Will U.S. households save more? That may seem an odd question after all the discussion lately about getting Americans to spend more. If you believe current economic problems are just a transitory phase in the business cycle, increased saving is a problem, because it weakens the increase in consumption the economic stimulus package is intended to foster.
But if you believe, as I do, that our problems are structural, deeper and longer-term than a garden-variety recession, then greater savings are needed to put the economy on a sustainable footing. Indeed, the steady decline of combined public and private savings to near zero over the past quarter-century is a root cause of current difficulties. Without reversing that decline, increasing the money supply to lower interest rates and $600 rebate payments are temporary palliatives that merely perpetuate collective self-delusion.
Economists have long shied away from the question of what determines people’s willingness to save versus spend. But it seems reasonable to assume that people are more likely to save if their parents, friends and neighbors save and if saving is culturally honored. On the other hand, if we know our sister-in-law, cubicle mate and neighbor across the alley all have taken out home-equity loans or liquidated a 401(k) to pay down credit card debt, we are more likely to do so ourselves.
Moreover, any study of economic history produces much evidence that thrifty societies — those willing to delay gratification and plow savings into new productive public and private infrastructure — grow faster than those that live in the moment. Aesop’s fable of the thrifty ant and spendthrift grasshopper has played out through history at national as well as household levels.
For a nation, savings consists of saving by households, government and business. The traditional assumption was that over the long run, government would run a balanced budget, neither saving nor running into the red. Households would save, and that money would be lent through financial markets to businesses to build new factories and buy new machines.
One problem is that from the mid-1960s to now, the federal government has run persistent budget deficits. These were particularly large from 1982 to 1994 and from 2002 to the present. Another problem is that personal savings rates, which hovered in the 8 percent to 12 percent range from the late 1950s to the early 1980s, have declined steadily since then and have been near zero for most of the past five years.
Historically, low savings meant little capital available for business expansion or even for home mortgages. Low savings would push up interest rates, as borrowers competed for the few available dollars.
But over the past two decades, foreigners, particularly from Asia, have been willing to lend us money at low rates of interest. We bought their goods and they lent us back the dollars we paid them. Households could borrow more than they saved and government could run deficits, year after year. No one seemed to get hurt. Federal Reserve expansion of the money supply further served to keep interest rates low.
That pattern obviously could go on for years, but I submit it is impossible to sustain over the long run. Indeed, it is an important cause of our current problems.
Having become used to spending all we earn, can U.S. households return to saving 10 percent of income without some traumatic event to shake up social preferences and values? That is the key question.
In no society has consumer borrowing been marketed as aggressively as in the contemporary United States. Social values about going into debt or declaring bankruptcy have changed. People expect that, early in their work careers, they will be able to immediately buy all the conveniences and devices their parents had and take the same vacations. Popular media portray a high-consumption society.
We snicker at miserly grandparents who experienced the Great Depression. We view German and Japanese savers, scarred by Weimar-era hyperinflation and post-World War II deprivation, as interesting trauma survivors but not as examples to emulate.
What will change our minds and our values? What will happen if we don’t change?
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.