STD/NA(2001)29 ISSUES IN MEASURING HOUSEHOLD NET SAVING AND WEALTH Abstract: As holding gains and losses in equity markets have become increasingly important to understanding the economy, the national accounts conventions for measuring household saving and wealth have increasingly been questioned by data users. I summarize joint research by staff from the Bureau of Economic Analysis (BEA) and the Federal Reserve Board that examines the effects of some of these conventions: the treatment of pension plans, the treatment of consumer durable goods, the effects of inflation, and the treatment of capital gains taxes. I conclude by raising questions for discussion about the treatment of capital gains taxes and of consumer durable goods The views expressed in this paper are those of Brent R. Moulton and do not represent an official position of the Bureau of Economic Analysis Introduction During the last decade, the net saving and wealth of households in the United States have undergone unprecedented changes: • The average annual return to a broad index of stocks of U.S. companies (the Wilshire 5000 Index) was 27 percent per year for the 5year period ending 31 December 1999, a cumulative increase of 231 percent. Since the market peaked on 24 March 2000, however, this index has dropped 36 percent (as of 24 September 2001) • From the end of 1994 to the end of 1999, the net worth of households and nonprofit institutions serving households (NPISH) increased 71 percent, or an average of 11.3 percent per year. As a percent of disposable income, net worth increased from 475 percent in 1994 to 632 percent in 1999. The growth mostly reflected holding gains (or “capital gains”) in corporate equities, life insurance and pension fund reserves, real estate, and mutual fund shares. From the end of the first quarter of 2000 to the end of the second quarter of 2001, however, net worth declined 5.5 percent • The personal saving rate (that is, net saving of households and NPISH as a percent of disposable income) declined from 8.7 percent in 1992 to 1.0 percent in 2000. Over the period from 1992 to 2000, disposable income (in current prices) increased at an average rate of 5.0 percent per year, while final consumption expenditures increased at an average rate of 6.0 percent per year These unusual changes have been the focus of considerable attention from economists and policy makers For example, the opening remarks of Chairman Alan Greenspan at this year’s symposium of the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, was devoted to an analysis of the effects of STD/NA(2001)29 holding gains on output, income, and saving (Greenspan, 2001). He found that information on net worth was quite useful in estimating consumption behavior, showing that wealth explains about onefifth of the level of consumer outlays. Greenspan also asked the question, “whether the aggregate ratio of net worth to income is a sufficient statistic for summarizing the effect of capital gains on economic behavior or, alternatively, whether the distribution of capital gains across assets and the manner in which those gains are realized also are significant determinants of spending,” and concluded that the additional information on the type of asset and the realization of gains are also important The data to address these and similar questions are found in the sectoral accounts of the System of National Accounts (SNA). In the United States, the national accounting system consists of four complementary sets of accounts: The Bureau of Economic Analysis (BEA) compiles (a) the international transactions accounts, which include a complete set of current, capital, and financial accounts for transactions and investment position with the rest of the world; (b) the national income and product accounts, which cover the SNA’s production, distributionanduseofincome, and capital accounts, as well as the stock of fixed assets and consumer durable goods; and (c) the industry accounts, which include inputoutput and value addedbyindustry accounts (Bach, 2001; U.S. Dept. of Commerce, 1998, 1999, 2001). The fourth set of accounts, the flowoffunds accounts, is compiled by the staff of the Federal Reserve Board and cover the SNA financial and otherchangesinassets accounts and the balance sheets (Teplin, 2001). These four sets of accounts comprise an integrated set of macroeconomic accounts that provide comprehensive information on the U.S. economy In the next section, I will discuss some recent joint research by BEA and the Federal Reserve Board on issues in measuring saving. In the final section of this paper, I will raise questions for discussion about two points in the SNA’s accounting treatment of household net saving and wealth Research on Measurement of Saving The BEA and the staff of the Federal Reserve Board have recently been conducting joint research on the measurement of personal saving Reinsdorf and Perozek (2001) have examined several issues in measuring and interpreting personal saving: (a) the treatment of pension plans, (b) the treatment of consumer durable goods, (c) the effect of inflation, and (d) the treatment of capital gains and capital gains taxes. Their research builds on earlier research by Jump (1980), Wilcox (1991), Gale and Sabelhaus (1999), and Peach and Steindel (2000) Reinsdorf and Perozek find that large holding gains for pension plans contributes to the drop in personal saving during the 1990’s. The employer contributions to these plans are treated as saving of households As these plans amassed holding gains, pension plans tended to become overfunded and some employers were relieved of the requirement to make contributions to the plans This decline in employer contributions accounted