December 06, 2022
There has been a lot of hype in the media recently about the 2.8 percent personal saving rate reported for the first quarter. This is near a record low and has many commentators predicting disaster when consumers run out of savings.
While it is undoubtedly true that the savings rate has fallen by any measure, a large part of the decline is due to people paying taxes on capital gains. This can easily be seen in the data. If we look at the third quarter data, people paid $3,244 billion in taxes, or 14.8 percent of personal income. By comparison, in the fourth quarter of 2019, the last pre-pandemic quarter, people paid $2,216 billion, 11.8 percent of their income in taxes.
Since there were no major changes in tax rates over this period, we can assume that most of this increase in tax payments was due to capital gains taxes on stocks that people sold. Capital gains do not count as income in the national income accounts. Let me repeat that for the folks worried we will run out of savings. Capital gains do not count as income in the national income accounts.
This means that we have deducted the taxes people pay on their gains from income, thereby reducing measured savings, but have not added these gains to their income. For example, if a household had sold stock for a $50,000 gain and then paid $10,000 in taxes on these gains, we would say that their savings had fallen by $10,000. Let’s see, at this rate, this household should run out of savings in …..
If people were still paying 11.8 percent of their income in taxes instead of the 14.8 percent paid in the third quarter, the saving rate in the third quarter would have been 6.2 percent. There is still down from the 8.7 percent saving rate in the fourth quarter of 2019, but not the crash being touted by economic analysts who don’t have access to government data.
There is another serious quirk of accounting worth noting when commenting on all-time lows in saving rates. When a company pays out money to shareholders as dividends, this is counted as personal income to shareholders. When a company pays out money to shareholders by buying back stock, this does not count as personal income for shareholders but rather as saving by the corporate sector.
This is not a factor likely to matter much quarter to quarter. Still, if we compare current saving rates to decades before share buybacks were legal, we will be understating personal income and therefore understating savings. In recent years, share buybacks have been close to $300 billion. This would raise personal income by almost 1.4 percent and disposable personal income by more than 1.5 percent.
If we treated the money paid out to shareholders as buybacks the same way we treated the money paid out to shareholders as dividends, the saving rate would be roughly 1.5 percentage points higher in 2022. This would still not change the fact that there has been a decline in recent quarters from the pre-pandemic level, but we are very far from zero in this story.
There is one other related area of confusion. A popular line in commentaries is that credit card debt is soaring, implying that people are experiencing extreme hardship and being forced to borrow on their credit cards. While there are undoubtedly many people in this situation, the main reason that credit card debt has soared is that mortgage refinancing has gone through the floor.
It is common for people refinancing a mortgage to borrow more than their existing mortgage, using the extra money for buying a car, remodeling their home, or other major expenditures. Now that the rise in mortgage interest rates has cut off this channel of financing, they are looking to other channels for borrowing, most obviously credit card debt.
Anyone who hypes the rise in credit card debt without noting the collapse in mortgage refinancing is telling us that they don’t know what they are talking about. These two phenomena are obviously related, and it simply is not serious to talk about rising credit card debt as exclusively an indication of economic desperation. That is wrong.