Feinman: That's at the heart of what we've been talking about, in terms of the economy having to work off excesses and imbalances. The stock market played a key role in creating a lot of these excesses and imbalances, and now it's playing a key role in turning them around. So there's no question that it's going to be a big part of the story over the next couple of years. It's going to be one of the factors that is restraining growth and keeping us from being able to get back to the growth rates that we had in the late 1990s. Yes, it's the reversal of the wealth effect, it's the associated reversal of some of the investment boom, it's households getting back to saving again.
Simonoff: Where would you see the savings rate going to?
Feinman: It's going to be trending up some gradually. I don't know that it's going to leap up immediately. Keep in mind, the savings rate drifted down fairly gradually. There are also some measurement issues associated with capital gains and stuff that kind of muck it up a bit. I don't know that I would focus on any specific number, but I think you can look for it to be moving up gradually over the next few years.
Simonoff: Brian?
Horrigan: As Josh mentioned, there's a real measurement problem. If you look at the savings rate as the average-up until the early '80s, it was fairly high and, of course, it fluctuated cyclically, but it doesn't have a strong trend. It has trended down, for the better part of at least 15 years. Now, it's not a coincidence, that this was a period of, really, the longest boom market in the stock market ever. I mean, granted, there have been a few corrections in that period, but we've had a good run since 1982, until early 2000. Well, there's the tremendous, you know, wealth buildup or, put another way, a lot of capital gains generated on the stock market boom.
The government does not include capital gains in its measure of income when it calculates the personal savings rate. While on the other hand, any taxes that you pay on your capital gains on realization are subtracted from income, you know, to define disposable income, when calculating the savings rate. So on one hand, you don't get an addition, but on the other hand, you get a subtraction. And that double whammy is largely responsible for reducing the measured savings rate. If we were to have a consistent definition that included net capital gains in income, we would see a far higher and more stable saving rate.
Simonoff: Paul, what's your view of the implications of the stock market for the saving rate?
McCulley: The headline that we have a negative savings rate is simply a headline, and I think the press makes too much about it. But that aside, there's no question that a long, extended expansion, punctuated by a boom at the end, led the household sector to feel more warm and fuzzy about life, and I think savings a la current income, however defined, did trend down. Now, we've got a situation where we'll have a bit more Calvinism, if I can put it that way, in household savings behavior.
It's important to note, as well, in the interest of fairness, the household sector ran down its savings rate, however measured, but Uncle Sam ran up his savings rate dramatically. Now we have national savings actually higher overall than we did a few years ago. It's just the distribution of that national savings has changed. And the household sector has gotten negative savings in the accounts, but Uncle Sam has got huge savings. And if we consider ourselves to be citizens and stockholders of Uncle Sam, then you can say that we're better off in aggregate than most people give us credit for, because we're sitting here with a quarter-trillion-dollar-plus government surplus, which is indirectly owned by the citizenry.
Horrigan: We've had an even greater increase in capital investment or the capital-deepening process. So we've had the government-surplus crowd in private investment, and then we've crowded in even more private investment by running a very large capital-account surplus or a current-account deficit.