I am pleased to speak to the
25th symposium of the Credit Research Center (CRC). Over the past
quarter century the CRC has been responsible for much innovative
and relevant policy research on consumer credit topics. Center
staff have routinely testified before the Congress and state
legislatures regarding the impact of various consumer laws. Your
topic for today, Consumer Credit in the 21st Century, continues
the tradition of timeliness and relevance.
Since most of your agenda
involves the details of consumer credit regulation and operations,
I thought I might take the opportunity to look at the big picture.
The United States has always been a country with a relatively low
saving rate, both for the household sector and for the nation as a
whole. Concerns about low saving have been amplified lately, what
with the previously reported consumer saving rate dropping below
zero for several quarters now, the high level of personal
bankruptcy filings, and the nation's enormous trade deficits,
which suggest a deficiency of national saving. Are these concerns
justified? Is the consumption-saving picture a soft spot in the
so-called Goldilocks economy of the United States? Indeed, in a
deep sense is the United States economy saving enough? To
anticipate my bottom line, I do find some grounds for concern,
though in the spirit of centralbankspeak, the picture is not
entirely clear.
One reason why the picture is
not entirely clear is that it never can be entirely clear. At a
theoretical level, a nation's saving rate helps determine its long
run path of output per capita. Up to what is known as the
"golden rule of capital accumulation," a nation can
raise the level of this path by saving more, in effect raising
future consumption levels at the expense of present consumption
levels. Even theorists have not solved the question of whether
this might be a desirable exchange, since it involves comparing
the living standards of present generations with the living
standards of future generations.
But short of this theoretical
puzzle, one can ask more pragmatic questions about national
saving. Is it as high as it used to be? Is it high enough for the
country to benefit from potential innovations? Are there potential
imbalances down the road that could be prevented by higher saving?
Consumption and Saving
Beginning with the time series
perspective, for all of a week now we have had new national income
accounts (NIA) data to analyze. The NIA revisions have made at
least two important changes in the nation's investment-saving
accounts. The revisions at long last treat software expenditures
as investment, and also at long last, treat public pension
surpluses as personal saving, consistent with the treatment of
private pension saving.
Chart
1 (6 KB PDF) shows gross domestic investment and gross
domestic saving, in nominal terms and scaled by nominal GNP,
annually from 1959 to the present. Recessions are indicated by
shaded areas. The top panel of the chart shows gross saving and
investment, and the middle panel eliminates the statistical
discrepancy by focusing just on net foreign investment, the part
of the gap that represents the foreign saving used to finance
domestic investment.
For many years net foreign
investment was close to zero, indicating that trade deficits were
also close to zero and that not much foreign saving was needed to
close the investment-saving gap. But beginning in the early 1980s,
a large gap opened up, as it did again in the late 1990s.
While the average levels of
saving and investment are similar in these different periods, the
trends are very different. In the 1980s, after an early sharp
rise, both investment and saving trended down. In the 1990s,
beginning from low levels, both investment and saving trended up.
Comparing the late 1980s with the late 1990s, in the earlier
period investment was falling and the foreign saving was
increasingly financing a consumption boom; now investment is
rising and the foreign saving is increasingly financing an
investment boom.
This point can be amplified when
we consider relative prices. The investment numbers shown in the
chart are in nominal terms. But computer prices are dropping
rapidly, and computers are a much bigger component of investment
in the 1990s than the 1980s. In real terms, then, investment is
relatively higher now and the real difference between investment
in the 1990s as compared to the 1980s is larger than shown in the
chart.
There is both good and bad news
in this picture. The good news is that national saving is now
recovering from its lows in the late 1980s and early 1990s, and
this should make for positive returns down the road. But the
blessings are mixed because the nation is still importing a lot of
foreign saving right now, more than 3 percent of GNP. Presumably
foreign savers will not want to build up their U.S. assets without
limit, which is another way of saying that at some point the
foreign saving inflow is likely to taper off. That will require
some adjustments in the U.S. economy--some combination of higher
exports, higher interest rates, lower investment, and/or lower
dollar values. These adjustments need not be painful, though they
could be. They could also be partially prevented were the United
States to raise national saving.
