Savings and the American economy
Gerard Jackson
In The Savings-Rate Myth (National Review Online, 23 December 2004) John E. Tamny took the Wall Street Journal’s David Wessel to task for arguing that the “American people, businesses and government don’t save enough.”
Tamnly referred to David Malpass, NRO financial writer and chief economist at Bear Stearns, who claimed savings are under reported because they exclude “cash flow improvements from realized gains on equities, houses, and mortgage refinancings.”
Most economists define savings as deferred consumption. But this is a very misleading definition that confuses the demand to hold cash with savings. To the Austrian school of economics savings is a process that defers present consumption in favour of future consumption by expanding the capital structure. This definition clearly excludes cash balances.
Using the Austrian definition we see that “cash flow improvements from realized gains on equities” cannot in themselves be defined as savings. To be savings they must be invested.
Housing is a consumption good, not “a form of savings,” as Mr Tamny and so many others would have it. The fundamental difference between a capital good (future good) and a consumption good (present good) is that the services of a capital good are indirectly consumed while the services of a consumer good are directly consumed. (Carl Menger, Principles of Economics and Böhm-Bawerk’s Capital and Interest)
It follows that the basic difference economic difference between a hamburger and a house is not durability but time. While the direct services of a house can be consumed over many years, the services of a hamburger are consumed in minutes.
If durability becomes the defining factor what is to stop us from classifying vintage cars as capital goods? We can now see that the misunderstanding stems from confusing durability with capital goods. Durability is incidental and in no way can define a capital good.
It therefore follows that the Commerce Department is perfectly correct, despite Tamny’s protestation to the contrary, in defining “money used to pay down a mortgage into the same basket as money used for everyday consumption.”
He is on far sounder ground by pointing out that 401(k) deposits are savings, at least to the extent that they fit the Austrian definition of investment. Where any 401(k) deposits are ‘invested’ in consumption goods they become dissavings.
As further evidence that Americans are saving he noted that Forbes 400 increased their net worth in twelve months by $US45 billion. At the moment I don’t think this figure proves anything one way or the other. Considering the amount of credit the Fed has poured into the economy this increase in wealth might turnout out to be largely illusionary.
To reinforce his argument Tamny also refers to “Securities Industry Association reports that individual participation in the stock market has jumped from 30.2 million in 1980 to 84.3 million in 2002.” This means that during that 22-year period net savings rose. (To invest in shares is to save).
I think it highly unlikely that dissavings rose sufficiently to offset these additional savings. (Regarding this possibility see Friedrich von Hayek, Profits, Interest and Investment, Augustus M. Kelly, Publisher 1975).
Reverting to home ownership as part of the measure of savings, Tamny states: “The rise in home prices is increasingly on the minds of many Americans. That this is so has a lot to do with the fact that at 69 percent, the supposedly ‘spendthrift’ United States has the highest rate of home ownership in its history.”
But as I have already explained, houses are consumption goods. Any genuine investments liquidated in favour of housing are dissavings. For example, if someone sells his shares in order to buy a much larger house he has engaged in dissavings.
This does not necessarily mean that total savings have been reduced, just his own. The fact that his house is an asset doesn’t change the situation any more than if he spent the money on vintage cars.
I’m in broad sympathy with Tamny’s conclusions. It has been my feeling for sometime that American savings have been greatly underestimated. But the question remains: Is America saving enough?
If by this one wonders whether enough is being put away to satisfy Americans’ future material aspirations, then the llikely answer is no. But then this would probably be the case no matter how much they saved.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 31 January 2005