Negative savings in America

John Quiggin6 Comments

I was looking at national savings figures for the United States when the Australian National Accounts came out yesterday, which is why I belatedly noticed the negative households savings figure.

The US has also experienced a big decline in household savings, but they remain positive at around 3 per cent of GDP. Retained corporate earnings are between 0 and 2 per cent of GDP depending on how you measure depreciation. These small positive contributions are wiped out by the government budget deficit (around 5 per cent for the Federal government – the states are also in deficit, but I don’t have a number yet). More on all this is available from the Bureau of Economic Analysis.

One interpretation of all this is that people from outside the US (and, for that matter) Australia, are eager to buy US assets, and Americans are simply cashing in the consumption benefits. I don’t agree. A steady decline in household savings seems to be occurring wherever financial markets have been liberalised. At the moment, the whole system is being kept in balance by massive purchases of US dollars by Asian central banks, but this can’t continue indefinitely.

It’s therefore time to invoke Stein’s Law – if a process can’t continue indefinitely, it won’t. There seems no prospect of an exogenous shift in the behavior of households or of a return to fiscal probity by the US government. I conclude that a return to equilibrium must involve an increase in real and nominal interest rates, probably facilitated by inflation. Even allowing for an inflationary cushion, this will not be a pleasant process for heavily indebted Australian households. American householders are protected by the structure of mortgage contracts, which allows them to lock in low rates, but the costs will be borne elsewhere in the financial system.

Negative savings in Australia

John Quiggin8 Comments

Apart from showing near-zero GDP growth for the quarter, the latest national accounts released today by the Australian Bureau of Statistics include the startling (to me, anyway) information that Australia now has negative household savings. I’ve reproduced the relevant bit of the release below.

Household saving ratio

In both trend and seasonally adjusted terms the household saving ratio was negative in the June quarter 2003 implying that household consumption was greater than household disposable income. In trend terms the ratio was -1.2% in the June quarter and in seasonally adjusted terms it was -1.3%. The deterioration in the saving ratio in recent quarters has been driven by both a slow down in the rate of growth of disposable income and the continued strength of household consumption expenditure. The movement in disposable income has been affected by the very weak income results for the farm sector arising from the drought. The impact occurs because the household sector defined in the national accounts includes unincorporated businesses and therefore includes most farm businesses. Consequently, most farm income (included as a significant component of ‘gross mixed income’ ) is also part of total household income. Although seasonally adjusted household saving has been negative in the past three quarters, net national saving has been positive over the same period. The net national saving ratio in the June quarter was 2.5% in seasonally adjusted terms.

Caution should be exercised in interpreting the household saving ratio in recent years, because major components of household income and expenditure may still be subject to significant revisions. The impact of these revisions on the saving ratio can cause changes in the apparent direction of the trend. The following graph presents the household saving ratio derived from trend and seasonally adjusted data (see Explanatory Notes).

Householdsavings.gif

As the graph shows, although the latest figures may be distorted by the drought etc., the long-term trend has been clearly negative, and the decline goes back further than this (the Fitzgerald report on declining national savings was commissioned at the beginning of this period.

When I responded to the Fitzgerald report, I argued that it was misleading because it failed to take account of investment in human capital. But we’ve done miserably on this score in the last decade or so, with school completion rates declining in the early 90s (they’ve since recovered a bit) and domestic higher education commencements frozen since 1996. In both cases, there was a direct link to expenditure cuts imposed in the name of economic efficiency.

I haven’t yet managed to work through to an aggregate national savings figure. But with the Federal government budget roughly balanced in accrual terms, the contribution from government savings can’t be large, and I’d be surprised if retained earnings of corporations accruing to Australian owners amounted to more than 3 or 4 per cent of GDP. So this suggests that Australian national savings are approximately zero, or in other words, that all net investment in Australia must now be financed by foreign debt or equity investment.

One reason for this negative saving is the fact that, thanks to the property bubble, people can spend more than they earn and still, apparently, get richer. But there’s a fallacy of composition here. We can’t all sell our houses to cash in this wealth – if we did, prices would fall and the wealth would disappear.

