Cooking the savings rate promotes tax cuts for the wealthy.
This article is from the January/February 2000 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org
This article is from the January/February 2000 issue of Dollars & Sense magazine.
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As with other products, economic statistics should be recalled when they no longer function safely. One prime candidate for such a recall is the series of figures that supposedly tracks the "personal saving" of U.S. households.
The Bureau of Economic Analysis, the agency that produces the numbers, recently reported that in September and October of 1998, the personal saving rate dipped into negative numbers for the first time ever. If accurate, this would mean that American households, taken as a whole, were actually spending more than their combined total income.
At the end of October 1999, the government's statisticians made some long-overdue adjustments that pulled the savings rate out of negative territory. But even in the revised series, the savings rate for the most recent month — just 1.6% of personal income — was still the lowest in history. And even with the latest revisions, the series is still deeply misleading.
The political Right has brilliantly used this questionable data to fuel popular anxieties about the future and justify new policies that disproportionately benefit the rich — as well as to garner support for their plan to dismantle Social Security. Fortunately, some press reports, as well as some mainstream economists (see Gale and Sabelhaus), are taking these terrible savings numbers with a grain of salt, and for obvious reasons.
The booming stock market of the past few years has increased dramatically the wealth of households that hold stock. The increase in the value of stocks from 1994 to 1998 alone produced a $3 trillion increase in household wealth. This increase vastly exceeds the additions to household wealth in earlier periods, when household saving was allegedly healthier. And while little of that new wealth has improved the financial position of middle- and lower-income families, the rich, who have always done the bulk of the savings in the U.S. economy, made out like bandits, and their personal savings are no doubt higher.
The way the savings rate is calculated, however, leaves out several large chunks of money that should probably be counted as savings, including social security reserves, public sector pension funds, and value of owner-occupied homes, as well as the money flowing to affluent households through the recent fad of corporate stock buy-backs. All these factors make the savings numbers highly suspect.
Despite the skepticism about it, however, the unrecalled saving data has already helped do considerable damage. The flawed personal saving data has been used repeatedly to justify tax cuts that disproportionately benefit higher-income households. With the Republican tax proposal (later vetoed) that passed in 1999, for example, cuts in capital gains taxes, inheritance taxes and so on were justified by the need to create stronger incentives to save. The comment by Ways and Means Chair Bill Archer was typical: "Every tax dollar taken by the death tax is a dollar taken out of savings when what this country needs is more private savings." (New York Times, July 25, 1999)
In addition, since the mid 1980s, conservatives have skillfully used the reports of low rates of household saving as part of a long-term strategy to dismantle Social Security.
In a 1983 article in the libertarian Cato Journal, Stuart Butler and Peter Germanis laid out what they called a "Leninist strategy" for privatizing Social Security. The Cato spinmeisters began by recognizing that a frontal assault on Social Security was politically impossible; the system was simply too popular and its supporters too well organized. Their alternative was to carry out incremental changes that would "make private pension options more attractive," as a way to weaken the pro-Social Security coalition.
They reasoned that if large sections of the middle class accumulated considerable savings in individual retirement accounts, they would be less dependent on Social Security and could be more easily persuaded that a government-run system was inherently flawed. Then at some point in the future, when Social Security had its next crisis, the time might well be ripe to privatize the whole system.
While Butler and Germanis did not mention the personal saving data in their article, it came to play a critical part in their strategy. From the mid-1980s to the present moment, reports of low rates of personal saving have been used repeatedly by both political parties to justify expansion of tax-sheltered schemes for retirement savings such as IRA's and 401k plans. The expansion of these programs has increased public support for privatizing Social Security, just as Butler and Germanis thought it would. It has also undermined the progressive nature of the tax system, because higher-income households reap the bulk of the tax advantages.
Examining the Logic and the Data
It's important to realize that the savings data are not only misleading — in some of the arguments where they're used, they're irrelevant. The conservative arguments on savings are based on a series of unjustified logical leaps. In our economy, the amount that households save is not an important determinant of our future prosperity, or of the government's future ability to pay Social Security benefits. The truly relevant factors are how much business invests in plant and equipment, and how much the public sector invests in research, educating the workforce, and infrastructure.
The real danger at the moment, in fact, is exactly the opposite of what the conservatives claim. After years of hysteria about the dangers of budget deficits at the federal level, we now face a distinct risk that the U.S. will fail to spend enough on the public investments needed to assure our future prosperity.
