Every so often the government spits out some factoid that seems crammed with special significance. The Commerce Department did just that recently when it reported that Americans' personal savings rate had dropped to zero. As a society, we seem unwilling to devote even a penny to the future. How could this be, considering all of our huge contributions to retirement accounts? There are two possible answers. One is alarming: A low savings rate reflects national character -- an addiction to immediate gratification. The other is more reassuring: Low saving is partly a statistical mirage. Both answers are true.
Go back 250 years and you find British colonies already bulging with big spenders. In 1764 an anonymous English pamphleteer marveled that Americans spend "as much [on] the luxurious British imports, as prudence will countenance, and often much more." The colonists bought vast amounts of linens, tableware, watches, glasses, gloves, hats, furniture and much more, relates historian T.H. Breen of Northwestern University in his recent book "The Marketplace of Revolution."
From the mid-1740s to 1771, British exports to the colonies rose fivefold. Credit was common. Some Philadelphia merchants "sold as much as 90 percent of their goods on credit," Breen writes. Farmers could "obtain whatever goods they wanted in advance of the sale of their crops." Credit was also a come-on. Said one writer: "['T]is well known how Credit is a mighty inducement with many People to purchase this and the other Thing which they may well enough do without."
Sound familiar? Breen depicts an America whose basic values and instincts were rapidly crystallizing: its brashness, its optimistic faith in the future (hence, the desire for credit), its acquisitive culture, its tendency to see material items (china bowls in 1770, flat-screen TVs now) as badges of success and status. Today's consumption binge, which erodes savings, expresses the same impulses. Perhaps absurdly so.
But economic statistics also distort what's happened. The outlook isn't as dire as the zero personal savings rate implies. One common error is to confuse personal with national savings. Along with consumers, businesses and governments can save, too. In 2004 companies saved about $1.4 trillion in retained profits and depreciation allowances. If you own stock, your companies are saving for you. But federal budget deficits, a form of dis-saving, erase some of that. The overall result: Although our national savings rate has declined, it's nowhere near zero.
The personal savings rate is derived by subtracting Americans' total consumption spending from their total after-tax income (i.e. "disposable income''). By definition, the rest is "saving." In 1984 the personal savings rate -- savings as a share of disposable income -- was 10.8 percent. It's drifted down ever since. It was 4.6 percent in 1995 and 1.8 percent in 2004. It hit zero in June. These low figures are not inconsistent with huge 401(k) and IRA contributions. Suppose you put $4,000 into a 401(k) account. You think you've "saved." But then you borrow $4,000 to go to Vegas or pay college tuition. Now your savings rate is zero. Ditto if you'd sold $4,000 of stock. Borrowings and stock sales offset much retirement saving.
The trouble with the official savings rate is that it excludes some items that people intuitively count as savings, notes Susan Sterne of Economic Analysis Associates. A big omission is the capital gains -- aka profits -- on housing or stocks, both realized (if you sell) or on paper (if you don't). If your home or stocks increase $10,000, you may feel comfortable borrowing $4,000 to spend. You've still got an extra $6,000 in savings. But the savings statistics ignore these value changes; all they show is that you've saved less by spending another $4,000.
Over two decades, these value changes have soared. Lower interest rates -- mainly reflecting lower inflation -- have driven up stocks and home prices. Stocks became more appealing next to interest-bearing deposits; lower mortgage rates made higher home prices more affordable. From 1985 to March of this year, Americans' mutual funds and stocks rose from $1.3 trillion to $10 trillion; over the same period, real estate values jumped from $4.6 trillion to $17.7 trillion. Once you consider these value changes, most Americans don't look so irresponsible. Sure, they've borrowed heavily. But their net worth -- what they own minus what they owe -- continues to grow. Compared with income, it's higher than in most years since 1950.
We've had an exceptional two decades, enabling Americans to indulge their self-indulgence: They've spent more of their incomes and saved less. Some commentators -- including this one -- have warned that this process must end, and with it the spectacular economic stimulus provided by the supercharged American consumer, because the outsize wealth gains can't continue indefinitely. Indeed, for stocks, that's already happened. Sooner or later, Americans seem bound to react to rising debt burdens and disappointing asset values by slowing their shopping. But in a country of passionate spenders, it's hard to know when the reckoning will occur or how damaging it will be.