What is "personal savings"?

Factual Questions
21

On re-reading the thread, I just caught this:

I might be misreading you, but just to be clear: It’s the NIPA method that excludes consumer durables from personal saving, and the Flow of Funds method which includes them. The NIPA method treats durables as personal consumption.

On preview, I see Caldazar has already hit most everything, but repetition using different words can’t hurt.

A big reason why I think it’s confusing is that you’re still bringing your own language to the table.

You talk about “spending” on this, and “spending” on that. It would genuinely help if you used the given words. Hard to blame you since I was sloppy about this, too, but that’s not the right way to go about this business. You’re bringing your personal dictionary to the BEA. There’s a discrepancy, because they don’t care about your personal dictionary. They have one of their own. These are their words for the purpose of their macroeconomic reports which they write for their select audience of people who have studied the same things that they have studied. The word book belongs to them. So it’s time to learn those words. And it’s easier to learn a strange language if you try to start speaking it yourself, rather than continually translating back into your native tongue. (Trilingual here, and just now starting my fourth language. This is essentially the same kind of learning process. You have to use the words to learn them.)

On top of that, it’s also confusing because the scale is wrong. It’s like you’re looking at a single jigsaw puzzle and trying to interpret the whole picture from that. That’s extremely difficult. The reasoning behind these account definitions didn’t start at the micro-level to be built up. The reasoning started with the big picture, which was then sliced and diced into smaller pieces as seemed appropriate. Those smaller pieces were deliberately designed so that they would be fully consistent with the big picture when they’re put back together. The jigsaw puzzle is printed as a complete image first, and only then are the pieces cut.

That’s why the pictures on the smaller pieces don’t always make sense by themselves. Sometimes only the jigsaw puzzle as a whole makes an understandable image. When you understand the big picture, it can be easier to see why the smaller pieces have been cut into their peculiar shapes. A careful review of your previous thread might be in order to better understand the big picture. To spend an immodest moment of self-congratulation, that thread is pretty damn awesome.

But if you want a different perspective, you can look at the Concepts and Methods of the US National Income and Product Accounts straight from the source. That page has a list of downloads from the BEA. The current version of the full handbook runs at nearly 400 pages, and there are a few chapters still missing after their recent restructuring of IP investment and a few other topics. The problem is that if you misinterpret something like “outlays”, then the handbook can’t correct that mistake.

Look at the definition. Start with the definition from the OP.

Personal saving is personal income less the sum of personal outlays and personal current taxes.

Let’s just assume we’re cool with income and taxes. Those two terms seem fairly straightforward, so we’ll just go with that and rewrite the definition with personal disposable income. This should still be very simple. Personal saving is personal disposable income less personal outlays. Your favorite word “spending” shows up nowhere, so let’s dispense with it. We’re not talking about spending. Personal saving is our disposable income, minus this “outlay” stuff. And that’s it. That’s the definition. Very simple. We just have to figure what outlays are.

Thankfully, we’ve already done that. Outlays is right there in Post 16. But let’s do it again. Personal outlays are 1) personal consumption, 2) personal interest payments, and 3) personal transfer payments (either to the government or internationally). And that is all. You count up those three things, and nothing else, to get personal outlays. So back to the definition.

Personal saving is personal disposable income less the sum of personal consumption, personal interest payments, and personal transfer payments.

It’s cake now to answer the rest of your questions. Is buying gold consumption? No. It’s just an exchange of already-existing assets. Bonds? Stocks? Real-estate? None of that is consumption, therefore none of that is included in outlays. It’s all asset rearrangement. If you earn 100k of disposable income, and you spend half of it on shiny Krugerrand coins, then congrats. You have 50k of personal saving. Which makes a certain sort of sense. Buying the coins is your form of personal saving.

You bring up “investment”, and that’s another tricky word discussed in your previous thread. To review: None of the things that you listed are actually investments in the big honking macroeconomic sense. To invest macro-style means to build investment goods. A machinist buying a new lathe is an investment. Buying a Krugerrand gold coin is not an investment. But both count under personal saving. We’re not at the full macro scale right now. All of the puzzle pieces will eventually fit together, but right now we’re looking at one sector. And of course, buying gold coins might be considered by some a “personal investment”, if there were such an account for that. (But there is no such account for that under this system. Just the way it is.)

Well, they’re both nouns.

But yes, it’s absolutely correct that people often use “saving” for the flow and “savings” for the stock. This distinction isn’t favored by everyone, but some people do try to adhere to it.

22

I’m interested in how the personal savings rate should be measured, but (since this is the GQ) I’m going to try to stick with how it actually is. Again, I’m talking about the rate that’s widely reported in the media, is currently around 4%, and is calculated by the BEA.

The Fed has this to say about it:

The first bolded bit seems to imply that stocks, at least, are not considered to be part of personal savings.

