Nobrainer’s Think Tank

During a commercial break of the Clemson - NC St game on Sunday, I got stuck on PBS. PBS was showing an interview about disposable income. My attention was snagged when it was asserted that now with more families having two people in the workplace, we have seen disposable income decrease drastically.

So I watched the slow, painfully well pronounced interview progress to see what point they were getting to. I also realized that I hate TV interviews. One person sits there doing nothing exciting. Then every once in a while we get to see the interviewer smiling and nodding.

There was also the assertion that the cost of living was growing faster than wages.

Finally the interviewee, got to some numbers. Compared to 30 years ago we spend:
- 22% less on clothing
- 21% less on food
- 44% less on appliances, even though we have tons more appliances.

Not too shabby, eh? But those decreases in spending, don’t explain what they’re really trying to complain about: the lack of money put into savings.

Where is the money going? Compared to 30 years ago, we have seen
- 70% increase in mortgages
- 100% increase in health insurance
- going from 1 to 2 cars in the household
- childcare costs
- higher taxes

These “basic expenses” also referred to as “must haves” account for 75% of household spending. It used to be about 50%. The goal to reducing household debt, she says, is to get back to 50%, with 20% going to savings and 30% going for consumables (to be paid in cash). And Ms. Warren (missed her first name) works at Harvard Law School.

I disagree.

Even if we are already spending 20-40% less on consumables, you really don’t need a lot of that crap. While we may be spending less on clothes, we still probably have far more of them than we need. I think you can say the same thing about food, appliances, and what not.

So going to the 5 basic expenses, you can’t really reduce your taxes. Health insurance is probably not a good thing to scrimp on. Childcare costs? Well I don’t know much about them, but you gotta find someone to take care of your kid while you’re at work. Transportation costs can probably be reduced. Buying a new car is like throwing money away. It’s even worse when it’s a big new car.

But then the remainder is left to reduce the money spent on housing. The problem here, is that money spent for a house isn’t entirely going to disappear. Keeping interest payments down is a great thing. But Ms. Warren is mostly suggesting that in order to improve household savings, we need to re-allocate 25% of our spending, mostly away from our houses.

(this is pretty much where I finished this post on Sunday. Today I found the article that helps carry me through. (thanks OJ))

Are American households really buried under mountains of debt? Probably not.

The best measure of household savings in the US is the Federal Reserve’s Quarterly Flow of Funds Accounts, says Claymore’s Chief Economist, Brian Wesbury. According to this data US households had $62.5 trillion in assets at the end of September, $11.4 trillion in liabilities and a net worth of $51.1 trillion.

“This is a record level and $5 trillion more than a year earlier”, Wesbury exclaimed in a note to clients on January 2, 2006.

Of the increase, financial assets improved by $3.3 trillion suggesting that US households may be one of the best, not worse [sic], savers in the world.

Market bears have long touted a negative savings rate statistic as a reason to be skeptical of the future health of the US economy. What are they missing, if anything?

It appears that the methodology for calculating the savings rate by some agencies like the Bureau of Economic Analysis may be flawed. For example, when a car, home or computer is purchased, the entire amount is subtracted from income, even if it is paid for over time – skewing consumption upwards.

Spending on education is also considered to be part of consumption, however education is an investment and according to Wesbury would be treated differently on a set of corporate books. Moreover, capital gains on 401K’s, IRA’s and other savings accounts including the gain on a home are excluded from income. However, taxes paid on these gains subtract from income creating what is known as a downward bias on income.

Furthermore, as the number of retirees grows, consumption funded by personal savings will continue to grow. Since savings is not part of the income calculation, this will exacerbate the perception of a negative savings rate in the US and in other places like Canada. . .

Finally, personal income, wages and salaries are often initially understated and then later revised upwards. Given the likelihood of a positive revision in 2005, the negative savings rate could easily be revised away.

I willingly grant that my understanding of these matters isn’t great. This article probably doesn’t exactly refute the assertions of Ms. Warren. I think that to a great extent we are seeing that Americans respond to the market place. When interest rates are down, we remove money from savings and buy into value-holding big ticket items like homes. This may not be the best strategy, but money going into homes is not money being thrown on the fire.

There are valuable points, that many Americans are learning. High interest credit debt is generally pretty bad debt that can most often be avoided. Over-consuming just to keep up with your neighbors is nothing more than a measure of your vanity. Anyone who is impressed by such behavior is really not worth impressing.

My plan is to basically spend on what can be enjoyed and saved, not on what is enjoyed and lost or not enjoyed at all. Or in short, by buying what’s important, I’ll have plenty of money leftover for retirement.