It’s way too late to say it’s too late to say it’s too late.
Instead of quoting the NIPA guide, I now have to start quoting my own posts in this thread.
Well, I’m not claiming perfection here. I have to own up to a lack of clarity. If this were a topic I revisited once or twice a year, I’m sure I’d be better at laying out the pieces. But still, I was very careful with my words. There is more than one group of people in my example. Here is what I actually wrote in the previous post:
Emphasis added.
I was listing the productive income of workers. Every single worker, yes, but I did not say that those workers were the only people in existence. There can and will be other people and other institutions somewhere out there sitting on a pool of assets. They can dip into their assets in order to pay for the other half of production. They are not workers in this economy, but they can still hire workers and thereby give those hired workers a productive income.
There are many different possibilities here. Every sector we consider gives us different possibilities. As I said: “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.” I wasn’t trying to be coy about the limited perspective. I explicitly explained that I was not talking about the whole world: “We have one jigsaw puzzle piece. We do not have the whole picture.”
Even considering the personal sector in isolation, as a closed system, still leaves one source for the other half of the income. See below.
If the entirety of all spending from workers who receive a productive income is on consumption and stocks, that does not mean that the entirety of all spending from everyone in the economy is on consumption and stocks. Not everyone earns income as a worker in the current time period. This is obviously true in the real world, too. Even workers tend to retire someday, after which they can spend money out of their pool of savings.
This does not require multiple sectors. We can do away entirely with the private enterprise sector, the government, and foreign trade, and there is still no contradiction from my example. In that particular case, we’d have to assume that our non-worker population in this economy has no need of consumption. Not realistic, but then again, getting rid of the other sectors for simplicity isn’t realistic either. Adding a foreign economy is more realistic, and I could have done that, but it also requires more moving parts. I don’t like to add more moving parts until we know how all the previous gears fit together.
I like to start with keeping it simple. So if we’re dealing only with the personal sector, in a closed system based on the example from my previous post, then there are two groups of people: the workers and the non-workers. Each worker earned 100k of personal income and spent 50k on consumption and 50k on stocks. They purchased the consumption from themselves. They purchased the stocks from the non-workers. And the non-workers hired them to build investment goods. That is the other half of the productive income. If we limit ourselves to the personal sector, there is no other possibility. It must be investment goods. Full stop. (There is never any net flow of paper in a closed system, but there can always be net creation of investment goods.)
As we expand into different sectors, different options for the other half of productive income open to us. We can have net increases in paper within one sector if there are other sectors out there. But at the macroest of macro levels, one sector’s paper deficit is another sector’s paper surplus – at the highest level, the paper will always cancel out and the only remaining factor for saving will be the creation of investment goods.
Communication is a two-way street. It’s not your fault for not grasping explanations that I’m writing for the first time.
The immediate jump to assuming the explanation must be mistaken is another story.
The blame always has to lie with someone else, huh? Never with you, always someone else.
In your original hypothetical, you said, “the average person on the economy earns an income of 100k,” and spends 50k on consumption and 50k on stocks.
I don’t think that scenario works, and it sounds like you agree with me.
But if you add older, retired people, I still don’t think it works.
If the workers are producing 50k of consumption, which they consume themselves, and 50k of investment, which they sell to non-workers, there’s a problem: there’s nothing for the retired people to consume.
You’ve got 50k of investment, but all the rich old people are going to die, when they starve to death.
You can still have investment (saving) but it has to be a number less than the 50k stock purchases of the workers, if the non-workers are going to eat.
For example, the workers could produce 25k of investment, 75k of consumption, and purchase 50k of stocks. Then there’d be 50k the workers could consume, and 25k (per worker) for the non workers to consume.
In any case, unless the amount the non-workers consume is 0, investment can’t be equal to the amount of stocks purchased by the workers.
Either way, the amount of “savings” is entirely a matter of which things you classify as investments, rather than consumption, and has nothing to do with how much people have left over, after they spend their paychecks, or whether they buy stocks.
You’re right, there are sentences in that previous post, #33, which don’t work when taken literally.
This is, of course, why I wrote a new post with tighter language after your subsequent questions. The explanation can be sharpened in those places where it is fuzziest. This whole thread has been a continual example of that, at least for those who have read it.
Here is what I wrote.
Zero-consumption populations are unrealistic, as I said. But realism isn’t necessary, or even desirable, for getting an initial handle on these accounts. Better to start simple, with few moving parts.