I really have no idea what the second part means, and I’d be happy if someone could explain it to me.

23

I am still not sure if the OP is asking for an interpretation of the BEA’s definition (towards some useful end involving the BEA), or trying to decide what constitutes “personal savings” and chose the BEA definition as an example.

Two very different questions with different answers, and only the BEA can answer the first one to any useful or safe degree.

24

It’s fairly straightforward.

The little pieces of the jigsaw puzzle are consistent with the big picture.

The big picture is GDP.

GDP is the flow of newly created goods and services. That’s the jigsaw puzzle as a whole. All the little pieces, therefore, have to be flows, too, and on top of that, all the little pieces have to fit together consistently to account for GDP as it’s actually measured.

GDP is the value of final goods and services. As such it excludes changes in asset values. For example, if we all wake up tomorrow and the stock market doubles but everything else in the economy remains the same, then that doubling of the stock market would not be included in GDP.

Therefore the doubling of the market is also not included in the NIPA analysis of income and saving. Double the market, and NIPA saving changes not at all. (Not directly, anyway. Changes in consumption that result from a doubling of the market will naturally count.)

Dividends and interest income are included in GDP. That’s why they’re included in NIPA measures of income and saving.

But capital gains comes from the changing price of already existing assets. The stock market doubling would be some serious capital gains, but that doesn’t count. Dividends, yes. Doubling of the stock market, no.

Should be clear.

A house is an investment good. When a new house is built, that counts for investment as part of GDP.

Selling an already-existing house is not part of GDP, in the same way that the doubling of the stock market is not part of GDP.

But houses create a “service flow”. Houses create a flow of value, a service, to wit the ability to live in that sweet-ass crib. Living inside a house is a consumer service, and that’s a consumption service, and it counts in GDP. So both the construction of a new building (investment) and also the rent we pay to landlords (consumption) is part of GDP, because we’re first building an investment good and then buying the service of living there. And for owner-occupied housing, this “rent” that owners pay to themselves is estimated.

But consumer durable goods? Washing machines and cars and stuff like that? It’s counted as consumption immediately. Buying it is counted as consumption, and then it’s ignored thereafter. Arguably these goods offer a “service flow”, just like a house does, but yeah. Fuck that shit. We don’t count that service flow.

Arguably education and training is a kind of investment in human capital. Ordinarily we might think of investment as a form of saving, but in this case, it gets counted as consumption.

Everything we’ve listed above tends to overstate consumption at the expense of saving.

Generally, the value of the stock market goes up over time. Generally. But that’s not counted. Consumer durables are sort of like investment goods, but they’re not counted as such. Education is very much like an investment, but it’s not counted.

25

I’m asking about the savings rate, which is generally reported in the press, and is currently about 4%.

For example:

The Economist: Saving: Too thin a cushion.

Forbes:Why American Savings Are Inadequate
CNBC:America’s Savings Crisis: Your Spending Habits May Be to Blame

To my understanding, the BEA is the primary (if not only) source of information about personal savings rates, and is where the press gets its numbers for these kinds of articles.

So that’s the number I’m asking about - the BEA number.

If there’s another source, or if the press is getting their numbers from somewhere else, I’d be curious to learn about it.

26

I have so little doubt that people as a whole don’t save enough that arguing over the exact percentage is irrelevant. I don’t think it matters whether it’s 3%, 4% or 5% or that any fluctuations in that range mean very much.

I also don’t think there’s any question about why savings rates are so low, but CNBC’s careful qualification gives me a chuckle.

27

Ok, I get that. So when somebody buys stocks, it’s counted as consumption, not “savings,” right? Or bonds, or gold or bitcoins.

When somebody buys a new house, it’s considered savings, but when somebody buys a used house, it’s consumption?

So when somebody buys a new house, it’s “investment” (savings), but when they live there, there’s an estimated “consumption” number, that’s deducted from savings?

When somebody buys a used house, it’s considered “consumption”, and then when they live there, there’s another estimated consumption figure (the cost of renting the house, presumably) that’s added (or subtracted) again?

28

Oops, I missed some posts, but I’ve got to go play Monopoly with my 4 year old.

29

To my understanding, stocks, bonds, real estate (except new houses(?)) are not considered “saving(s)” by the BEA. Hellestal can speak for himself, of course, but I think he’d say the same thing: that buying stocks, bonds, and used houses are not “investments”.

The BEA itself says it doesn’t consider buying or selling of previously existing assets as “saving”. Since stocks, bonds, and real estate are usually pre-existing assets, they would not qualify as “saving(s)”, according to the BEA.

“Outlays” is a tricky word. The dictionary definition is: an amount of money spent on something. That’s not, however, the definition the BEA is using. It’s using a different definition, which it does not, itself (at least that I’ve been able to find) provide.