for about a percentage point of the decline in the personal saving rate during the last half of the 1990’s Reinsdorf and Perozek also examine the role of consumer durable goods. These goods are treated as final consumption expenditures when purchased by households, yet the consumer may think of these goods as assets that are to be consumed gradually over a long service life. Since 1979, BEA has published estimates of the net stock of consumer durable goods, based on the same perpetual inventory method that is used in calculating the net stock of fixed assets (Musgrave, 1979; U.S. Dept. of Commerce, 1999). Reinsdorf and Perozek find that about 2 percentage points of the decline in the personal saving rate during the 1990’s represents an increase in net accumulation of consumer durable goods (that is, expenditures less STD/NA(2001)29 depreciation and net sales), which are expenditures that one arguably may wish to count as part of net saving. I will discuss this issue further in the next section of this paper Reinsdorf and Perozek next examine the effects of inflation. Inflation accounting is addressed in the System of National Accounts, which recommends alternative measures of flows to be applied under conditions of high inflation. In the United States, inflation has been relatively mild during the 1990’s, yet Reinsdorf and Perozek find that adjustments for inflation can affect the saving rate by as much as percentage points. Their work suggest that inflation adjustments should be considered more often in the analysis of national accounts data, even under conditions of mild inflation Finally, Reinsdorf and Perozek examine the roles of capital gains and capital gains taxes. They observe that disposable income excludes capital gains, but that capital gains taxes are treated as taxes on current income and therefore are deducted in the calculation of disposable income With large capital gains realizations, as occurred during the late 1990’s in the United States, the effect of capital gains taxes on the personal saving rate explains about a percentage point of the drop in the personal saving rate. The SNA treatment of capital gains taxes will also be discussed further in the next section. In their analysis of capital gains, they find that most of the growth in household net wealth since 1994 has been attributable to holding gains, rather than to net saving Issues in SNA Treatment of Saving Capital Transfers The SNA explicitly states that taxes on capital gains taxes should be treated as taxes on current income, “irrespective of the periods over which the gains have accrued.” (SNA 8.52) This treatment has been controversial in the United States; many data users have argued that capital gains taxes should receive a parallel treatment to holding gains and be excluded from current taxes. Greenspan (2001), for example, argues that households are more likely to view capital gains taxes as a subtraction from their realized capital gains than as a subtraction from current income, and attributes the effects of capital gains taxes on the personal saving rate as a reflection of national income accounting conventions An interesting contrast is with inheritance and gift taxes, which the SNA explicitly classifies as capital taxes (SNA 10.136). Capital gains taxes appear to share many or most of the same characteristics of inheritance and gift taxes. Like other taxes, they fit the SNA definition of a transfer, that is “a transaction in which one institutional unit provides a good, service or asset to another unit without receiving in return from the latter any counterpart in the form of a good, asset or service (SNA 10.131). They are “linked to, or conditional, on the acquisition or disposal of a tangible fixed asset or assets by one or both parties to the transaction,” and therefore do not appear to fit the definition of a current transfer (SNA 10.133) For discussion, I will pose the following questions: • Is there a coherent explanation of why inheritance and gift taxes should be treated as capital taxes while capital gains taxes are treated as current taxes? • If not, should the definition of one or the other be reconsidered in the interest of consistency? Consumer durable goods The SNA recommends that consumer durables be included in the balance sheets only as memorandum items. In the United States, the net stock of consumer durable goods has long been measured as part of our estimation of fixed assets. The value of consumer durables is not insignificant at STD/NA(2001)29 the end of 2000, the net stock was valued at $2.7 trillion (by way of comparison, the net stock of fixed assets was $26.9 trillion and the stock of inventories was $1.5 trillion) The SNA ties the exclusion of consumer durables from the measures of saving and wealth to the SNA production boundary and the exclusion of services of consumer durables in production processes within the production boundary (SNA 9.3940, 13.85). The treatment of services of consumer durables has long been controversial; extended accounts developed by researchers such as Eisner, Jorgenson and associates, Kendrick, and Ruggles and Ruggles have all included the services of consumer durables 1 The SNA’s argument against including these services, however, is that consumer durables are used in production of household services for own final consumption that are outside the production boundary, and that counting these services would leave the production boundary misaligned with that for other inputs, such as own labor used in household services, which are also used in production of household services for own final consumption. (The SNA position, for example, is that it would be inappropriate to count as production the services