Comment on “The Great Unwinding”

June 12, 2009

David Brooks published an op-ed this morning entitled “The Great Unwinding.”  It discusses the impact of public and private debt on the growth prospects for the U.S. economy.  Unfortunately, it overstates the case for the value of an important statistic — how much the U.S. savings rate will have to rise to put the economy back on firm economic footing. Citing a Federal Reserve study, Mr. Brooks writes:

“Reuven Glick and Kevin J. Lansing of the San Francisco Fed estimate that Americans will have to increase their household savings rate from 4 percent to 10 percent by 2018 to restore balance.”

No they don’t, at least not in any meaningful way. I’ve read this report.  It is a perfectly fine report, but it is highly preliminary in nature. The authors essentially compare the Japanese corporate sector after their housing bubble burst in the early 90’s, detailing how much corporate deleveraging occurred, and then show that if U.S. households behaved similarly to Japanese companies they would end up saving about 10%.  The authors are clearly using this data, and a few assumptions, to come up with some kind of ballpark estimate. I’m sure they themselves would not put much faith in the 10% number, as housholds and companies behave differently for a whole host of reasons.  

Mr. Brooks reports this finding the same way one would report the results of some exhaustive research on the subject. That’s a shame. Very few people will read this Federal Reserve report, but many will read Mr. Brooks and use this statistic as a focal point for further discussions of policy.

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