I’m not sure about the distinction between “saving” and “savings”. It’s true that one is a noun (or an adjective) and one is a verb, but they’re often used interchangeably. For example, Investopedia says:

Although it doesn’t say so explicitly, I suspect the numbers come from the BEA, since they’re consistent with the BEA numbers, and I don’t know where else they could have come from. I recognize there’s a distinction, though, between “saving” and “savings”: one is a stock and the other a flow.

30

Well, I think it’s fairer to say that I’m using the dictionary definition of words, in a situation where the BEA is using its own special definitions, without saying so, or saying what they are.

Disposable income, to my understanding, is income after taxes. If it has a different definition, I’m happy to learn what it is.

Outlays I’m not so clear about. I’ve already cited it’s dictionary definition (“an amount of money spent on something”), but from this thread I’ve gleaned that the BEA uses the word to mean (mostly) money spent on consumption, rather than investment.

However, that doesn’t help much, because they also appear to have their own definitions of “consumption” and “investment”. For example, buying stocks is not considered “investment,” and buying a home is considered “investment,” but only if no one has lived there before.

Anyway, I don’t necessarily disagree with what the BEA (or other economists) are doing. But I do think if you use words that are different from, or the opposite of, their ordinary meaning, you should probably expect a certain amount of confusion.

I’m not really sure what you mean. The ordinary meaning of expenditure is the act of spending funds. If that’s what you mean, then you’re saying spending money on stocks is spending money on stocks. If you mean something else, please tell me what it is. I’m not sure why you used the phrase “personal cash” (as opposed to what? credit cards? debit cards? checks?), and I’m not sure what the number of times the word “spending” appears in a report has to do with anything.

I get all of that, but “outlays” seems to be the slippery word here. Clearly, the BEA is using “outlays” in a non-standard way: to mean spending on consumption, as opposed to investment. But to complicate matters, they seem to be using “consumption” and “investment” in non-standard ways as well. Using the word “outlays” without explaining what it means, or without explaining what they mean by “consumption” and “investment” doesn’t explain much at all.

31

There are two claims here, first that the BEA did not say they were using their own special definitions, and second that they did not say what those definitions are.

I encourage everyone who is interested to check the pdf document given by the OP in Post 3. The name of the report is A Guide to the National Income and Product Accounts of the United States. The definition of “personal saving” given in the first post comes from page 13 of the document on the lower-right corner of the page.

But before turning there, it might be best to start on page one of the document. This contains the table of contents. For convenience, I list the first sections of the contents here:

Page 13 is within the section “Definitions and Classifications Underlying the NIPAs”. This is the section where the BEA explicitly lists the definitions that they are using. I want to stress that this is not an easy document. Even for those who have read the table of contents, and thus realize that a large section of the report is explicitly dedicating to giving definitions, that does not mean that they will be able to understand the given definitions. In fact, for someone unfamiliar with the general economic and accounting principles behind the NIPAs, it’s possible that no amount of reading and re-reading would suffice. Without some foundation of understanding, the definitions are very likely to be an unintelligible goo. This is not an easy report. But it should be clear that the claim that the BEA did not say they had their own special definitions is false. It’s listed right on page one in the table of contents.

The next claim is that the report does not say what the definitions are.

For anyone who has opened the pdf file, I would direct attention to page 13 again where we found the definition of “personal saving” that is written in the OP. We can then check one paragraph above that definition. For convenience, I’ve copied that section:

The definition of “outlays” is hard to understand. But it is given in the paragraph immediately preceding the excerpt copied into the OP. It is just one paragraph up.

The term “investment” is not needed to understand personal saving. The term “personal consumption expenditures” is needed, and it is defined on page 9, in the upper-left part of the page. The claim that the BEA did not give these definitions in their pdf guide is false.

For a longer explanation of the NIPAs, the BEA has provided a handbook. In this thread, I have already cited the webpage where a pdf copy of this handbook can be downloaded from the BEA. The handbook can be downloaded as one file, or in sections. The last downloadable section is called the Glossary. This section contains the list of definitions the BEA uses for these accounts. The rest of the handbook, checking in at nearly 400 pages, provides a bit more help in untangling the rhymes and the reasons for these accounts. It might go without saying, but one will of course have problems finding these definitions if one has not actually read the documents that have been cited.

*For those unfamiliar with the NIPAs, those numbers are account classifications. The first number is the account number, of which there are seven, and the second number denotes a specific entry within the account. It’s an interdependent system of accounts which combine like the pieces of a jigsaw puzzle into a consistent whole. Entries that appear in multiple sections are cross-referenced.

32

Ok, well, I think I got it now. You were talking about GDP before, and I was talking personal savings, which of course are two different things. Also, you’re right, there’s lots of definitions in the Guide. Anyway, I think I’ve got a better handle on it now.