If your only complaint now is that the current example isn’t realistic, when I already admitted it isn’t realistic, then there’s nothing else to say. The only realistic formulation is the whole jigsaw puzzle put together, and that would take significantly more time than would be worthwhile in a GQ thread. If you want realism, you can read their 400-page handbook from the methodology cite linked earlier.
I’m curious if you have any comments on the last sentence of my last post.
Take the same initial set up: every worker in the economy earns 100k personal income, spends 50k on consumption, over the stated time period. But in this new example, we say that every worker earned 100k by producing consumption goods.
The difference is that we open the foreign sector. Just that one sector, to keep it simple. We can posit that the other half of the consumption goods were exported. They received payment for their productive work. They spent half on consumption. Their personal saving rate is 50%, but nothing here is classified as investment.
Personal saving without investment.
That seems to contradict what you were saying in that sentence, if I understand you correctly. Their saving is how much they have left out of their income that period, after they spent their paychecks, and nothing to do with the creation of investment goods. They can keep the cash they received from abroad, or buy stock from abroad, and either way the result in this economy will be net acquisition of financial assets. Net acquisition of paper is impossible in a closed system, but the personal sector of an economy is not a closed system.
True, but it’s consistent with what what I said further up, which is that personal saving is sum of the deficits/surpluses of the other sectors (government, foreign, and corporate).
The saving of the exporting sector = the deficit of the importing sector.
If you combine the two sectors, the saving is 0.
Unless you use what I understand to be the general macro definition of saving: which is spending on whatever you decide to classify as investment rather than consumption. Then saving = spending on investment.
Still has nothing to do with how much people have left over after they spend their paychecks (except to the extent there are deficits in other sectors) or whether they buy stocks.
My initial question was how the BEA comes up with “personal savings rate” - admittedly a boring subject - and more confusing than I’d originally thought. But I’m also curious whether their method has anything to do with the popular (mis?)conception of what it means (how much people have left over after they spend their paychecks), and how it fits in with general macro definition.
This might be clear to you at this point, but personal saving doesn’t just use the macro definition of saving. It uses both definitions. Personal saving has both basic components: a paper component, and a real production component.
The paper component will cancel out at higher levels, when you combine sectors, exactly as you say.
The real component will not cancel. At the macroest of macro levels, what remains will be the real component.
We can look at our last example. Economy 1: Personal income 100k from consumption good production, consumption 50k, exports 50k. Add to that Economy 2 with similar population and currency adjustment: Personal income 100k from investment good production, consumption 50k, imports 50k. Personal saving for both economies is 50k. For the first economy, this personal saving represents 50k acquisition of paper into the sector. For the second economy, it represents a negative 50k, from the loss of paper out of the sector, plus 100k creation of investment goods. When we combine sectors to create a macro-notion of “global saving”, the paper cancels and all we care about is the creation of investment goods.
But personal saving isn’t the whole picture, which is why the paper is still important.
Using the word “saving” contributes to popular misconception.
An individual is going to think of saving from a personal perspective: earning more than they spend. But that doesn’t work on a macro level, because income = outgo. Every dollar I earn is a dollar someone else spent, so it’s impossible for all of us together to earn more than is spent. But there is a deeper idea here, an economic dynamic that almost no one considers, of what we produce in order to prepare for the future. At the biggest level, the word “saving” gets assigned to this economic dynamic, the act of creating investment goods instead of consumption goods. Which is to say: saving is earning more than we consume. This is a vitally important idea. What’s potentially confusing is the label attached to the idea.
We might say that “personal saving” bridges the gap between the everyday idea and the deep macro idea, because it includes both the paper and the real component. The paper component cancels somewhere, sure, but the same is true when I as an individual earn more than I spend. People reading a news article on the topic won’t appreciate this double-definition. Hell, most people who write that news article won’t appreciate this. But there it is. There’s simply not an easy way to explain it.
As for boringness, well, I might agree with you but this thread has had about 80 views in the last 24 hours. I assume it’s not you refreshing dozens of times. I guess search engine bots would account for some of that, but the other possibility is that some of the people here are genuinely interested in the National Income and Product Accounts. One might think they had better things to do with their time. Like watching paint dry. Or finding what brand of mayonnaise tastes best with Doritos. Or giving serious consideration to what their hero name would be if they were a superpowered kitten that fights crime. (Mine is Avengakitty.) But they’re reading this. There’s something here that’s worthy of some attention. This is not a topic that comes up often. Or at all.
The big idea here is genuinely important, and worth some consideration, even if it’s a little too easy to get bogged down in extraneous details that hamper understanding.