Of course, if we could persuade some overseas buyers to purchase a million or so houses at current prices, our problems with foreign debt would be over. But although it’s not precisely true that the only potential buyers of Australian houses are Australian residents, it’s a good enough approximation for economic analysis. A few thousand wealthy HongKongers may want a Sydney bolthole, and there are probably a few thousand more footloose global professionals in the market, but not enough, I think, to make a real difference.

Update My wife Nancy, who’s paying more attention than I am, tells me there’s nothing new in the negative household savings story, which is confirmed by a look at the graph (savings have been negative for three or four quarters now) and a quick Google. As so often, I’m a bit behind the times, but I’m still surprised there hasn’t been more comment on this.

New on the website 2

John Quiggin2 Comments

I’ve added a number of recent Op-Ed pieces from the Fin to the Website. Here’s a brief summary.

  • Putting HECS to good use argues that the HECS debt could and should be used as the basis for a capital injection into the higher education sector
  • Stuck in the comfort zonelooks at the issue of work intensity and suggests that workers are beginning to find ways around pressure for longer hours and a faster pace of work
  • Woolly thinking on Telstra refutes the idea that government ownership of regulated monopolies creates a conflict of interest
  • Interesting time for rates predicts rising inflation and interest rates in the US, and perhaps Australia also

Finally, there’s a Review of David Moss, When All Else Fails: Government as the Ultimate Risk Manager

Monday Message Board

John Quiggin9 Comments

It’s the first of Spring* and time once again for your comments on any topic (civilised discussion and no coarse language please).

* There are more assumptions in here than I have space to unpack, but I’d be interested in people’s views on whether a four-season division makes sense where they live. It certainly doesn’t in Northern Australia, where there are really three seasons – the Dry, the Buildup and the Wet. In Brisbane, as far as I’ve experienced it, the seasons are Summer and Not Summer – there aren’t enough deciduous trees for an autumn/fall and there’s nothing that could be called a winter.

Feet of Clay

John Quiggin14 Comments

This opinion poll reported in the Sun-Herald shows Labor 4 points ahead on the two-party preferred vote. I don’t imagine that this will persist – the government has had a particularly bad week. Still there are a couple of lessons that can be drawn.

One is that, contrary to what was, at least a week ago, the conventional wisdom, Howard does not bestride the political scene like a colossus. Given some bad luck at the right time (for example, a Tampa-style stunt that went wrong), he could easily lose the next election.

The second is that the view of the government as ‘mean and tricky’ is well-established for a large section of the electorate. Episodes such as the ethanol scandal, Abbott’s efforts over Hanson and the WMD lies all fit into this perception.

As long as the housing bubble continues, the odds are in Howard’s favor. But, the bubble will burst sooner or later. When it does, the accumulated costs of mean and tricky government will burden the Liberal Party for years to come.

Update 1/9/03: Glenn Milne agrees with much of this, and emerges as a Costello partisan and strong critic of Howard. Is this new, and does it reflect a nascent Press Gallery consensus that Howard is consistently dishonest, and therefore should not be PM?

Further update 2/9: Dave Ricardo and Tim Dunlop, who follow Milne more closely than I do, say that he is a longstanding Costello partisan. And Mork raises the more general issue of the Press Gallery and its role. This will require a big post some time.

Blast

John Quiggin3 Comments

Regular reader Jim Birch has been in touch by email to advise me that this site has been inaccessible and suggests the problem may be access restrictions introduced in response to the Blaster worm. I am looking into this, but haven’t made any progress yet. I’ve had lots of similar problems with other blogs in the last couple of weeks so it seems as if this worm is still doing lots of damage. To anyone who can read this and has any helpful suggestions, please make them.

What I'm reading, and more

John Quiggin

A Universal History of Infamy by Jorge Luis Borges. Among other interesting features is the fact that Borges has drawn on sources including Gangs of New York (which was only recently published at the time Borges wrote) and Life on the Mississippi. I haven’t read either and also missed the film of Gangs of New York when it came out. So I’ll have to follow Borges’ pre-hyperlinks. I think he would really have loved the Internet.

I also went to see Life + Debt, a documentary about Jamaica and its troubles with the IMF. Insofar as there was a ‘line’, it was the standard anti-globalisation story of farmers being driven out of business by import competition and so on. A couple of things struck me about the film. One was that Jamaica seemed to have tried everything (self-sufficiency, free trade zones, general liberalization) and nothing seemed to work. So while the analysis implicit in the film was inadequate, it didn’t seem to me that the IMF had any better answers.

The other point, discussed previously in Ozplogistan, is how bad economists look on film. The film gave a lot of time to Stanley Fischer and wasn’t obviously unfair to him, but he came across dreadfully nevertheless.

Werewolves

John Quiggin2 Comments

This piece by Daniel Benjamin in Slate attacks the idea, being popularised by Bush Administration figures like Condoleezza Rice and Donald Rumsfeld that the occupying forces in Germany after World War II faced resistance from ‘Werewolves’, that is diehard remnants of the SS and Hitler youth similar to those found in Iraq today. The story seems to have been started by this National Review Online piece by Mackubin Owens

This story rang a bell with me, and, digging back I found this NRO piece by John O’Sullivan from early April which seems to have been the first mention of Werewolves. Interestingly, though, O’Sullivan, writing before Baghdad fell, was using this precedent to predict that no resistance would emerge.

Not a single “Werewolf” emerged from his lair. And the allies, who had arrived as conquerors not liberators, soon found themselves handing out food parcels to a grateful German population. That will happen in Iraq too. When? That no one can predict with certainty. But happen it will � and not long after the battle of Baghdad is joined.

So O’Sullivan’s account of the facts matches Benjamin’s and is exactly the opposite of his NRO colleague. I don’t know who’s right, though the fact that O’Sullivan’s version came first and that I had never heard anything of postwar German resistance before it became a Republican talking point suggests that O’Sullivan is correct.

I’ve never been a big fan of the ‘meme’ metaphor, but this example may force me to reconsider. Obviously, the Werewolves image has a good deal of reproductive power, and the virus changes its coat to survive in changing environments.

Age before beauty

John Quiggin3 Comments

Here in Brisbane, the buses still have signs admonishing students (who get concessional fares) to give up their seats to adults. I hadn’t seen this in action until yesterday, when I was on a bus from the University to the city, which was standing room only when I got on. An elderly lady got on the next stop and the driver used the PA system to call on students to get up and “give their seats to the older people”.

I was pleased to see that one student immediately offered her seat to the old lady. I had slightly more mixed feelings when another student followed suit, offering her seat to me. After declining one such offer, I decided it was better to age gracefully and accepted a second – the old knees aren’t what they used to be, after all.

New on the website

John Quiggin2 Comments

A piece I wrote for the Fin on the ‘generation game’ several years back, but omitted to post on my website is finally online. Here’s a couple of paras.

One of the standard ploys in journalism, marketing and political commentary is the generation game. The basic idea is to label a generation ‘X’ or ‘Y’, then dissect its attitudes, culture, and relationship with other generations. The most famous generation, of course, is that of the Baby Boomers, born between the end of World War II and the early 1960s, and their most enduring contribution to the generation gap is the ‘Generation Gap’ between children and their parents.

At first sight, discussion of this kind can carry with it an air of fresh insight, but most of it stales rapidly. Much of what passes for discussion about the merits or otherwise of particular generations is little more than a repetition of unchanging formulas about different age groups ö the moral degeneration of the young, the rigidity and hypocrisy of the old, and so on.

Update 30/8/03 As if to prove my point, today’s Fin (subscription required) runs a particularly silly generation game, with an even sillier lead on the front page. After recycling the the usual cliched half-truths, the article turns to a complete furphy as its main theme. Boomers are blamed for grabbing the old age pension and leaving nothing for the young. In reality, boomers paid taxes during the 1970s and 1980s to finance a universal non-means-tested pension, with access for women at 60 and men at 65. Even when the pension was means-tested, tax concessions for superannuation and easy access to lump sums gave lots of early retirees the chance to double dip.

Now pensions are tested on both income and assets, the women’s age is being raised to 65 (just in time for the first boomers) and there’s talk of pushing the pension age up to 67 after that. Concessions for superannuation, while still generous compared to most other investments, have been scaled back significantly, as has the generosity of employer contributions. On any reasonable assessment, it’s the Depression kids who have done well on this score and the boomers who have paid for schemes whose benefits they will never enjoy.