STRIKING A BETTER BALANCE; GOVERNMENT'S EVALUATION UNDERVALUES AMERICAN SAVING WHILE OVERCOUNTING SPENDING.

Byline: GARY M. GALLES Local View

``AMERICANS should be saving like crazy . . . instead, Americans are saving less than ever.'' That is how an article by The New York Times described the apparent conflict between baby boomers in their peak earning and saving years, and a personal savings rate that has not only been low and falling for years, but actually turned negative during September and October for the first time since the 1930s.

Along with Social Security and Medicare shortfalls, this sounds like America's next big financial crisis. After all, without savings there are no funds for new investment, the capital stock shrinks, and economic growth withers, not to mention the adverse consequences for retirement security.

Besides, the Clinton administration already is putting together town meetings about why we don't save more and what to do about it. However, like so many other alleged crises, this one largely rests on official statistics whose errors measure in the trillions of dollars.

The Commerce Department measures personal savings as wages and other income, minus spending and taxes. Unfortunately, both the income and spending categories seriously misrepresent what is happening in the economy, understating income and overstating spending.

The most important omission in the official income measure is that it doesn't include changes in the value of financial portfolios. Given that the Federal Reserve estimates that the market run-up of the last four years alone has added about $12.5 trillion to household assets, and that household net worth (assets minus liabilities) has approximately doubled over the last 10 years, this alone means that recent official personal savings data is not even ``close enough for government work.''

The official personal savings data not only omits increases in asset values as income, it doesn't even include the profits from sales of stock and other assets. Just including these capital gains raises the year's annual savings rate an order of magnitude, from 0.6 percent to 6 percent.

At the same time, the taxes paid on those capital gains are subtracted in calculating the savings rate, further understating it. Similarly, the multitrillion-dollar shift of savings from forms such as passbook saving accounts, whose interest income is included in the savings measure, to personal retirement accounts in mutual funds, IRAs and 401(k) plans (industry assets have risen almost $3 trillion since 1993) that are not included in that measure, also biases the official data in the same direction.

Consumer spending is also misrepresented in the official accounts, further understating savings. That is because they count the purchase of consumer durable goods - long-living automobiles, appliances, etc. - as current spending, even though such purchases are largely investments, or embodied savings (an asset with a useful life of five years is about 80 percent investment and only 20 percent consumption, the year it is purchased). This is a substantial bias, with automobile sales headed for their second best year ever and consumer durable goods orders strong.

The statistics do not take account of how lower interest rates have reduced the cost of financing existing debts, even though the effect of reduced debt payments are the same as increased savings (as millions of home refinancers can attest). But they do count any spending financed by such reduced debt service costs.

They do not count the effects of Social Security taxes (and about two-thirds of Americans pay more in Social Security taxes than in income taxes) as savings, even though the net system inflows of $99 billion this past fiscal year would be included as savings if retirement were privatized (replacing the government's promise of retirement benefits with savings that finances investment).

And these do not exhaust all the measurement problems.

Lord Kelvin once said, ``When you can measure what you are speaking about . . . you know something about it; but when you cannot measure it . . . your knowledge is of a meager and unsatisfactory kind.''

We measure personal savings, but current official statistics are still of a meager and unsatisfactory kind (as indicated by the broader national savings rate, also called gross domestic savings, which includes household, business and government saving, that has risen from about 14.4 percent of GDP to 17.4 percent in the past five years).

We measure personal savings so badly that official figures makes the spending of only a fraction of American's huge increase in wealth this decade look like an orgy of unsustainable current consumption at the expense of our future.

But the only crisis to be found here is one of measurement, not reality.