Re: Savings and NIPA

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Harry:

Thanks for posting this.

Re. the following:

So on the surface, a zero personal saving rate on the
national level would appear to mean that individuals are consuming all of
their income in a given time period, but....

Income, as measured by NIPA, only includes wages, dividends, interest, and
rental income; it does NOT include capital gains on stocks and other assets.

Comment:

Keynes' concept of "income" in Ch. 6 of the General Theory "does NOT include
capital gains on stocks and other assets."

In Ch. 10, Keynes wrote on related issues, inter alia, as follows:

"Our normal psychological law that, when the real income of the community
increases or decreases, its consumption will increase or decrease but not so
fast, can, therefore, be translated - not, indeed, with absolute accuracy
but subject to qualifications which are obvious and can easily be stated in
a formally complete fashion - into the propositions that deltaCw and deltaYw
have the same sign, but deltaYw > delta Cw, where Cw is the consumption in
terms of wage-units.  This is merely a repetition of the proposition already
established [earlier].  Let us define, then, dCw/dYw as the _marginal
propensity to consume.

"This quantity is of considerable importance, because it tells us how the
next increment of output will have to be divided between consumption and
investment.  For deltaYw = deltaCw + deltaIw, where deltaCw and deltaIw are
the increments of consumption and investment; so that we can write deltaYw =
kdeltaIw, where I - 1/k is equal to the marginal propensity to consume.

"Let us call k the _investment multiplier_.  It tells us that, when there is
an increment of aggregate investment, income will increase by an amount
which is k times the increment of investment."

It is not clear how the real-world fact of "a zero personal saving rate" can
be squared with theoretical analysis along the above lines.

And, if it cannot be so squared, the question arises what - if anything -
remains of Keynes's _General_ Theory?

Gunnar




----- Original Message -----
From: "Harry Veeder" <eo200@xxxxxxxxxxxxxxxxxxx>
To: "pdavidso" <pdavidso@xxxxxxx>; "post keynesian thought"
<pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, April 26, 2003 6:44 PM
Subject: Savings and NIPA


>
> For the consideration by the pkt list.
>
> Taken from the Employee Benefit Research Institute (EBRI)
> http://www.ebri.org/facts/0699factb.htm
>
>         ***********
>
> The Savings Paradox?
>
> Question:
>
> If more and more people are saving for retirement, how can the personal
> saving rate be near zero in the United States today?
> Answer:
>
> First it's necessary to understand how the ³personal saving rate² is
> measured. The most frequently cited definition comes from the Bureau of
> Economic Analysis of the U.S. Department of Commerce, based on the
National
> Income and Product Accounts (NIPA). As measured by NIPA, the U.S. savings
> rate for 1998 was 0.5 percent of disposable personal income (see
below).(1)
> Under NIPA, personal savings is a residual. This means that personal
savings
> is what is left over from personal income after subtracting payments for
> personal taxes, individual contributions to social insurance (i.e.,
payroll
> taxes for Social Security and Medicare), and personal outlays such as
food,
> housing, and clothing.
>
> Personal income includes the following:
>
> *    Wages and salaries.
>
> *    Other labor income (i.e., employer contributions to pensions and
> profit-sharing plans and group insurance, such as health, workers'
> compensation, and supplemental unemployment).
>
> *    Rental income.
>
> *    Personal dividend income.
>
> *    Personal interest income.
>
> *    Transfer payments to persons (i.e., Social Security, government
> unemployment and insurance payments, veterans benefits, government
employees
> retirement benefits, and welfare payments).
> Personal taxes include the following:
>
> *    Federal income tax payments.
>
> *    State and local income tax payments.
>
> *    Any penalties, fines, or interest payments made on income tax
> statements.
> Personal outlays include the following:
>
> *    Personal consumption expenditures (i.e., spending on food, housing,
> clothing, household operations such as utility bills, transportation, and
> medical care).
>
> *    Consumer interest payments (i.e., payments of credit card interest).
>
> *    Personal transfer payments to foreigners.
>
> Personal savings is what is left over from personal income after deducting
> the above outlays, contributions to social insurance, and taxes. Personal
> savings divided by disposable personal income is the personal savings
rate.
> Disposable personal income equals personal income after deducting personal
> taxes and individual contributions to social insurance, but before
personal
> outlays are deducted. So on the surface, a zero personal saving rate on
the
> national level would appear to mean that individuals are consuming all of
> their income in a given time period, but....
>
> Income, as measured by NIPA, only includes wages, dividends, interest, and
> rental income; it does NOT include capital gains on stocks and other
assets.
>
> So what does that mean? Individuals who own equities have generally
> experienced tremendous increases in the value of those financial assets
over
> recent years; i.e., they are wealthier. According to federal data, the net
> worth of U.S. households(2) increased from $16.8 trillion at year-end 1987
> to $33.2 trillion at year-end 1997, as assets increased by $19.4 trillion
> and liabilities increased by $2.9 trillion. Of this asset increase, $15.0
> trillion came from financial assets and $4.4 trillion from tangible assets
> (such as real estate). In other words, 77 percent of the increase in net
> worth over the past 10 years was due to the stock market rise.(3)
>
> If individuals choose to spend more as a result of this increased wealth,
> such behavior would drive down traditional measures of personal savings.
> This is so because under NIPA, the increase in wealth does not show up as
> income, but the increased consumption that some of it finances does figure
> into the savings rate calculation.
>
> So it is quite possible to have households saving money for retirement >
through a 401(k) plan or an individual retirement account (IRA) >
simultaneously tapping into recent wealth gains to fund additional
> consumption.
>
> One could argue that a more complete measure of saving would include
> increased wealth through capital gains as part of personal income.
According
> to one estimate,(4) if the value of capital gains were included in income
> when measuring savings, the 1997 savings rate would have been 8 percent,
as
> opposed to the NIPA estimate of 0.8 percent.
>
> (1) A less-quoted measurement of personal savings is the Flow of Funds
> Accounts (FFA) produced by the Federal Reserve System, which differs from
> NIPA in its definition of personal income and consumer durables. For
> instance, the FFA treats the acquisition of consumer durables (i.e.,
> automobiles, major household appliances, etc.) as a form of saving,
whereas
> NIPA treats consumer durables expenditures as personal consumption. FFA
> consistently shows a higher national savings rate than NIPA, but receives
> less attention in the news media.
>
> (2) Including nonprofit organizations, which cannot be segregated from the
> data.
>
> (3) Richard D. Rippe, Rita J. Lavin, and Philip Laverson, ³There Is No
> Saving Crisis,² Prudential Securities Economic Outlook Monthly (January
> 1999).
>
> (4) Klaus Friedrich, ³The Real American Savings Rate,² New York Times, May
> 4, 1999.
>
>
>