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EYE ON THE PIE: Saving shouldn't put you in jail

June 11, 2007

Here is a test for you. The state government sends you a check for $2.5 million. What do you do with the money?

According to the Associated Press, Sabrina Walker received such a check from the state of Minnesota. She then "bought a $500,000 certificate of deposit, funded two retirement accounts, [and] bought a $500,000 Treasury bond." Prosecutors claim she also bought $5,500 in jewelry, and spent $3,817 at Best Buy and $2,000 on limousine services.

This prudent woman is charged "with theft by swindle and concealing the proceeds of a crime." Come on, Minnesota, loosen up. She puts $2 million into savings and takes a few bucks, mainly for consumer durables, and you are complaining. She should get to keep her new jewelry and electronics since she stowed 80 percent of the money in secure, recoverable places.

Sabrina didn't run out and throw a big party. She didn't transfer the funds off-shore and buy a villa in the Caribbean. Minnesota made an error and the state should thank her for conserving their money.

We lament America's "low, if not negative, savings rate." This woman saves a windfall and she ends up in jail.

Our savings rate is a matter of definition and perspective. The figure we hear most often is the personal savings rate. It's a fairly easy calculation. Imagine you made $50,000 last year and paid $7,000 in taxes. Thus, your disposable personal income (DPI) was $43,000. However, you spent $45,000, which meant you had to borrow $2,000 on your credit cards. Take the $2,000 and divide it by your DPI. The result is a negative 4.7-percent savings rate. Last year, the U.S. had a negative 1.1-percent savings rate.

But wait, there's more. How about that car you bought? That's not something you are going to use up in just a year's time. And don't forget the washing machine, the new furnace and all those other consumer durables that kept you from taking that cruise to Alaska before the glaciers melt.

If we include as "savings" the purchase of $984 billion in consumer durables (less $752 billion in depreciation of those items), Americans saved 1.5 percent of their DPI. That's a more realistic view of savings in my mind.

In addition, we put $491 billion into mutual and pension funds. In return, we got shares of corporations that accumulated $704 billion of undistributed profits. This was a form of savings that gave households more financial stability and less hesitation about spending. It may, however, give them a false sense that they can spend what is on paper today but might be gone tomorrow.

Don't think I am going soft on debt. But I have heard the panic-wailing for more than 40 years and the walls have yet to fall in on our "debt-ridden" society. The Federal Reserve Board reports that total individual monthly obligations for debt repayment (principal and interest) are up to 14.5 percent of our DPI. This is the highest point in a data series going back to 1980. It means that $1 of every $7 we have to spend after taxes is used to pay off purchases we made in the past.

Such exuberant spending is partly a result of the confidence we have in our own economic good fortune. Bad things might happen to others, but surely not to us. But it doesn't take a recession to destroy a family's economic well-being. Unemployment may be temporary, but it can put a household in serious debt. Health problems not covered by insurance can leave people in debt for years to come. Likewise, other family emergencies can eat up current and future income and leave people destitute and desperate.

The AP story did not say if Sabrina Walker paid off all her debts. Maybe she ought to go to jail for that demonstration of poor judgment. Moral: If you get a windfall, clear up the past before you buy a CD or a DVD player.



Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, send e-mail to mortonjmarcus@yahoo.com.
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