Wednesday, January 30, 2013

Back on track

I dunno. I got off topic yesterday. I was saying I have trouble making sense of the data on savING and savingS. I was pointing out that "saving" is the flow of money into the pool of funds called "savings" -- and that savings is a stock, an accumulation.

When I first heard guys talking about "stock" and "flow" I thought it was irrelevant to anything. Really, the two words are very helpful because they let us make important distinctions. If you take a "snapshot" of the economy, there are no flows. Only stocks. If you start the film rolling and watch what happens, you see flows adding to and subtracting from stocks or pools or accumulations. I find myself using those concepts often. So they must be important to my thinking. But I'm drifting again.

In a recent post, Paul Krugman said

We all know that personal saving dropped as inequality rose; but maybe the rich were in effect having corporations save on their behalf. So look at overall private saving as a share of GDP...

He distinguishes between "personal saving" and "overall private saving". For the latter, he uses FRED's GPSAVE. So I compared GPSAVE (blue) to Personal saving (red):

Graph #1: Gross Private Saving (blue) and Personal Saving (red)
The difference, Krugman suggests, is the saving of the rich through their corporations.
Click Graph for FRED Source Page

By the way, these are two measures of "flow" (if my Discrepancy Analysis is working). They are annual additions to total accumulated multi-year savings-with-an-ess. Thus, FRED's "Gross Private Saving" -- Krugman's "overall private saving" -- shows the annual addition to savings, and "Personal Saving" shows the part of it saved by individuals -- as distinct from corporations, as Krugman points out.

Graph #2 shows a ratio of the one to the other, expressed as a percent:

Graph #2: Personal saving as a Percent of Overall Private Saving
Click Graph for FRED Source Page
In the early years, personal saving ran about 30 to 35 percent of the total, drifting perchance upward. Since 1982 or before, personal saving was falling as a share of the total, reaching below 15% of total just before the crisis.

The difference has been made up, to use Krugman's alternative, by the saving of the rich through their corporations. So now we can see some of the effect that Krugman couldn't find, some of the effect of inequality on saving since the 1980s.


Greg said...

This confusion of stocks and flows is what gets people to claim that "Social Security and Medicaid have all these trillions in unfunded liabilities!".

They look at how many trillions are spent each year on them multiply it by 50 and say "We dont have that much money!!"(meaning we dont have it in an account now)

Someone somewhere said this is like a person, who when told that they needed to go on a 200 mile trip, exclaiming "but my vehicle only goes 40 miles per hour!" Thought that was great

Another great comment I saw somewhere regarding this idiocy surrounding cutting SS/Medicare now to save it from later shortfalls was this;

"This is like having a school lunch that costs 4$ now and since we are afraid that it will rise to 6$ at some point in the future advising us to only send $2.50 with your child for lunch today."

Spot on!

Luke Smith said...

If the rich have been increasing their savings through corporate savings, from the 1980s to present, then there must have been an increase in corporate income or an increase in profit margins to explain why this happened - I think both are approachable explanations.

The early 1980s marks the point in time when personal consumption and the trade deficit, both as a percent of GDP, began their respective long-term trends. Personal consumption as a percent GDP 63% then to 71% now. The trade deficit went from about 0% then to about -3% now (-6% at its max).

If I had to attribute any major events to this accumulation of wealth during this period, I would say tax laws like 401(k), private equity leveraged-buyouts, increased consumption of cheap oil (after 1986), and most of all - trade with China lead to this generation (flow) and accumulation (stock) of wealth.