provided by an oven without also counting the services provided by the cook; under the SNA’s production boundary, both of these services are excluded if used by a household for its own consumption.); BEA and its users have had a longstanding interest in measuring the services of consumer durables (Katz, 1983; Okubo, Fraumeni, and FahimNader, 2001). While BEA has found it useful for analysis of certain measurement problems to attempt to measure the services of consumer durables, there are also recognized empirical obstacles to accurate measurement of these services. As a possible intermediate position, which recognizes consumer durables as wealth without proposing direct or indirect measurement of their services, I would like to put forward the following for discussion In view of the importance of consumer durables as a form of wealth, I think that there may be merit to considering the possibility of treating the net acquisition of consumer durables as a form of saving, without changing the production boundary. An analogy may be the SNA’s treatment of valuables, which are treated as assets and included in saving and in net wealth, even though they are not used primarily for purposes of production or consumption. Household final consumption expenditures could be reduced by the net acquisition of consumer durables (purchases less disposals of consumer durables less a depreciationlike charge for the decline in value of the durable good as it ages), thus reducing net saving The interpretation of the adjusted consumption expenditures would be that the consumer durable is consumed over time, as if it were out of an inventory; no production of consumer durable services would be implied. In the capital account, the net acquisition would be treated as a change in asset, similar to valuables, and offsetting the effect on net saving. Revaluation and other changes in volume would be calculated, and the value of the net stock of consumer durables would appear on the balance sheet For discussion, I will pose the following questions: • In view of the importance of consumer durable goods as a form of household wealth, is there a clear justification for showing them only as memorandum items? • What objections are there to counting net acquisition of consumer durables as part of net saving, and the net stock as part of wealth? For survey of these extended accounts, see Appendix E of Eisner (1989) STD/NA(2001)29 REFERENCES Bach, C.L. (2001), “U.S. International Transactions, Revised Estimates for 19892000,” Survey of Current Business, 81, no. 7, 3036 Eisner, R. (1989), The Total Incomes System of Accounts, Chicago and London: University of Chicago Press Gale, W.G., and Sabelhaus, J. (1999), “Perspectives on the Household Saving Rate,” Brookings Papers on Economic Activity 1, 181223. Greenspan, A. (2001), “Opening Remarks,” remarks at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 31 August, available at http://www.federalreserve.gov/boarddocs/speeches/2001/20010831/default.htm Jump, G.V (1980), “Interest Rates, Inflation Expectations, and Spurious Elements in Measured Real Income and Saving,” American Economic Review, 70, 9901004 Katz, A.J. (1983), “Valuing the Services of Consumer Durables,” Review of Income and Wealth, 29, 405 427 Musgrave, J.C. (1979), “Durable Goods Owned by Consumers in the United States, 192577,” Survey of Current Business, 59, no. 3, 1725 Okubo, S., Fraumeni, B., and FahimNader, M. (2001), “Expanded U.S Travel and Tourism Satellite Accounts: Extension to Include Imputed Services of Motor Vehicles and Vacation Homes,” paper presented at International Conference on Tourism Satellite Accounts, Vancouver, B.C., Canada, 810 May Peach, R., and Steindel, C. (2000), “A Nation of Spendthrifts? An Analysis of Trends in Personal and Gross Saving,” Current Issues in Economics and Finance (Federal Reserve Bank of New York), 6, no. 2, 16 Reinsdorf, M., and Perozek, M (2001), “Alternative Measures of Personal Saving and Measures of Change in Personal Wealth,” unpublished paper, Bureau of Economic Analysis and Board of Governors of the Federal Reserve System Teplin, A.M. (2001), “The U.S. Flow of Funds Accounts and Their Uses,” Federal Reserve Bulletin, 87, 431441 U.S. Department of Commerce, Bureau of Economic Analysis (1998), Benchmark InputOutput Accounts of the United States, 1992, Washington, DC: U.S. Government Printing Office U.S Department of Commerce, Bureau of Economic Analysis (1999), Fixed Reproducible Tangible Wealth in the United States, 192594, Washington, DC: U.S. Government Printing Office U.S. Department of Commerce, Bureau of Economic Analysis (2001), “A Guide to the NIPA’s,” available at http://www.bea.doc.gov/bea/an/nipaguid.htm STD/NA(2001)29 Wilcox, D.W. (1991), “Household Spending and Saving: Measurement, Trends, and Analysis,” Federal Reserve Bulletin, 77, 117. ...STD/NA(2001)29 ISSUES? ?IN? ?MEASURING? ?HOUSEHOLD? ?NET? ?SAVING AND? ?WEALTH Abstract: As holding gains? ?and? ?losses? ?in? ?equity markets have become increasingly important to understanding the economy, the national accounts conventions for? ?measuring? ?household? ?saving? ?and? ?wealth? ?have increasingly... capital gains, they find that most of the growth? ?in? ?household? ?net? ?wealth? ?since 1994 has been attributable to holding gains, rather than to? ?net? ?saving Issues? ?in? ?SNA Treatment of? ?Saving Capital Transfers The SNA explicitly states that taxes on capital gains taxes should be treated as taxes on... The BEA? ?and? ?the staff of the Federal Reserve Board have recently been conducting joint research on the measurement of personal saving Reinsdorf and Perozek (2001) have examined several issues in measuring and interpreting personal saving: