Savings Glut? Households Are Just Saving All That New Money!

Summary

• The Personal Saving Rate - saving, or holding relative to income, divided by (disposable) income - has skyrocketed. In simpler terms, spending as a percent of income has plummeted.
• The short answer, of course, is that households' failure to immediately turn over their new assets in spending will fail to stimulate economic activity.
• Fiscal policy is kind of pushing on a string. But we should probably expect a postwar-style dynamic to play out over the rest of this year, and beyond.

The big coronavirus stimulus programs are helicopter-dropping trillions of dollars in assets into households' (and firms') accounts, onto their balance sheets - all those assets created ab nihilo by government deficit spending.

But as many are pointing out, households aren't turning over many of those assets in spending, buying things - transferring the assets to firms in exchange for newly-produced goods and services. The Personal Saving Rate - saving, or holding relative to income, divided by (disposable) income - has skyrocketed.

In simpler terms, spending as a percent of income has plummeted.

A Twitter post by our new Deputy Assistant Secretary for Macroeconomics at Treasury Neil Mehrotra raises exactly the question that comes to my mind:

The short answer, of course, is that households' failure to immediately turn over their new assets in spending will fail to stimulate economic activity - producers creating goods and services: giving massages, preparing meals, producing cars and cell phones - and presumably hiring more people to do that production.

But will households start spending those assets when things open up?

That immediately got me thinking about WWII and ensuing, when the same thing happened though in somewhat different form: households were hoarding their income, holding onto their assets, like they are now (saving rates were in the mid-20% range 1942-44). Meanwhile both households and firms were getting a lot of their income/revenue from wartime government deficit spending - paying soldiers and arms producers. The household sector was piling up those magically created new assets, and not turning them over, transferring them to firms in spending.

Which all reminded me of this old post by GMU economist David Henderson: "Does Drawdown of Savings Explain the Postwar Miracle?" He pooh-poohs the idea that postwar households were "spending down their savings," because while saving rates declined (9.5% in '46, 4.3% in '47), they didn't go negative.

Which highlights the fundamental problem with (especially Right) economists' quasi-Calvinistic "saving rate" obsession: that measure has both a numerator and a denominator, which both involve income (saving is just a residual: income minus spending). Note that the spending graph above doesn't have that problem.

And the two are causally connected. When postwar households started spending out of their accumulated stock of assets, causing firms to produce more consumer goods, firms inevitably hired more to produce those goods - increasing households' aggregate income. (While firms' revenue sources shifted from government deficit spending to household spending turnover.) So the "saving rate" didn't go negative because the resulting income increase kept it positive.

In other words, Henderson's "saving rate" framing is an error of composition (or a partial-equilibrium error); it considers saving as a percent of income, without considering that higher spending causes higher income. Households were spending out of their assets at a higher rate, postwar - the lower saving rates clearly suggest that - even as higher wage bills paid by firms were funneling (a lot of) those assets right back to the household sector as income.

We can perceive that today by looking at the sudden decline in household spending as a percent of assets, spending velocity; the numerator (spending) declined a lot, while the denominator (assets) increased a bit:

Fiscal policy is kind of pushing on a string. But we should probably expect a postwar-style dynamic to play out over the rest of this year, and beyond. Households have more assets; if (when?) velocity returns to pre-crisis levels, they'll start turning those over in spending.

And we should remember that the big postwar jump in household spending/asset turnover didn't translate into significant, sustained inflation for another three decades - excluding the war years, the only significant and sustained inflation episode we've seen in the last ninety years. (Extra credit: count the recessions over that period.)

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[KS_Rider]

I'm actually glad people somewhere in this country are setting aside at least part of their stimulus money for rainy days.

Locally, I've seen a HUGE surge in ATV's and outdoor entertainment centers with 60" screens in peoples backyards. This tells me some portion of stimulus money is going to those who don't really need it or are not using it for its intended purpose such as food, lodging, utilities, etc....or maybe the government doesn't really care how it is used, just as long it is spent?

My gripe is I really don't want to sit in my own backyard and have to listen to a half dozen televisions blaring the preferred content of its various owners. haha...

[Lawrence J. Kramer]

"Stimulus" is what pols call hand-outs whether or not they are intended or expected to stimulate. During WWII, there was a shortage of consumer goods, but people were working, and the economy was booming. Conventional wisdom is that the war ended the Depression, i.e. that the spending during the war was in fact stimulative DURING the war. But families saved because there was nothing to buy.

A pandemic creates just the opposite situation. A pandemic puts people out of work and reduces the incomes of those who own businesses. The government isn't spending; it's rescuing. That's a good thing, but the effect is on people's balance sheets. People are saving because they can't afford to shop, even with the relief. And when the pandemic ends, we should expect a balance sheet recession unless the government spends on infrastructure the way it spent on materiel during WWII.

[Main_Street]

@Lawrence J. Kramer Interesting thoughts. The current period has in one aspect very little in common with the postwar period. In the postwar period America was an industrial superpower creating a great number of blue collar and middle class jobs. The round of globalization that started in the 70s had the opposite effect: liquidation of well paying blue collar and middle class jobs. The stimuluses of 2020/2021 just temporarily alleviate this situation. The American worker is the big loser from globalization and this has no end in sight. For this reason there will be no repeat of the postwar spending and growth boom in America. Actually I fully expect the government to keep dropping money from helicopters in foreseeable future just to maintain the standards of living of the working class at some level that will prevent social disruption.

[Lawrence J. Kramer]

@Main_Street

I'm largely with you, except that I do believe an end is in sight. Cheap foreign labor is something of an historical accident, although perhaps an inevitable one. Sort of like there having to be monkeys before there were people. Technology emerged in a way that made transoceanic transportation and communication economic before it made robotic production economic. Logically, it did not have to be that way, but in the real world of engineering, it probably did. Point is, the American entrepreneur, always looking for a cheaper way to produce products for sale, found cheap foreign labor before he found even more efficient American robots. But those robots are coming, and there's no reason to believe that the Third World's comparative advantage in labor will forever give it a comparative advantage in manufacturing.

We face a serious political problem of creating purchasing power to absorb what our robots can produce. Because the whole point of automation is to displace wage earners, we can hardly count on wages as the basis for access to outputs. At the same time, lots of work won't be automated for decades, and we need to pay the people who do the work more than we pay the ones who aren't needed. From a purely "mad scientist" point of view, that means returning to the one-earner household, subsidizing homemaking - it IS work, you know - and shortening careers, but not so much as to lose the value of experience.

These are very real challenges, too hard for central planners but maybe impossible for free enterprise. Empowering labor unions seems to me the right way to go. As AI progresses, those workers who remain essential will have substantial bargaining power by virtue of their necessity and specialized skills. They should be able to negotiate good pay. The real problem is how to create prosperity for everyone else. I'm thinking that massive public works that use human labor may be a solution. Like in the middle ages, when there were no industrial jobs so people built cathedrals.

The end of manufacturing employment, not to mention truck driving, will be a sea change that we will almost certainly handle poorly, because we are not really very bright, and when there is a plus-sum opportunity, some people will have to surrender a personal advantage for what appears (albeit perhaps only to game theorists) to be the greater good. That's not our strong suit.

[TestMax2010]

Agree - the missing element in all these inflation Cassandras is the Velocity. It hasn’t budged much, till it doesn’t there will be no major inflation.

[TestMax2010]

@akshay1974 The Fed data on the M2 velocity:
fred.stlouisfed.org/... - no increase. 

Needle on M2 velocity needs to move --> which would signal consumption --> leading to gauges showing lower savings --> leading to higher GDP growth

If savings increase, then that's a net negative for the economy