Economic Trends
By Laura Cohn
Fixing the Dents in Savings Data
In the fourth quarter of 2000, the U.S. personal savings rate was -0.8%, the lowest level since 1933. That's down from 1.5% in the fourth quarter of 1999, and 3.8% a year before that.
But consumer balance sheets may not be as bad as these figures suggest. Wages and salaries, the main source of income for most Americans, have actually been rising as fast as consumer spending for most of 2000 (chart).
And a recent study from the Federal Reserve Bank of New York confirms what most economists already suspected: that the Commerce Dept.'s official gauge of savings is "a very distorted measure" of consumer finances that doesn't say much about Americans' ability to keep on spending. "The personal savings rate could well remain quite low for some time without jeopardizing household spending or finances," conclude the study's authors, economists Richard Peach and Charles Steindel.
In particular, the personal income figures exclude gains or losses from the sale of important items such as real estate or financial assets. That means that government statisticians undercount both personal income and personal savings, which is calculated from the income figures. Complicating the matter is the way the statistics account for capital-gains taxes. Such taxes are subtracted from personal income, even though the capital gains themselves are not included in the income figures. That makes savings and income look weaker than they actually are.
The authors suggest two ways to address this distortion. One is to remove capital-gains taxes from the statistics altogether. After Peach and Steindel did that, the personal savings rate rose by about 1.5 percentage points from its reported level. The other way is to include realized capital gains in the personal income figures. When the economists did that, the savings rate was 7.25 percentage points higher than initially reported in 1999. Moreover, the rate didn't drop much throughout the 1990s, painting a much more optimistic picture.
No Way Out of the Nurse Shortage
Medical costs could be heading a lot higher. A key factor holding down medical-cost inflation in the 1990s was relatively low wage increases for health-care workers. For example, from 1993 to 1998, wages of private hospital workers rose only 2.3% annually, less than the 2.4% rate of inflation (chart). But shortages of health-care workers have become more common in the past two years, and medical wages have been accelerating. In particular, private-sector hospital wages are growing faster than overall wages. That's one big reason why health-care consultants expect medical costs to jump 12% this year, the biggest gain in 10 years.
Registered nurses, for example, are in short supply. According to a study released on Jan. 3 by health-care consultants William M. Mercer, 32% of the nearly 200 health-care providers surveyed said turnover of registered nurses was a "significant" problem. Moreover, the report says the problem will continue to worsen. Most registered nurses today belong to the baby-boom generation, which means they will be retiring soon. In addition, the U.S.'s aging population is further intensifying demand for health-care workers.
Even higher pay may not solve the shortage by itself. The Mercer report points to poor job satisfaction as a key factor that is holding down the supply of nurses. The study says nurses currently face a tougher work environment because of understaffing. "While pay raises are often an excellent short-term solution, they frequently are insufficient as a long-term approach unless augmented by changes to the work environment," says Jose Pagoaga, a health-care consultant at Mercer.
Taking the load off overburdened hospital staff may require hiring more nurses, which will make the shortages even worse. In any case, rising wages for hospital workers---with their effect of pushing up medical costs--look as inevitable as death and taxes.
Are VC Startups Run Better?
When a startup is funded by venture capitalists, it's likely to be managed better than startups that get more traditional financing. That's the finding of a recent study by two Stanford University Graduate School of Business professors who examined the experience of 173 high-technology Silicon Valley startups from 1994 to 1997, before the big dot-com bubble and subsequent crash.
The researchers, Thomas F. Hellmann and Manju Puri, found that startups with venture-capital funding were more likely to quickly hire marketing executives. That's an important milestone, says Hellmann, because it's a sign that the company is "serious and organized."
Moreover, startups were more likely to replace their founders with an outside CEO with experience if they had VC funding than if they didn't receive such backing. That avoids one of the greatest pitfalls of new companies: relying too long on a founding entrepreneur who had the initial idea but may not have sufficient experience to manage a successful company. Such events as the hiring of a professional CEO take place expeditiously at venture-funded startups because venture capitalists are more focused than other investors on getting a quick return on their investment.
Of course, Hellmann and Puri's sample did not include the events of the past year, in which many venture-funded startups either went under or are on the brink of failing. It will be interesting to see whether the VC-funded firms still did better than their traditionally funded counterparts in the downturn.
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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