The U.S. Commerce Department keeps blowing it, miscalculating the personal saving rate.
The rate was 0.5% for 1998, negative 0.7% for the first quarter of 1999, and negative 1.1% for the second quarter, for example.
This misleads government and corporate policymakers both here and abroad about the critical economic measures of savings and consumption.
The miscalculation may well mislead decision-makers into believing that Americans are ignoring savings. Corporate decisions could be thrown off about whether the timing is right to introduce products and services.
It also can cause some to exaggerate concerns about the stock market, since share prices are critically dependent upon consumers and spending trends. What is even more frustrating is that many economists, myself included, have called the error to the department's attention. Even the Federal Reserve calculates a different and more accurate number for personal savings, consistently reckoned at 5% to 6% for 1991 through 1998.
But havingmore than one government measure of the same data is not helpful to policymakers or analysts.
The most glaring problem with the Commerce Department's methodology is in capital gains. The department shows taxes individuals pay on capital gains and reduces after-tax income accordingly. But it ignores the income from these gains. If consumption rises because of realized capital gains, then the department ignores the source of income for the increase, and it reports overspending.
In the wrongheaded view of the Commerce Department, capital gains income is not regular income because it occurs infrequently -- even though capital gains taxes reduce disposable income in the department's own calculations.
The methodology makes absolutely no sense. Income is income. Regardless of where consumers get it, they can buy things with it or save it.
A growing number of Americans earn their incomes on an irregular basis, as more have started their own businesses or become independent contractors. Is this method of earning income any different from capital gains?
If capital gains were included as income, the saving rate would jump to about 6%, rather than the Commerce Department's sub-zero measures. In 1994, it would have been 8%.
In ignoring capital gains income, the Commerce Department ignores one of the main reasons for federal and state surpluses, particularly in New York: capital gains taxes.
It is high time that the department gets the saving rate calculation correct instead of tying numbers to outdated methodology that ignores individual participation in the stock market. Unless this is corrected, a stock-market correction could lead to less consumption and the incorrect conclusion that Americans are saving more out of income rather than reacting to declines in their wealth.
The problem will only get worse for policymakers because, given the enormous growth in retirement plans, there is no reason to expect individual participation in the stock market to reverse. The growth and popularity of retirement programs should dispel any notion that most Americans are spendthrifts who do not think about their futures.
Several foreign analysts have expressed concern about the world economy if American consumers stop spending and start saving again. Like the Commerce Department, they ignore the increase in household wealth, from $2 trillion in 1990 to $8 trillion in 1998, attributed to stock ownership alone.
The surge in capital gains taxes means that some individuals are realizing gains and using them to buy durable and nondurable goods. Is this increase in wealth any different from a writer receiving a lump-sum royalty payment and spending part of it for consumption?
Including capital gains in disposable income would yield a more accurate picture of consumption and savings. Unless the Commerce Department responds to these criticisms, a market correction will lead to less consumption and the erroneous conclusion that Americans are saving more.