Personal savings

The BEA defines personal savings as:

Personal savings = personal income minus “personal outlays” and taxes.

Personal income is mostly wages, salaries and benefits ~70%*
The rest is:
Proprietors’ income ~ 9%
Interest~9%
Dividends ~ 5%
Government benefits ~ 6% (which is actually a net benefit - it’s the difference what people pay and what they get from programs like Social Security)
Rent ~ 1%

Personal outlays are mostly personal consumption ~ 85%
Personal interest ~ 2%
“Transfer payments” ~ 1%
Taxes ~ 12%

Personal savings were essentially zero in that year ~ -.03%.

*These numbers are dated, but it’s helpful to get a sense of proportion, in terms of which categories are most important.

A couple things:

  1. Sales of financial assets aren’t counted at all. So for example, if you have income from selling stock, it won’t show up “income” as far as the BEA is concerned. Similarly, if you buy stocks, it won’t show up as an “outlay”. Buying stocks or bonds is not “saving”.

  2. Selling a new house will show up as “income”, because the people who build it will draw salaries, wages, and benefits, and possibly proprietor’s income or dividends, depending on classification of the entity that builds the house. Buying a house, on the other hand, does not appear to fit into any of the categories under “outlays”. It’s not "personal consumption, for example, as far as I can tell. So buying a new house would result in “income” without corresponding outlay. Since “savings” is the residual, it would show up as “personal saving”. (On the other hand, the BEA charges imputed rent to owner-occupied homes, which would tend to offset the savings over time.)

  3. Income and outlays in the BEA accounts are related. They’re typically opposite sides of the same transactions. The incomes people get from salaries, dividends and benefits are the outlays people pay for consumption and taxes. Put the other way around, the outlays people pay for consumption and taxes are the income they get from salaries, dividends, and benefits.

  4. BEA savings doesn’t appear to have anything to do with people spending less than their incomes. Hypothetically, if people reduce their spending, the reduction in spending shows up as a reduction in income, in an equal amount. In other words, people spending less than their incomes doesn’t result “personal savings”, just lower incomes. “Personal saving” therefore, must come from some other sector.

  5. If that’s true, that means - at least in theory - that “personal saving” is just the sum of the surpluses or deficits of the other sectors.

The other sectors, as I understand it, are

business (corporations),
government,
and the foreign sector.

So “personal saving” would be the sum of the surpluses or deficits of those sectors.

33

The big idea of saving is that it is income minus consumption. That’s the core idea.

It’s not a perfect match for all the contexts where we use the word “saving”, but it’s still the core idea. I haven’t focused strongly enough on that in this thread, so I’m going to be repeating it many times. Even personal saving is basically the same idea, with a few twists to make everything fit together. Personal saving is personal disposal income minus personal outlays, and the big ticket item in outlays is consumption. The other categories aren’t totally negligible, but they’re still very small compared to consumption. Big idea: saving = income - consumption.

Yes, and it’s my fault that I didn’t clarify that previously. My plan had been to start large and then move small, but that didn’t happen. There were some tangents far more interesting than the NIPAs.

Yes. Everything here tends to fit snugly under the GDP umbrella in some fashion, and GDP is production. So “income” refers to productive income, the flow of money that results from producing new goods and services. This is why capital gains from buying and selling paper doesn’t count as income.

Yes. Buying stocks is not consumption. (It’s also not an interest payment or a transfer payment.) So correct, buying stocks is not an outlay.

The big idea of saving is that it is income minus consumption. There are wrinkles, but that’s the core idea.

When you earn disposable income and you buy stocks, then you didn’t consume your income. That means you saved. Personal saving: Personal disposable income minus outlays. You earn 100k of personal disposable income (after taxes). You consume 50k, and buy 50k worth of stocks. That means your personal disposable income was 100k, and your outlays (consumption) was 50k. Therefore your personal saving was 50k.

The same sort of calculation can apply for the economy as a whole. (See below, last section of the post.) Buying stocks is not macro-investment, but it will count for personal saving because it’s also not consumption.

Well, selling a new house counts as income because building a new house is a productive activity.

That means if a sole proprietor sells a house, it will be part of personal income. But you would have to keep in mind that this is potentially a very difficult calculation to determine the actual amount of income from the house. Proprietors’ income is not straightforward. For the purpose of the NIPA proprietor income, inventories and capital assets are expensed differently from how they might be expensed according to the sole proprietors’ internal bookkeeping methods. There’s some fancy accounting that goes on here that’s almost certainly not worth the trouble getting into.

Yes. Buying a house is not consumption. That means buying a house out of your disposable income would be saving. This would be true of both a new house or a previously owned house. Buying a new house is not consumption, and buying a previously owned house is also not consumption.

The big idea of saving is that it is income minus consumption. Buying a house is not consumption.

