Money matters. Explaining the role of households in the 2008/2009 downturn
The savings ratio of British households according to two different estimates of savings, UK
When we, as the ONS (Office for National Statistics) recently did, exclude all kinds of non-monetary imputations from the data on household income and household saving the resulting data show that the Great Financial Crisis caused a much larger upturn in household saving (and subsequently: a much larger decline in expenditure) than indicated by the national accounts data. Which means that the consequences of household behaviour on aggrevating the crisis were much larger and immoderate than previously thought.Why didn’t we see this? What troubled our perception? Why didn’t we understand that household income had to be sustained instead of cut, to stem the crisis?
Economists measure the macro economy (and much else) with the national accounts. The construction of these accounts requires, unavoidably, that a lot of the data have to be tweaked and twisted. Also, some imputations are made. The most important one is ‘imputed rent of owner occupied houses’: the statisticians assume that owner/occupiers receive an income equal to the market rent of their house, to enable a consistent treatment of rented and owned houses. Another imputation, which I’m not going to explain, is FISIM (Diane Coyle is not happy with this particular imputation, which involves banks, I agree with her). A problem with such imputations is that they lead to a difference between the monetary income households observe and the national accounts concept of income. As the British ONS states (emphasis added):
The measure of RHDI (real household disposable income) published within the United Kingdom Economic Accounts (UKEA) contains elements which, despite being required for compiling a sequence of national accounts, are not directly observed by households. For example, imputed rentals represent the value of housing services that owner occupiers derive from their homes. This is the amount that they would have to pay in rent to achieve the same consumption of housing services. Whilst this concept is important when measuring economic output, it is not expenditure directly observed by home owners. … We therefore consider ‘”cash RHDI”. This measure removes imputed rental and other imputed components resulting in a measure of RHDI which is a closer representation of disposable income as measured by social surveys
This clearly matters. The cosy ‘Rational Expectations’ idea that households and people have perceptions consistent with the model developed by the economists is clearly not true. We should take heed of this when trying to understand economic statistics and try to explain and map household behaviour with variables which come as close to the perception of households themselves as possible.