The bottom panel of the chart
asks who is doing the saving. The personal saving component of
national saving has been drifting down lately, inspiring some of
the alarm stories alluded to earlier. But the chart gives some
reasons for tempering this concern. First, once pension saving is
properly allocated, the personal saving rate is not negative after
all. It may not be very high, but it is not negative. Second, the
rising amount of other saving, done by both the corporate and the
government sector (the latter in the form of budget surpluses),
has more than offset this decline in personal saving, as reflected
in the rising level of overall national saving. Finally, not shown
on the chart, the St. Louis Federal Reserve Bank has recently
calculated that if capital gains were treated as income, which is
improper from an NIA standpoint but might reflect how households
actually look at the matter, even personal saving rates have not
dropped.
There could also be a problem
with the distribution of saving across households. Table
1, from the 1995 Survey of Consumer Finances, gives this
distribution. The table shows that one-third of the lowest income
households have no financial assets at all, that those who do have
assets have tiny amounts, and that only 8 percent of these
families have self-directed retirement accounts. Median financial
assets rise slowly across the income classes, but the pension
saving is still low--three-quarters of the next class of families
have no self-directed pension assets, and the share of families
owning retirement accounts does not get above half until incomes
of close to $50,000 per year. And, 16 percent of families with
incomes above $100,000 report no self-directed retirement
accounts, though on average the families at this level do have
substantial amounts of other assets. These figures suggest that
many families will be looking at big declines in their standard of
living as they approach retirement years. This was an important
reason why, wearing a different hat, I recently recommended a
small saving supplement to Social Security.
Consumer Debt
Another potential alarm bell in
this area involves consumer debt, the topic of your conference. As
shown in the bottom panel of chart
2 (5 KB PDF), personal bankruptcy filings per 100,000 persons
have risen sharply since the mid-1980s. There could be some
deficiencies in the nation's bankruptcy laws to explain part of
this rise, a topic I am sure you have discussed extensively, and
of course a topic that the Congress has been debating for the past
year. Recently this number of bankruptcies has turned down fairly
significantly, perhaps reducing the intensity of the congressional
debate about bankruptcy reform.
Will the level of bankruptcies
continue to decline? One should make the usual statistical
disclaimers, but there are some grounds for optimism. Various loan
delinquency rates should be a leading indicator of future
bankruptcies, and all have turned down lately--rates for consumer
loans, auto loans, credit cards, and home mortgages are all
declining, mortgages for some time now. Household debt service
burdens, from the chart that Dean Maki showed you, is reproduced
in the top panel of chart
2 (5 KB PDF). Debt service burdens rose sharply between 1994
and 1996 but have held steady since then, at levels well below the
peak of the early 1980s. Debt service burdens have been held down
recently by the rapid rise in incomes and the shift of household
debt away from consumer credit toward longer maturity mortgage
loans. These debt service burdens are even lower relative to
household net worth, since net worth is rising relative to income.
The debt statistics enrich the
consumption-saving picture, but do not seem to change it
fundamentally. Personal bankruptcies have soared in recent years,
probably a result of earlier rises in debt service burdens and
perhaps a function of U.S. bankruptcy law. But debt service
burdens have now leveled off, and loan delinquencies are
declining, giving some hope that recent declines in personal
bankruptcies will continue. But personal bankruptcies probably
will not decline as much as we might like, just as some consumers
may not save as much as we might like. This decline in
bankruptcies may turn off the alarm bells, but there is still
valid concern that at least some U.S. consumers may be undersaving.
Conclusion
Is the level of U.S. consumer
saving too low? In the end, it is difficult to tell. The best
single measure for assessing saving adequacy is the overall
national saving rate, which is trending upward, largely because of
the welcome appearance of budget surpluses at both the federal and
state levels. In contrast to the 1980s, this rate of national
saving is financing rising levels of capital investment,
particularly in real terms. But the rising national saving is
still being supplemented by large-scale foreign saving, implying a
hefty trade deficit that probably cannot continue and will require
some macroeconomic readjustments.
As regards personal saving, it
is trending down. Presumably the rising stock market explains some
of this trend, but explaining a phenomenon is different from
applauding it. There does seem to be a personal saving deficiency,
especially for households with low incomes but perhaps even for
some upper-income households. As the baby boom generation moves
inexorably towards retirement, many families may be looking at
potentially large declines in their standard of living, declines
that might have been averted had the level of personal saving been
higher. Household debt statistics reinforce this picture. Most
families seem to be doing fine, but a great many are still
declaring bankruptcy.
As with many macroeconomic
issues, it is difficult to generalize. There is some good news and
some bad news. Perhaps we should say that while there is not cause
for alarm, there are grounds for concern.
