- The Washington Times - Saturday, September 3, 2005

For the month of July, personal income in the United States, measured at a seasonally adjusted annual rate, reached a nominal record of $10,303.1 billion, the Commerce Department reported Thursday. We paid $1,221.1 billion in personal taxes, leaving $9,082 billion in disposable personal income. Normally, there are two ways we can allocate disposable personal income: We can spend it; or we can save it. Personal outlays (the spending option) totaled $9,140.8 billion in July. Because we actually spent more than we received in income, personal saving was a negative $58.8 billion. Thus, the personal saving rate was a negative 0.6 percent. In other words, for each $100 in personal income, we spent $100.65.

Since the Great Depression, there has only been one other month during which the personal saving rate was negative. That was October 2001, the month following the September 11 terrorist attacks, when the personal saving rate was a negative 0.2 percent. July’s descent into negative personal saving territory could be an ominous development.

Over the past quarter century, the trend in the personal saving rate has been steadily downward. After averaging 10.4 percent during the first half of the 1980s, the personal saving rate fell to 7.7 percent during the second half. Corresponding rates for the 1990s were 6.5 percent (1990-1994) and 3.8 percent (1995-1999). For the 2000-2003 period, the personal saving rate averaged 2.2 percent. Last year it was 1.8 percent. During the first six months of 2005, it averaged 0.4 percent. In July, as noted, it turned negative in a big way.

Yes, there are measurement concerns involving the personal saving rate. Yes, there are implicit savings in the soaring values of housing and stocks — although housing prices on the East and West coasts have increased far more than they have throughout the rest of the nation and stock ownership remains highly concentrated within the upper-income levels. No matter how you spin the collapse of the personal saving rate, the fact remains that tens of millions of baby boomers have not made the necessary preparations for retirement. Those preparations require savings to supplement Social Security, disappearing pensions and the income streams inherent in rising housing values.

True, homeowners who have benefited from the housing boom are right to believe that the increased value of their homes has raised their net worth. It’s worth noting, however, that a significant portion of that increased value has already been extracted via home-equity loans to finance the consumption binge that has kept the nation’s economy expanding during the past three-and-a-half years. Moreover, the saving implicit in rising home values cannot be recycled to finance business investment in the way that traditional saving has financed such investment.

With personal saving now negative and with federal-government savings having become substantively negative, only businesses have provided significantly positive savings in recent years. From record profit levels, the retained earnings by businesses have soared. These undistributed profits, for example, have more than doubled in recent years, rising from an annual average of $143 billion (1998-00) to $289 billion (2003-04). These soaring retained earnings have been buttressed by accelerated depreciation, which further increases cash flow.

Still, that combination has not been sufficient to bridge the growing gap between domestic savings and investment. Instead, we have had to borrow from abroad. Essentially equivalent to the current account deficit, net foreign borrowing increased from $279 billion in 1999 (3 percent of GDP) to $653 billion in 2004 (5.6 percent), according to the National Income and Product Accounts compiled by the Commerce Department. Such an increase might be justifiable if it were used to finance rising business investment, whose subsequent income streams could generate the cash to service the exploding foreign debt. Alas, business investment in 1999 totaled 12.2 percent of GDP, while business investment in 2004 represented 10.2 percent of GDP. In other words, a savings-deprived America increased its foreign borrowing by 2.6 percent of GDP while its business investment fell by 2 percent of GDP.

How has all this foreign borrowing been used? It has partly financed our rising budget deficit and our recent consumption binges (which has increased from 67.1 percent of GDP in the 1990s to 70.1 percent since the end of 2002) and housing (residential investment has increased from 4.13 percent of GDP in the 1990s to 5.65 percent since the end of 2002). Now, with the United States having become the world’s largest debtor nation, our personal saving rate has just become negative.

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