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Misunderstanding Savings Rate: Still Negative

Posted By Barry Ritholtz On February 9, 2006 @ 5:00 am In Data Analysis,Economy | Comments Disabled

This evening, I read Michael Brush’s column Americans Still Have Saving Grace [1]. He argues that "Are we really dipping into our savings for the first time since the Great Depression to keep spending? Not at all."  My problem with the main premise of the column is that his argument omits or misstates several "game changing" facts that alter the dynamics of the non-wage/income data discussion. I am compelled to clarify them.

Brush states that the savings rate is not actually negative; He quotes Ed Yardeni’s claim that "the definition of "income" excludes capital gains, and this creates a huge distortion in the savings picture."

While Yardeni is technically accurate, his statement is highly misleading, and his conclusion is erroneous. Here’s why:

According to an analysis by the non-partisan Congressional Budget Office, the richest 1% of households received 57.5% of all income from capital gains, dividends, interest and rents in 2003. That was up from 38.7% in 1991.

In other words, the "excluded" non-wage income doesn’t fall to the vast majority of households. Yes, the very same population that has a negative savings rate.

Consider the math on that: 1% of the country garnered well over half of all that non-wage income. And if memory serves, its less than 10% of Households that garner over 90% of all non-wage income (I don’t have the precise stat handy). Incidentally, if you are in the top 1% of all earners in 2003, your
wages/income ranged from $237,000 to several billion dollars. Not too
shabby.

This is a classic error of confusing mean with the median. In a case where a small percentage of the sample is disproportionately weighted — as is non-wage income distribution — we end up with a mean and a median wildly diverging.

The classic example is a dozen cops or firemen in a bar having a beer. Bill Gates walks in for a quick one. While the "median" average income of all drinkers might be $50,000, the "mean" average income would be about $1 billion.

And thats why the non-income income exclusion is so irrelevant to the negative savings rate. The Cops weren’t suddenly making more money — the statistics were skewed by BillG@Microsoft.com.

As to the other comment in the column that deserves challenge — "What’s more, solid job growth and decent wage gains suggest the consumer will continue to be just fine" — let’s save that for another day . . .

>

Sources:
Americans Still Have Saving Grace [1]
Michael Brush
RealMoney.com, 2/8/2006 1:07 PM EST
http://www.thestreet.com/p/rmoney/retail/10267249.html
 
Rich getting richer faster [2]
MSN Money Staff, 1/30/2006
http://moneycentral.msn.com/content/invest/extra/P143548.asp


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/02/misunderstanding-savings-rate-still-negative/

URLs in this post:

[1] Americans Still Have Saving Grace: http://www.thestreet.com/p/rmoney/retail/10267249.html

[2] Rich getting richer faster: http://moneycentral.msn.com/content/invest/extra/P143548.asp

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