Forced saving has a long and controversial history in economic thought. Here I will argue that there is forced saving in the US economy today. This is a follow-up piece to my earlier post “Economic Policy and COVID-19: It’s Impossible to Buy Goods and Services That Do Not Exist” (March 8, 2020).

With the help of massive government programs household income has not fallen. In fact, personal income rose 7.3% ($1.4 trillion) in 2020:II compared to the first quarter. But personal consumption spending fell by 10.0% ($2.1 trillion). The difference went to saving which more than doubled from $1.6 to $4.7 trillion. That’s a nifty 194.5% increase quarter over quarter.

Sources of Personal Income

In order to understand this, we need a deep dive into the changes in consumer behavior. But let’s start at the beginning: the sources of personal income. Compensation of employees fell slightly. But that was more than offset by personal current transfer receipts. Social Security and Medicare rose modestly. Unsurprisingly, given the current state of unemployment, Medicaid payments rose by 8.1%. But the real kicker was Unemployment Insurance which rose from (take a deep breath) $43.4 billion to $1.0 trillion. Percentages fail me here. In 2020:ii Unemployment Insurance payments rose by 23.6 times the payments in 2020:I.

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That, of course, was the intent of the CARES act. Part of the payments went to unemployment compensation. But there were other uses, too, such as Paycheck Protection Payments (PPP). Those are probably included in the ubiquitous “Other” category which increased by $1.3 trillion. Between unemployment insurance and PPP, personal income was boosted by $2.3 trillion, more than enough to offset the decreases in other sources of income. Naturally, with wage income falling, tax revenues fell too. That caused disposable (after-tax) personal income to increase by a whopping 9.2%.

Consumer Spending

Yet, as noted earlier, personal consumption spending fell by 10.5%. To understand this, let’s look at the basic GDP accounts. Consumption expenditure is divided into three broad categories:

1. Durable goods such as cars and refrigerators;
2. Nondurable goods such as food and clothing; and
3. Services, a category so broad that it includes everything from what you pay a plumber to clear a clogged drain to “meals eaten away from home.” There’s our first clue to what’s going on.

Durable purchases fell by 1.5%. Nondurables were down by 5.9%. And services were off by a cool 13.3%. Here’s how that looks.

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A Detailed Look at Services Spending

Digging even deeper, the Bureau of Economic Analysis publishes Table 1.1.5, “Gross Domestic Product, Expanded Detail.” This is an amazing table that breaks down GDP into incredible detail. Here are some highlights.

• Food Service and Accommodations fell by $318.3 billion (34.4%). When restaurants are closed and travel is limited, demand for this category plummets.
• Recreation services fell by $263.8 billion (49.1%). The reasons are similar to the decline in Food Service.
• Health Care fell by $511.3 billion (21.3%). Hospitals have been empty and people are terrified of going to the dentist. On the plus side, there are very few cars on the road so injuries from crashes are way down. But that also reduces demand for health care.
• Transportation Services decreased by $171.0 billion (37.7%). No commuting means public transit traffic has fallen way off. And the only people flying are those who really, really need to be somewhere.

Here’s the story.

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Forced Saving

Now you can see the problem. People have enough income and purchasing power. But they cannot go out to dinner, see a movie, take a vacation, or see the upcoming Rolling Stones tour. (Actually, I’m just guessing at that last one.) There is a limit to how much food, computer gear, video games, and photo equipment that you will buy. If nothing else, it will take some time to learn how to use that hardware.

There are simply not enough goods and services available for people to buy. Therefore, they save the difference between income and spending. This is forced saving.

Normally I would proceed with a Keynesian analysis of the impact of an increase in the marginal propensity to save on the economy. Today that is a fool’s errand. In fact, I have great admiration for those willing to engage in economic forecasting. I assume they are relying on fortune tellers and other forms of witchcraft for assistance. But they are very brave.