Thursday, April 1, 2010

The saving rate paradox

Edward Harrison at Credit Writedowns is theorizing why the saving rate is falling when it should be rising, as households scram to deleverage their balance sheets. My reaction to this is twofold: first this is a meaningless exercise; but second, and worse yet, there's likely something very "unhealthy" going on here.

Meaningless: The BEA conducts a comprehensive revision of the NIPA tables every five years. The saving rate is usually revised upward, and by a fair amount, as was the case for most of the 2000s.

So in "roughly" 5 years from 2009 (it's not uniformly 5 years between each revision), you will see a higher saving rate than you do today. As I said in July, the
"BEA has "found" that households have been in fact saving roughly 1% more of their disposable income per quarter since 1995, 0.9% per quarter in 2008."
They will "find" it again.

Unhealthy: But even if they don't "find" much more than an average +1% a year, there's probably something a bit more sinister and non-economic (i.e., in addition to the wealth, income, or substitution effects - see Edward Harrison's post on this point) going on here: non-market activity is rising. I haven't seen a study to this point - if you have, please send me the link; I am very interested - but I wouldn't be surprised if non-market income has crept up lately, i.e., through the informal labor force.

With an employment-to-population ratio a shocking 58.5% in February (it was 63.4% as recently as March 2007), there's got to be a growing supply of labor that is "working under the table" just to get by. This non-market income would flow through the spending accounts but not the income accounts. Therefore, you have official consumption going up with official income (doesn't include non-market income) stalling, which reduces the saving rate.

Now go back and read Marshall Auerback's push for government as ELR (appropriate credit is given in this report)!

Rebecca Wilder

5 comments:

  1. Government as employer of last resort (ELR) is a crude idea. It was first advocated, far as I know, by Pericles in Ancient Greece 2,500 years ago.

    One weakness in ELR is that if it takes the form of many “make work” schemes, i.e. about ten unskilled people supervised by one permanent skilled person, output per head is hopeless. On the other hand if the work involves normal ratios of unskilled to skilled labour to capital equipment, then the scheme is indistinguishable from a normal employer. Thus ELR is stuck, logically, between a rock and a hard place.

    Far better than ELR is to subsidise the unemployed into temporary jobs with EXISTING employers (something that has actually been done in several countries for years). For the theoretical arguments behind this see my seminal (?) work: http://mpra.ub.uni-muenchen.de/19094/

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  2. Sounds good to me - more of, higher paying, & better benefits.

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  3. <p><span>Now that we’ve raided the mattresses:<span>  </span>Shifting interest-bearing assets into non-interest-bearing customer deposits has activated existing money.<span>  </span>Reliquefying by dissaving, disinvestment, or deleveraging, has ignited consumption in the underground economy.<span>  </span>It has accelerated the transactions velocity of money – but for how long? </span></p>

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  4. Nice explanation of job numbers by Robert McTeer.

    "The Bureau of Labor Statistics publishes quarterly gross job gains and gross job losses in a data series called Business Employment Dynamics. The latest numbers, from the second quarter of 2009, show 6,420,000 job gains, “an increase of 674,000 jobs compared to the previous quarter.” The Bureau reported that this was the largest quarterly gross job gain since the data series began in 1992.
    The number of job losses during the second quarter of 2009 from private sector closing and contracting establishments fell to 8,000,000, or 7,999,000 to be more precise, for a quarterly decline in gross jobs of 487,000. The gross job gains of 674,000 (and rising) exceeded the 487,000 (and falling) of gross job losses, but not enough to turn the levels of gained and lost jobs positive.
    In percentage terms, job gains in the second quarter of 2009 were 7.5 percent, compared to job losses of 6 percent. This is a far cry from “Not a single job has been created.” "

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  5. Rebecca, this might hold a clue: <span>For Consumers, Time to Shop (Until the Mortgage Drops)</span> - Here’s a provocative thought: what if ‘extend and pretend’ within our nation’s troubled mortgage markets is actually providing a lift to consumer spending? It’s not as far-fetched as the idea might initially sound, and it might help explain some interesting data we’ve seen as of late — and it also might explain why the statistical recovery we’re seeing now doesn’t really feel like a recovery to most Americans. And, if I’m right, it also explains why we may very well slip right back into the throes of recession all over again as we head into 2011. Let’s start with what we know. We’ve got 7.4 million non-current loans in this country, according to data source Lender Processing Services, Inc. - that’s an awful lot of households still living in a house, without a mortgage or rent payment draining their available disposable income. And the mortgage or rent borne by most households has historically been one of the most significant capital commitments any household makes, relative to other purchases. In fact, as I’ve shown in previous columns, most Americans behind on their mortgage have gone more than a year without making any payments. The average age of a loan in foreclosure is now 410 days delinquent, after all, according to LPS; and that’s just the average. Many delinquent borrowers are able to stay in their homes for even longer than that.

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