Owner-imputed rent is income for the owner, just as it is consumption for the owner. It’s like pulling a five dollar bill out of your wallet to pay yourself for a nice self-applied foot massage. When you’re done paying yourself, you put the five back in your wallet.

The big idea of saving is that it is income minus consumption. There are wrinkles to the idea, but in this case, the consumption necessarily equals the income for any service you offer to yourself. No change to saving.

No, this characterization goes too far.

Personal income can be derived from consumption production, sure, but it can just as easily come from private investment production, or from government investment production. The bulk of the economy is consumption. Naturally, the bulk of outlays is consumption. But personal income can and does have other sources. There is a good deal of overlap here, but it’s just not the right way to think about this. The important point is where they don’t overlap, and why. (See below, last section of the post.)

Saving is about consuming less than income, not spending less. The big idea of saving is that it is income minus consumption. There are wrinkles, but that’s the core idea.

No. This was discussed at some length in your other thread. This was the number one lesson about saving in your other thread. There was no division into different sectors, but there was still saving. It’s easy to imagine a world with only proprietorships for simplicity. We can likewise skip past government and the foreign sector. This is the exact sort of scenario that was previously discussed. Just one sector, the personal sector, but it is still very easy to have private saving.

The big idea of saving is that it is income minus consumption.

When we simplify the picture in this way and eliminate the other sectors, then we can see that the saving residual is almost exclusively investment production. This is true even when everybody is buying stocks. We can say that the average person in the economy earns an income of 100k. They spend an average of 50k on consumption and then buy 50k of stocks. Buying those stocks naturally does not count as investment in itself.

So what was the investment? It was the other half of the work done for the income. Half the people earned their salaries producing consumption goods, and the other half earned their incomes producing investment goods. Simultaneously, absolutely everyone who earned this 100k of income spent half on consumption and half on stocks. Buying those stocks was not investment. Where did that money come from? The equation doesn’t tell us. It’s easy to believe that the people who sold those stocks took the new money they made from selling those stocks, and then used it to hire people to build investment goods. That’s one likely possibility. Another possibility is that the people who sold those stocks just stored their money, and another entirely separate group of people dipped into their net worth, whatever other assets they had available, and used that money to pay half the workers to build investment goods. Something like that happened, but there is no way to say for certain with the information we have available.

This is always the biggest problem that people face when they’re trying to think through the flow of money through the economy. Productive income was 100k, but only half was spent on consumption. So where did the other half of productive income come from? People look at the first link of the chain and get confused: obviously buying stocks was not part of the productive income. The key is that chains can be arbitrarily long. The people who sold stocks might have bought land. The people who sold land might have bought gold. The people who sold gold might have bought silver. The people who sold silver might have paid for the creation of investment goods, and that was the other half of income. Or maybe the people who sold silver might have bought nothing at all, and the income for investment production could have come from an entirely different source, maybe the people who were sitting on already-mined copper reserves. They sold their copper in order to buy investment production. That is completely possible. The NIPAs give us a bit of important information, but still, a great deal of information is left out.

The personal saving rate is 50%, but the formula does not provide us with the appropriate perspective. We’re zoomed in too far. We cannot say how the investment production was actually financed. All we know is that total income was 100k per worker, and total consumption was 50k per worker. That necessarily means that 50k was not consumption. We can again add wrinkles (interest payments, transfer payments), but the core idea remains the same. Saving is what’s left of our income after we’ve subtracted out the consumption. This will necessarily be the production of investment goods if we stipulate that we’re ignoring the other sectors. So 100k of income per person, 50k of which was income paid for consumption. When we eliminate everything else, we must conclude 50k of the income was paid for investment. How? Why? We don’t know.

And this is why it’s easier to start big. When you look at the big picture, you already know how much went to consumption and how much to investment. (And how much to government, and how much for the foreign sector.) When you start by looking at the entire jigsaw puzzle as a whole, then you don’t get confused by what you’re seeing when you divide it into pieces.

34

Buying stock may be saving, but it’s not “personal saving”, according to the BEA. The BEA doesn’t count purchases of stock as “outlays” and it doesn’t count sales of stock as “personal income”. Their definition of saving is the difference between personal income and personal outlays and taxes. No amount of buying stock will affect “outlays” and no amount of selling stock will affect income. Since their method is to subtract the one from the other, something that has no effect on either category will also have no effect on the residual - “personal saving”.

Buying and selling stocks may have an indirect effect on “personal savings”. For example, the BEA counts capital gains taxes as “taxes”, to my understanding, so taxes on capital gains would reduce personal saving.

Well, neither is considered personal consumption, according to the BEA. The difference is that purchasing a new house would generate income (for example, labor income, from building the house) without an offsetting outlay. Purchasing a used home, is not counted either as income or as an outlay, and would have no affect on BEA “saving”.

