Way back in my early years at the Federal Reserve Bank of Chicago, I wrote an article for our economic education newsletter that had the same title as does this post. Back when I wrote the article (1993), many economists were concerned about a personal savings rate that hovered between four and five percent. With recent headlines touting numbers that have gone negative, things would appear to be worse than they were a dozen years ago.
My interest was further peaked upon reading the Cleveland Fed's Economic Commentary for December, 2005. One of the charts showed saving as something just under seven percent of GDP. And while accurate, it certainly didn't agree with everything grabbing the headlines in the media.
Now one of the good things about working at the Fed is that there's always an economist around when you need one. I went to one of our research staff and asked for his take on the seemingly contradictory information. The short version of his explanation was in "what's in the data."
Finally, Don Bodreaux at Cafe Hayek discussed essentially the same issue in his February 8 post titled On American's Consumption and Saving. Bodreaux pointed out that many things the average person would consider "investment" gets counted as savings. My colleague pointed out that because Personal Savings is arrived at by subtracting spending from income, it's easily possible to run negative because of things that probably come out of savings (like a down payment on a new car).
But ultimately, the question for educators is "how do we explain this to the students?" The answer is that we have to get them to think about what data does and does not say. The issue of spending beyond income is important--both on a personal and national level. But one has to be careful not to overreact as to the immediacy, nor to underplay the importance of savings in providing capital for future investment. There's one side of the issue, and there's the other. There are no simple answers.
(Maybe there's a reason President Truman wished for a one-armed economist.)
Your comments are welcome.
Posted by TSchilling at 5:32 PM Comments (0)