What Goes In The Piggy Bank?

On the face of it, the definition of personal or national savings seems simple. Take a household's or a country's income, subtract consumption, and savings is everything left over. Easy.

Ah, but look again: First, it's not obvious how income should be measured. The Bureau of Economic Analysis omits capital gains from its definition of income. So the wealth created by rising home and equity values is not included in America's overall savings total.

More important, savings also depends on which outlays are logged as consumption or investment. The BEA has a specific list of purchases that count as investment: business and government spending on equipment, software, and buildings; and household outlays to build new homes or renovate existing ones. While the BEA occasionally adjusts its definition -- software was included in 1999 -- any other spending is counted as consumption.

As a result, what is called investment plays a key role in determining measured savings. Consider a family deciding whether to spend $30,000 on a new rec room or to put young Jackie through college for a year. Since that new wing counts as investment, not consumption, it will show up as $30,000 in personal savings. Young Jackie's education? Well, that's defined as consumption, so it would reduce savings by the same amount.

By Michael J. Mandel

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