will double, and we could end up owing 500% of gross exports.

How long do you think that can continue?

How do "loans create deposits?" I thought it was the other way around--I deposit money in the bank and the bank loans it out to businesses to create new wealth.

Common - almost endemic - misconception, but wrong. The money you deposit at a bank is drawn on another bank (mostly - government check and cash are different). When you get a loan from a bank, the money doesn't "come from" anywhere - what is happening is that the bank is acting as an intermediary to convert a relatively illiquid asset - your promise to pay - into a liquid one - their promise to pay. True, the bank has to maintain a certain percentage of assets as cash or fed reserves, but that doesn't change the accounting.

a good explanation of the process.

"Man is not a rational animal, man is a rationalizing animal."
Robert Heinlein

I wonder what the savings rate was at the height of the tulipmania, or at the peak of the South Sea bubble, or after the 3rd issuance of Assignats, or in the United States during the summer of 1929?

Per Steve Forbes ("Fact and Comment" 05/23/05) "...in reality, consumers added $590 billion to their savings last year, while the government reported total consumer savings to be a paltry $100 billion."

The $590 billion figure is probably net private savings. This includes both personal savings (which were about $100 billion) and undisbursed corporate profits (the other $500 billion).

I disagree with the .$4% number based on the people I work with. Among my coworkers it is rare to put in less than 10% (comp match is 4% plus an additional 4% regardless of whether you contribute to a 401k) and many do 15%. I max out the 401k contribution every year as to a lot of people. Most everyone I know over 50 is maxing out the over 50 catch up provision (4k this year). In addition about 20% of the company participates in the Emp Stock Purch Plan (up to 10% of your base pay and a 15% discount off the cheaper of the cost at the beggining or end of the 6 month period). I know a lot of people who are saving 20-30k a year. And a lot of those starting out are saving 10-25% of their income. I just don't see it as being as bad as the stats make it out to be. On the other hand during new hire orientation the company does a good job of running the numbers and showing what can be accomplished by savings. If they didn't do that maybe the savings rate would be lower. They really encourage savings.

Chuck, I don't know how Nixon won. Nobody I know voted for him. No doubt your well-to-do white collar workplace is entirely representative of the American workforce. You should also consider the massive amounts of debt most people have, whether in revolving credit lines or in home mortgages, and the fact that about half of households have net worth of $0 or less.

I didn't start saving for retirement until my late 40s, and then it was about 15%. But the best investment is 10% to God. It keeps you from buying all manner of things you don't need and the returns are great.

Oh, right, Norma. When I tithed, I put my money in an offering plate and the church spent it. If your money really gets to God, it's the first time any such thing has happened. Holy crap, you're naive.

Mmmmff...nice attempt, speedwell, but I believe the gong just rang.

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