Magazine

Online Extra: Totting Up Savings


What is savings? In its simplest form, savings is what's left behind from income after consumption. For example, if you earn $20,000 after taxes and spend $18,000, then the remaining $2,000 represents your savings. Your savings rate is your savings as a percentage of your after-tax income (in this case it would be 10%).

What's the difference between personal savings and national savings? Personal or household savings measures how much money is being socked away by households. National savings includes savings by businesses and governments as well as households. Businesses save in the form of undistributed profits, which go into bank accounts or get invested in securities. Governments save in the form of contributions to employee pension funds.

The personal savings rate these days is infinitesimal -- only 0.9% of income. The national savings rate is much better, 14.5% of national income.

DRIVING GROWTH? What's the importance of national savings? In a world in which savings does not flow easily across country borders, national savings is the main source of resources for investment in productive plants and equipment. That would suggest that countries with higher savings rates should have higher growth rates.

However, both economic theory and empirical research are far less convincing about the direct importance of savings for growth, especially if the pool of savings is global. For example, from 1985 to 2005, the U.S. and Britain ran the lowest national savings rates among major economies -- but they also had the highest per-capita growth rates.

Savings and Growth, 1985-2005

Average National Savings Rate (%)

Average Growth of Per-Capita GDP (%)

Britain

15.8

2.3

United States

16.1

2.0

Canada

19.3

1.7

Italy

20.1

1.6

France

20.9

1.7

Germany

22.1

1.5

Japan

30.8

1.8

Data: International Monetary Fund

What's not included in savings? Conventionally measured, it omits some types of spending that can be considered future-oriented. For example, the government classifies education expenditures and spending on research and development as consumption, an odd assumption given the importance of human and educational capital.

SURPRISING OMISSIONS. That means spending $20,000 a year on a college degree -- a long-lived asset with great social and individual benefits -- is treated just the same as spending $20,000 on expensive restaurants. Spending on long-lived consumer durables, such as motor vehicles, is also classified as consumption by the Bureau of Economic Analysis.

Perhaps more surprising, increases in the value of assets such as stocks and homes don't count as savings either. That means the wealth of Americans can go way up without any increase in savings. By Michael Mandel in New York


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