Wednesday, June 06, 2007

Great American Savings Myth

Economist Paul Kasriel takes on the topics of savings and investment and the idea that America is sitting comfortably atop a golden nest egg in, "Gene Epstein's Great American Savings (sic) Myth".

Here's an excerpt:


In the cover article of the May 28 edition of
Barron’s (see The Great American Savings Myth) Gene Epstein, Barron’s economics editor, argues that household saving is being underestimated. Epstein’s argument centers principally on two issues – the growth in household net worth and the absence of spending on intangibles, such as research and development, from our official Gross Domestic Product (GDP)/saving statistics.

I offer a counterargument that increases in household net worth do not necessarily represent saving in an economic sense. I also present evidence showing that investment in human capital – higher education and research/development – has not shown any extraordinary growth since the official measures of household saving have been plummeting in recent years.

If households are so wealthy, why have they recently been on a borrowing spree? If the return on business capital is so great, why have businesses been buying back record amounts of their equities rather than using their profits to spend more on physical and intellectual capital?


Read on as Kasriel describes why the current picture of household savings would more accurately be characterized as one of dissavings, and makes a few other points besides.