The Fall and Rise of Household Saving

[Excerpt] Household saving matters for two reasons. First, it is an important source of funds to finance domestic investment. Second, it is the means by which workers accumulate wealth and maintain their living standard into retirement. Congress has indicated its desire to promote household saving by, among other things, creating individual retirement accounts, and saving is an important consideration in proposals to reform Social Security. At a time, however, when policymakers have been looking for ways to increase spending to minimize the downturn and get the economy growing again, households have begun to save more. For the 40 months between January 2005 and April 2008, the personal saving rate averaged 1.8%. In contrast, in the 1970s, the average personal saving rate was 9.6%. In May 2008, the personal saving rate began to rise. It remains too early to tell with certainty if that represents the reversal of the long-term decline. What may seem unusual is that it occurred at a time of general economic weakness. The increase in household saving resulted in more than $300 billion less in consumer spending than would have occurred had the saving rate not risen. Prudent individuals might be expected to save enough to avoid a substantial decline in their living standard on retirement. If consumers seek to maintain a fairly stable level of consumption over their entire lives, then the level of consumption at any given point in their lives will depend on their current wealth and some expectation about their income over the rest of their lives. Changes in household net worth in recent years seem to have contributed to the swings in the household saving rate. In the 1990s, equity prices rose substantially. Between 1991, the beginning of an economic expansion, and 2001, the year it ended, the Standard and Poor’s index of 500 stock prices rose by 217%. It is widely believed those increases in equity prices contributed to a decline in the household saving rate. After the turn of the century, increased house prices insulated household balance sheets from the effects of a decline in equity values, and the household saving rate fell to near zero. More recently, both equity and house prices have fallen. The combined drop in asset prices had a significant effect on household net worth. At a time when current incomes have been falling, the personal saving rate rose to more than 5%. It may be that the economic downturn is limiting the saving response to the decline in household net worth. If that is the case, the saving rate might be expected to continue to rise, or at least remain steady at current levels, when the economy begins to recover, unless asset prices recover to levels now considered by many to have constituted a “bubble.

Inequality in the Distribution of Income: Trends and International Comparisons

Economic theory alone does not establish any basis for preferring a more or less equal distribution of income. Nonetheless, a common aim of policy is promoting equality of opportunity. An extremely unequal distribution of income may be considered an indication of a lack of equal opportunity. Arguments for a more equal distribution of income than that which would result from market forces are based on a number of propositions. One is a common assumption made in economic analysis known as diminishing marginal utility of income. This is the notion that each additional dollar of income yields less utility, or satisfaction. If the assumption of diminishing marginal utility of income is accepted, then, in theory, it should be possible to increase the overall well-being (utility) of society by taking some from those with high incomes and giving it to those with low incomes. A second, noneconomic, justification for policies designed to make the income distribution more equal is concern that society prevent its members from falling below some minimum standard of living. Existing measures of income fall well short of an ideal that would accurately indicate how well off individuals or households are. Not all kinds of income are counted. Taking the existing measures at face value, however, several observations can be made. First, the distribution of income in the United States has become increasingly unequal since the late 1960s. Second, the U.S. income distribution is the most unequal of all major industrialized countries. Some of the greater income equality found in other major industrialized countries may be due to the fact that government transfers are more directly targeted at lower income households. The distribution of earnings is more unequal than is the distribution of household income. Of particular interest is that the gap in earnings between highly educated or skilled workers and less skilled workers has grown substantially. Explanations focusing on world trade and national demographics have been suggested, but the one most widely accepted is that technological advances in recent years have increased the demand for more highly skilled labor relative to its supply. Policies that boost the supply of skilled workers would thus seem likely to narrow that gap and act as an equalizing influence on the income distribution. But, the large gap in pay between skilled and unskilled workers that has developed would itself seem to be a substantial incentive for prospective and current workers to expand their education and training. This report will be updated as developments warrant

Inflation and Unemployment: What is the Connection?

CRS_April_2004_Inflation_and_Unemployment.pdf: 91109 downloads, before Oct. 1, 2020

Employment Growth in the Current Economic Expansion

CRS_August_2003_Employment_Growth_in_the_Current_Economic_Expansion.pdf: 619 downloads, before Oct. 1, 2020