Opinion Editorial | |
| Monday, July 5, 1999 | |
Are Consumers Spending Too Much? |
Last week, the Department of Commerce released the latest data on personal income and expenditures. They show that in May income rose by 0.3 percent and spending rose by 0.6 percent, resulting in a negative saving rate. Consumers spent $77.1 billion more than their disposable income would ordinarily allow. They did this by drawing down previous saving, selling assets such as stocks, and by going into debt. Since January, consumers have reduced their saving by $274 billion.
These negative saving figures caused much hand-wringing in the press. A front-page story in the Wall Street Journal on Tuesday accused Americans of being "profligate" and "reckless." The notion is that Americans are eating their seed corn and frittering away their income on frivolous things they could easily do without. In the process, they are endangering their own financial well-being by not preparing adequately for retirement or an unforseen calamity, and impeding economic growth as well by reducing the capital available for business investment.
Such concerns are overblown for a number of reasons. First, although Americans are saving less out of their paychecks, their net worth has risen from a climbing stock market. According to the Federal Reserve, last year households saw their gross assets rise by nearly $4 trillion, but their liabilities rose by just $500 billion, for a very healthy rise in net worth of $3.5 trillion.
Second, what matters for the economy is gross national saving, of which personal saving is just a part. Of greater importance is saving by businesses and governments. Since the budget surplus adds to national saving, consumers really should get credit for this year's estimated $99 billion federal budget surplus. After all, it is the higher taxes they are paying that is responsible for it.
Finally, it is important to distinguish between pure consumption and purchases of durable goods, such as autos and home appliances, that are really a form of saving since such assets will last for many years. Indeed, the Federal Reserve includes consumer durables in its measure of household saving, which the Commerce Department does not.
In recent years, durable goods purchases have grown significantly as a share of consumer spending (see figure).
One explanation for rising durable goods expenditures may be the increasing importance of computers in homes, where they enhance household efficiency just as they contribute to business productivity.
Source: Burce Bartlett, senior fellow, National Center for Policy Analysis, July 5, 1999.
The National Center for Policy Analysis is a public policy research
institute founded in 1983 and internationally known for its studies on public policy issues.
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Julie Hillrichs, Dallas, TX 972-386-6272 Sean Tuffnell, Dallas, TX 972-386-6272 Joan Kirby, Washington, DC 202-220-3082 Internet: http://www.ncpa.org Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