I don’t think that’s how the BEA does it. It counts imputed rent as consumption. But there’s no corresponding entry for imputed rent as income.

If the BEA did what you suggest, the income from imputed rent (for the owner) would be the same as the outlay: the numbers would cancel to zero. In that case there would be no point in doing it in the first place.

Since the BEA method creates “saving” when people buy new houses, it has to have some way to account for the “consumption” of new houses over time. Houses don’t last forever, after all, and incur costs to the owners, not all of which show up otherwise in BEA accounting. “Imputed rent”, I think, is their attempt to make up for that.

[QUOTE]
It’s like pulling a five dollar bill out of your wallet to pay yourself for a nice self-applied foot massage. When you’re done paying yourself, you put the five back in your wallet.

I’ll attempt to respond the rest of what you said n my next post.

35

The following quote is part of the definition of personal saving that you personally copy&pasted into the first post of this thread. The emphasis is mine.

“Personal saving may also be viewed as the net acquisition of financial assets (such as cash and deposits, securities, and the change in life insurance and pension fund reserves)”

A stock is a security. The net acquisition of financial assets, such as securities, can be viewed as personal saving, according to the BEA. People can acquire financial assets by buying them. So yes, buying stock can be viewed as personal saving if the stock is purchased out of personal income. That’s what “net acquisition” refers to. If the stock is purchased out of a previously existing pool of cash, then there is no “net” acquisition of financial assets – it’s merely an exchange of one asset for another. Similarly, the change in value of already possessed assets is not an “acquisition” and thus doesn’t count as saving.

Saving requires productive income. You can earn personal income, for example from a wage, and then spend that wage by acquiring stock. That is personal saving. Obviously, buying stock is merely one method among many that would result in the net acquisition of financial assets. What matters for personal saving is not the buying of stock itself, but the lack of consumption. Buying stock with our personal income is one possible way to have an income and not consume it, and therefore to have personal saving.

To know whether there is a corresponding entry for imputed rent as income, you must actually read the NIPA guide.

The first relevant definition starts from page 12 of that guide, lower-right corner:

Underline added.

“Rental income” is also a term of art. This new term is defined just a little further up in the document, in the left column on the very same page, page 12.

Underline added.

At a certain point in the future, one might consider whether an intellectual stance of doubting my every statement is fully reasonable, particularly given my somewhat relevant distinction of having actually read the NIPA guide.

Yes. Precisely.

To quote myself: “the consumption necessarily equals the income for any service you offer to yourself. No change to saving.” For the purpose of personal saving, the numbers cancel out to zero.

Your assumption here is very strange. You don’t consider the possibility that your failure to perceive the point is a sign that you don’t have enough knowledge about this topic. Instead, whenever you fail to perceive the point, you assume there must be no point.

As has already been pointed out, the big picture purpose of the NIPAs is to calculate GDP. Not personal saving. GDP.

Personal saving is one of the tiny pieces of the jigsaw puzzle. GDP is the whole picture put together. Imputed rent doesn’t change personal saving. Naturally not. But it does change the GDP calculation. Without imputed rent, only the service flow of rental properties would be included to measure the productive capacity of the economy. The service flow offered by our massive stock of owner-occupied housing would be totally ignored. That would severely skew the calculation and grossly understate the production of the economy as a whole.

No.

There is no such thing as “consumption of new houses over time”. The ravages of time wearing out our stock of investment goods is not relevant to consumption. Personal consumption and depreciation of investment goods are entirely separate concepts. Depreciation can theoretically be exactly zero, given a perfectly immortal investment good, but there would still be yearly consumption expenditures like clockwork.

You can build a 100k dollar house. That’s an investment. It’s counted once.

Let’s say you’re astoundingly, absurdly lucky with your location, and you’re able to charge rent of 50k a year to live in the house (or equivalently, you live in a house you own where other similar houses rent out for 50k a year, so that value is imputed). That means there’s 50k consumption, not just once but every single year. The rent is consumption. The consumption/rent is half the investment cost every year, but that has nothing to do with depreciation. The house is not losing half its value yearly just because there’s 50k of rent. The consumption here is the value of living inside it. The service is “consumed” because if one family is enjoying living there, it’s not possible for another family to do so (at least, not at the same level of comfort). If people are willing to pay 50k a year to live inside it, then that’s the assigned value of the consumption/rent.

This does not mean that they’re eating up the investment cost of the house. Imputed or otherwise, high rents do not mean quicker depreciation. Depreciation doesn’t even show up in GDP calculations. GDP is gross. If you want to count depreciation, you have to move to NDP, Net Domestic Product. (Depreciation does show up in Gross Domestic Income calculations, in a strange bookkeeping sort of way in order to determine business income. This method of measuring depreciation is called “consumption of fixed capital”, and that’s another very confusing term because it also has nothing to do with personal consumption. It’s called that for obscure accounting reasons not really worth getting into. Bottom line: depreciation/consumption-of-fixed-capital is completely different from regular everyday personal consumption. They are entirely separate concepts.)

