Got this off of an email listing I am on. Cannot speak to its accuracy, but it speaks to your point on savings rates. I have removed the individual's name and identification. I did not write this, and I am not sure the individual who sent it out wrote it. I am just passing it along for consideration.
-Scott
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One of the favorite statistics cited by the gloom-and-doom crowd as to why
the US economy and stock market are in peril is our national savings rate.
According to the "official" figures, this rate for the US has fallen below
4%, and is significantly below the rate of other industrialized nations.
The pessimists believe this is a sign that Americans have become
irresponsible, that we're living for today and not planning financially for
tomorrow. This spendthrift attitude supposedly leaves us dependent on
foreign capital, and if and when that capital flows out, the US economy
won't be able to compete, and disaster will follow. To the extent this
supposed problem is related to foreign capital and the trade deficit, I'll
discuss in a future post. The important thing to know for now is that there
is no US savings crisis, there never was, and there most likely never will
be.
To understand how this myth has been created you first must understand how
the savings rate is calculated. In its "most simplest" form, the savings
rate is calculated by taking the national income and subtracting personal
spending and public spending. For John Doe, this means his personal savings
rate is his annual income minus what he spends and what the government takes
out of his paycheck. Although there are several other variables involved,
the most important one that negatively impacts the US savings rate is
capital gains. In calculating the savings rate, NO CAPITAL GAINS ARE
INCLUDED. This has a significantly negative impact on our savings rate
relative to other countries, especially as it pertains to real estate. The
easiest way to understand this is through an example.
I have an Aunt and Uncle who have lived in the same house in Garden City,
Long Island for over 40 years. When they bought this house, it cost less
than $10,000, but it's now worth over $450,000. They've recently considered
selling their house and using the proceeds to buy a $150,000 condo in
Florida. What would they do with the remaining $300,000 (after taxes)?
That's right, it would go right into the US stock and bond market.
However, in the eyes of the statisticians, only $10,000 of this $300,000
profit (capital gain) is savings, because that's all they originally paid
for the house! As far as the government is concerned, the other $290,000
doesn't even exist. Although measuring this negative bias is difficult,
this non-counting of consumer real estate gains is profound, and as more and
more baby boomers sell their "family" house and buy their "retirement"
house, more and more of this uncounted savings is going to be unleashed on
the US financial markets.
The simple truth is US citizens are being "punished" in the official savings
rate calculations because they've made the intelligent, rational decision to
use residential real estate as an investment- an investment that has a
better and more stable long term track record than any other. The US and
Australia have very low savings rates (according to the "experts") among
industrialized countries. What do these two countries have in common? They
have among the highest rates of home ownership. Japan has one of the
largest savings rates among advanced nations. It also has one of the LOWEST
rates of home ownership. Are these facts just coincidences? Hardly.
The capital gains exclusion penalizes Americans in another way relative to
the savings rate calculations. The exclusion of long term capital gains
from real estate is nothing short of ridiculous, especially when it's track
record is considered. Capital gains from stocks are another story.
However, unless you've been living in a cave for the past several years, you
know the value of the US stock market has skyrocketed recently. The reason
this has actually had a negative effect on the US savings rate in its
current calculation is because TAXES on capital gains ARE being included in
the calculations! Here's an example to clarify.
Suppose John Doe bought 100 shares of Dell a few years ago at $10 per share.
Because of recent volatility, he has decided to sell 50 shares at $110 each
and move that money into bonds. Since he only paid $10 per share, he's now
going to owe taxes on a $5,000 capital gain on these 50 shares he's selling.
Let's also assume John's income and personal spending haven't changed at all
since he first bought the Dell stock. This means that in the eyes of the
government, John's personal savings rate has gone DOWN, because the gains
from the Dell stock aren't included in his personal savings rate, but THE
TAXES ON THE CAPITAL GAIN ARE. Remember, savings equals income minus
spending minus taxes (including capital gains taxes). Since his taxes have
gone up, but his personal income and spending remained the same, his savings
rate went down!
We could argue all day whether capital gains from stocks should be included
in the savings rate. I personally feel at least a certain percentage of
them should be, but that's beside the point. If NONE of the gains from
stocks are going to be included, then certainly NONE of the TAXES on those
gains should be included. They should at least be counted as offsetting,
that's just common sense (but then again, we are talking about the federal
government here).