Even if we accepted the false assumptions behind the conservative arguments, it is still the case that the ominous savings rate data result from faulty accounting methods, which ignore large sums of money that should really be counted as savings. The way we currently account for public sector pension funds, the Social Security surplus, and owner-occupied housing, for example, have all helped to produce an official savings rate that's unrealistically low. When we adjust our accounting methods to better deal with these areas, the savings rate starts to look healthier right away.
In its latest revision, for example, the Bureau of Economic Analysis has started treating public sector pension funds the same way it treats private pensions. This revision, along with some technical adjustments, pushed the 1997 savings figure from $121 billion up to $271 billion.
The surplus in the Social Security Trust Fund is another source of unacknowledged personal savings. In 1997 the excess of revenues being paid into the Social Security system over outlays totaled $70 billion. These funds too need to be counted as personal savings. (See table, correction #2)
Finally, in dealing with owner-occupied housing, the National Income and Product Accounts treat homeowners as though they pay rent to themselves, and include that rent as part of their income. For consistency, the accounts then subtract an estimate of how much the house depreciated in value over the year. But in today's housing market, those homes are generally gaining, not losing, in value, so the depreciation deduction makes no sense. No longer subtracting depreciation of owner-occupied housing would add another $93 billion to personal savings for 1997. (See table, correction #3.)
The Impact of Stock Repurchases
It's a new factor, however, that accounts for the implausible claim that household saving turned negative during several months of 1998. That factor is a boom in corporations buying stocks from households.
According to economic theory, firms are supposed to sell shares of stock to the public and use the resulting funds to finance new investments. In recent years, however, a significant transfer of funds has been going in the other direction, as firms in the aggregate actually return funds to households.
These stock repurchases have become an increasingly popular corporate fad that has helped to sustain the corporate boom. When the price of a firm's shares are not particularly buoyant, it has become common for the firms to announce a share repurchase, in which the company uses its cash reserves to buy up its outstanding shares. This generally pushes up share prices, which is what drives the fad. To add to the incentive, corporate managers are increasingly being rewarded with stock options, that rise in value with the firms' share price. The fad has driven the announced value of stock repurchases up from $73.8 billion in 1994 to $209.9 billion in 1998. (Data provided by Securities Data Company.)
Also, as the merger and acquisition boom continues, it is common for one giant corporation to buy up another giant corporation by buying back all of its shares from the public. The combined effect of these two trends has led to a dramatic upsurge in the amount of corporate stock being bought back from households. According to Federal Reserve data, corporations in 1997 transferred $521 billion to households in this way.
Government statisticians, however, do not include these cash flows in their estimates of household income, even though both types of stock repurchases can be seen as substitutes for paying shareholders dividends. If a firm sitting on $2 billion of cash returns that money to its shareholders in the form of dividends, there would be no question that the $2 billion of dividend is current income for those shareholders. But if the firm instead purchases $2 billion worth of shares in another company, or buys back a similar amount of its own shares, the income that flows to households is not counted as current income. And, in fact, the total dollar value of dividends has been relatively stagnant in recent years as firms have increasingly resorted to these other mechanisms for distributing profits.
No wonder the official saving data have gone south. Even a conservative adjustment that adds just one-third of the income from net corporate repurchases of shares to personal savings has a dramatic effect. Using this approach, corporate repurchases of shares from households would add $173 billion to personal savings in 1997, bringing our revised estimate of personal savings for that year up to $607 billion, close to five times the size of the old official figure. (See table, correction #4.)
Saving Our Economic Future
There is, in short, no negative household saving rate. What there is instead is a change in corporate fashion that has led government statisticians to understate the real income flowing to households. But of course, these uncounted flows of income to households are highly concentrated among the wealthiest households that continue to dominate stockholding. The result is a peculiarly vicious cycle.
Over the past 20 years, a series of conservative policy initiatives has dramatically increased income and wealth inequality in this society. But an unintended consequence of the same changes is that the government's statistics on income and savings have been undermined, with the result that the data show an entirely mythical decline of household saving.
In other words: The rich get richer, and the official data get shakier.
A first step to break this vicious cycle is to perform a recall of the dangerous and inaccurate data on personal saving that has helped fuel the Right's campaigns to cut taxes and abolish Social Security. But it is also urgent that we reframe the larger debate about the economy. The growing inequality of income and wealth distribution is the most serious threat to our future prosperity. The specter that actually haunts us is the decade of the 1920s, when financial excess fueled by the lavish spending and speculation of the rich produced first the stock market crash and then the Great Depression in the 1930s. If we are to avoid repeating this history, we must move decisively to redistribute income and establish a more solid foundation for the economy than the speculative and fleeting enthusiasms of the rich.