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I did read the part about net acquisition of financial assets. But with your forbearance, I’d like to go back to the method BEA uses to calculate personal savings for a minute.

On the plus side, it’s mostly wages salaries and benefits. ~ 70%
Wages, salaries and benefits don’t include income from the sale of stocks.

Government benefits. ~ 6%.
This is an interesting category, because the government actually distributes much more than 6%, but the BEA method subtracts out what people pay for the benefits, the the 6% is a net number. In other words, it represents part of the government deficit.
But it still doesn’t include the sale of stock.

And finally rent, which 1%.
It’s a surprisingly small number, which makes me think that most rent must be paid out to corporations or small businesses, not persons.

Those are all the categories. None of them include income from the sale of stock. No matter how much stock persons sell, none of it will show up as income, as far as the BEA is concerned. (And since a quick search shows $30 - $60 billion worth of stock is sold each day on the NYSE alone, it would be a huge number - in trillions, if you included all stock sold everywhere.)

On the minus side, you’ve got personal outlays and taxes.

Personal income (a subset of personal outlays) and taxes make up the bulk of all of it. Between the two of them, they’re about 97%.

Neither personal consumption nor taxes include the purchases of stock.

Personal interest is about 2%. Does not include the purchase of stock.

The last category, personal transfers, makes up about 1%. I don’t remember the exact definition of personal transfers, but it means something like money spent without getting anything in return. It does not include the sale of stock.

So no matter which way you look at it, neither the sale or purchase of stock enters anywhere in the calculations.

If you have a formula that says x-y=z, where z=personal savings, how does something that doesn’t affect x or why affect z?

You said

But this statement makes no sense to me at all.

Aren’t all pools of cash, according to the BEA method, first personal income, before they become pools of cash?

Suppose I have some personal income. At some subsequent point in time, I buy some stock. At what point in time, between I get the income, and I buy the stock, does the money transform from “personal income” to a “previously existing pool of cash”?

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Right. The sale of stock is not productive activity, and does not count as personal income.

Yes. The sale of stock is not productive activity, and does not count as personal income.

And rightly so. Same reasoning applies.

Personal income is not a subset of personal outlays.

You almost definitely meant to write personal consumption there. That fits the context.

Correct.

And saving is personal income less consumption. So if you earn an income and buy stock with it, you didn’t consume that income. Therefore you saved. By buying stock instead of consuming your income, you saved.

Now the next point is very important, but also potentially confusing, so you might read the rest then come back to this: The person who sold that stock did not earn any personal income from doing so. Buying the stock can count as saving (or more technically, not consuming) if it was purchased from a productive income. But selling the stock does not count as income. It is absolutely possible to have an economy where every single worker earns 100k of personal income, and spends 50k on consumption, and spends 50k on stock, over the course of a year. Personal saving is thus 50k per person. There is no contradiction here. There is no problem. This is absolutely possible.

It only seems confusing because we don’t know where half the income came from. Half the income was clearly for the production of consumption goods. But the other half? We don’t know. It did not come from selling stock, but that’s all we know at this point. We have one jigsaw puzzle piece. We do not have the whole picture.

Personal saving is a residual. It’s not something that’s measured directly by little worker bees of the BEA going out and surveying people.

What they measure is personal income, personal taxes, and personal outlays. Mathematically this is very simple: Personal saving is a residual equal to NIPA account (3–26) minus NIPA account (3–1) minus NIPA account (3–2). Workers bees actually do go out and try to find the values for these three accounts. Personal saving is that first account minus those two other accounts. That is literally what it is.

But there is no meaning there. That is a mathematical formulation. It’s an equation. But what we want is some sliver of understanding. We want to know what the math means. You have a very valid question just below, and I’m trying to give you the answer by explaining not just the math but what the math is intended to represent.

Put it in water terms.

Start with an empty pool for simplicity. If x is the amount of water that came into the pool from PipeX, and y is the amount of water that left the pool through PipeY, then what is z? You might be tempted to say that z is the amount of water still left in the pool… but that’s wrong. What if we look afterward and, shit, the pool is empty? We know the water left because the pool is empty like it started. We know the water did not leave through PipeY because we were watching that pipe like hawks.

We must conclude that the water left through a different pipe that we weren’t necessarily measuring. And that’s what we call z. It’s our normal instinct to think of z as the amount of water left in the pool, but we were definitely not watching all the exits. We were only watching one exit. That’s why it’s more accurate to say z is the amount of water still left in the pool, plus the amount of water that left through the mystery pipe that we weren’t measuring. That is basically the idea here. You can think of the pool as cash in the savings account, and the mystery pipe as stuff like stock purchases.