Don't plan on this lack of judgment being corrected anytime soon. In fact,
the Bureau of Economic Analysis (BEA), which calculates the savings rate for
the government, recently made the problem WORSE. Up until now, mutual fund
distributions HAVE been included in the savings rate, as dividend income.
The BEA has now decided to classify these distributions as capital gains,
and therefore not count them towards people's income when determining the
savings rate. The result- the savings rate declines once again, even though
nothing has changed other than the BEA's accounting procedure...
Still not feeling better? Don't worry there's more good news. Saving money
"for saving's sake" may be a good rule to teach your children, but in
looking at the savings rate, it's important to remember WHY saving money is
important for a nation. When this is done, the US shines once again.
Savings are important for a nation because financial capital is the fuel of
any modern economy. The business sector needs access to capital to fuel
research, development, and expansion. The cheaper the capital (as measured
by interest rates) the better. The greater the amount of savings, the more
productive its workforce will become, the more the economy will therefore
grow, and the more standards of living will therefore increase. This is all
very true, but it ignores HOW EFFECTIVE a country is or isn't at investing
its capital. In other words, the savings rate pessimists simply assume a
dollar saved in the US is the same as a dollar saved in Japan, or in any
other industrialized nation. This is simply not true.
To put it simply, nowhere in the world does capital flow more freely and
efficiently to the sectors of the economy where that capital will be most
effectively implemented than in the US. Just as importantly, nowhere in the
world does capital STOP FLOWING to companies that no longer deserve it.
This is the biggest downfall of our competitors, they simply have enormous
trouble letting companies fail (which causes temporary pain like
unemployment). The capital used to support these ailing companies soaks up
precious resources that "winning" companies need to expand and thrive. In
other words, a dollar of savings in the US is much more valuable than a
dollar of savings in other countries because we get a much better return on
each dollar invested. Therefore, when you compare our savings rate in
absolute terms to that of other countries, you're comparing apples to
oranges.
I'm not saying an increase in our savings rate would be bad, it almost
certainly would be a positive, but it's dangerous to simply say saving money
is always good. If you want to see an example of what can happen to an
economy that saves too much and spends too little, just look at Japan.
Although there are several reasons behind Japan's current predicament, over-
saving is one of the biggest.
The Japanese government (through tax, financing, and trade policies) gave
their citizens an enormous incentive to save and enormous incentives NOT to
spend. They also gave their corporations an enormous incentive to invest,
primarily through expansion (very favorable depreciation schedules). While
US companies were busy investing in information technology to make their
factories more efficient, the Japanese were busy building more factories.
The problem was there weren't enough active consumers to consume everything
that was being produced, and a meltdown occurred. They avoided this problem
for a long time by exporting the surplus, but eventually even that wasn't
enough to absorb the production glut. Japan clearly saved and invested more
than the US in the eighties, but who invested their money more wisely, and
left enough money in the hands of consumers to reap the benefits of those
investment dollars?
If all this wasn't enough good news, the future of the US savings rate is
even brighter. With every passing day, it's becoming clearer that the US
Social Security system is going to eventually be privatized (this may be
wishful thinking on my part, but bear with me for a moment...). This is
going to have a huge impact on the "official" savings rate calculation. The
logic is pretty simple.
In its current form, we all know the Social Security is essentially a Ponzi
scheme. No money is actually being saved, it simply comes in and goes right
back out. Since this is therefore currently a tax, it actually appears as a
"negative" right now on the savings rate ledger. However, if the system is
privatized, over time it would become a "true" savings vehicle (albeit a
"forced" savings vehicle). And would therefore qualify as "savings" under
the current calculation scheme. Even if everything else stays the same,
this one change will add at least ten percentage points to the "official" US
savings rate.
If you include a privatization of the Social Security system, include
capital gains from real estate, and REMOVE the capital gains tax on other
assets, it's entirely possible that the US will have the LARGEST SAVINGS
RATE OF ANY INDUSTRIALIZED NATION IN THE 21ST CENTURY. Of course, then the
pessimists will say "remember Japan in the late eighties..."
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