It’s not that something else “affects” z. The water that left through the mystery pipe does not “affect” z. Rather, the water that left through the mystery pipe is the same thing as z. They don’t affect each other. They are one and the same thing.

(Conceptually, this is not really any different from starting with water already in the pool. You can start with 100 gallons of water at the beginning of the time period. 100 more gallons came in through PipeX. 50 gallons left through PipeY. When you look back again at the end of the time period, the water level is back at 100 gallons where it was at the beginning of the time period. That means 50 gallons must have departed through the mystery pipe. Same sort of idea. The empty pool is just easier to visualize.)

The NIPA accounts measure a flow.

Flows exist across a period of time. If I’m measuring the flow of water into a pool, I need a time period: the flow over a minute? over an hour? over a day? If the pool started out empty, then yes, the stock of existing water in the pool is the result of a previous flow. But if I’m calculating the flow during the current time period, then I don’t give a shit what the flow was ten years ago, nor do I care how much water is in the pool. I’m measuring the flow of water in and out. I’m not even measuring all of the pipes in, or all of the pipes out. I’m merely measuring the flow of some of the pipes in and out.

PipeX is one particular flow that I’m tracking. PipeY is another particular flow that I’m tracking. “Saving” is PipeX minus PipeY over a given time period. That is true no matter how much water got pumped in ten years ago.

The stock market increasing in value is… kind of like the amount of water in the pool expanding on its own without any help from the flow of new water pumping in. We don’t care about that. We only care about the flow of water, and we’re only watching the flow of certain pipes. (We only care about the flow of new production, GDP.)

What the BEA is doing with its alternative definition of personal saving is sort of like trying to list all possible mystery pipes that are not PipeY. Water staying in the pool is one possibility. Buying stock is a possible mystery pipe. Buying bonds is another possible mystery pipe. A machinist buying a new lathe is another mystery pipe. Etc. This is much harder conceptually. It’s much easier just to look at PipeX and PipeY, and then subtract one from the other.

Flows require a very specific determination of the time period. Let’s talk about years.

If you earned 100k disposable income in 2010, and you spent 50k on consumption and 50k on stocks, then that is 50k personal saving over the time period of the year.

If you earned 100k disposable income in 2011, and you spent 50k on consumption and kept 50k in cash, then that is also 50k personal saving over the time period of the year.

If you earned no money in 2012, and spent no money on consumption, and exchanged your existing pool of cash from a previous time period for more stocks, then there is no personal saving.

If your stocks became a million times more valuable in 2013 (with no dividends), and you consumed 50k of consumer goods, then your personal saving was -50k over that time period.

A flow doesn’t just exist. A flow exists over a clearly established period of time.

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Let’s go back and look at the basics, just for second; every economic transaction has one thing in common: the amount spent is equal to the amount received.

So if I buy a ten dollar screwdriver, the amount received for the screwdriver is ten dollars. The amount spent is ten dollars.

If the total amount spent on screwdrivers is one million dollars (from all sources), the total amount received is ten million dollars.

If there’s an economy where the only things bought or sold are screwdrivers and hammers, then the income from received from purchasing them = the money spent buying them.

If you arbitrarily decided that screwdrivers were “consumption”, and hammers were “investments”, then “saving” for the economy would be equal to the amount spent on hammers.

Whichever way you slice it, though, the total amount of spending (on hammers and screwdrivers), must equal the total amount of income from selling hammers and screwdrivers.

So for example, in an economy where everyone’s income in 100k, and everyone spends 50k on stocks and 50k on consumption, that income must come from the sale of consumer goods, and the sale of stocks. There is nowhere else for it to come from.

If the entirety of all spending is on consumption and stocks, the entirety all income must be from consumption and stocks as well.

It doesn’t matter how indefinitely long you make the chain of transactions, as long as you limit spending to buying stocks and consumption, income must come only from those sources as well.

If someone has income from something else, that means means somebody must have spent money on something else, as well.

Which means you’ve broken the initial condition: which is that everybody is purchasing only stocks and consumption.

To go back to your initial example, everyone can have 100k in income, if and only if you count the sale of stock as income; and even then everyone must sell 50k in stock in order to obtain 50k: every transaction must have a buyer and a seller.

The savings rate (over any given time) must therefore be 0, unless you decide to count the purchase of stock as an investment, while not counting the sale of stock at all. In that case, any two people, simply by trading stock back and forth, could generate infinite savings, without increasing anyone’s net worth, or creating anything of lasting value, at all.

On the other hand, if you don’t count stocks at all, the only income would be the income from consumption. Which means their income would be 50k, not 100k.

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I’d say it’s way too late, but it’s way too late. :smiley:

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It’s never too late to say it’s too late.