Are Americans spendthrifts?
Low savings rate: The "personal savings rate" was 10% in the 70's; but, it fell to a low of 2% recently.
"Wealth Effect" / Confidence in the future: Take a closer look at the chart. The savings rate rose a bit in the 1970s, compared to the 1960s. The 70's were an economically-troubled decade. When people feel less certain about their future, and when they feel their wealth has been eroded, they try to save more. This is a rational response. Perhaps this explains the slightly increased savings rates of the 1970s'. The chart then shows a drop in the savings rate starting in the early-1980s. Could this be because people felt better about their wealth and about their future?
This second chart also shows Personal Wealth as a multiple of current GDP. I chose this as a very rough proxy for how wealthy the "average person" feels. In the early 1960's wealth was over 3 times GDP (see the right-side axis). By 1975, wealth had dropped under 3 times GDP while the savings rate rose .Then, wealth came back to about 3.5 times GDP and the savings rate dropped back. Around 1995, we see wealth rising (taking in its stride a short, sharp drop for the "dot.com bust") till it was over 4.5 times GDP before our recent "housing bust". Meanwhile, the savings rate plunged.
Wealth and GDP are both expressed in nominal dollars (i.e. not adjusted for inflation). When the prices of long-held assets (like the stock market or home prices) go up, nominal wealth rises. Feeling richer, many people figure they're saving enough. Clearly, many people did not anticipate the sharp fall in asset valuations of the current recession. (This is different from outright profligacy or spending regardless of one's level of wealth.)
Stimulus dampens savings: Government stimulus cushions blows and redistributes losses. In the short run, there is less urgency to act. The reduced urgency must surely mean people save less. A person who thinks "this will blow over in a year or two" will have less urgency compared to someone who thinks we will have a decade-long slowdown. Similarly, if fiscal and monetary stimulus keep the stock market and home prices from falling even lower, it raises the nominal value of wealth without increasing real wealth. This creates a false sense of comfort. In this sense, worse news would have been better news. More accurately, if people understand how bad things are, they are more likely to act to fix things (Note 1).
Consider the dot.com bust of 2001. The chart shows relative wealth dropping, and saving rising slightly. Then, Greenspan rode in to save the day by lowering interest rates and championing equity-extraction, creating the housing bubble. Rising home prices meant rising wealth and the saving rate dipped again.
On the other hand, if the economy slows -- as it seems it will in 2012 -- wealth may flat line or even fall and people will probably save more.
Summary: Americans have not been saving enough, partly because they were carried away by the enthusiasm of a multi-decade credit-driven boom. They have now begun to save a wee bit more, but still not enough.
When I finish reading your posts, Darius, I have this half empty feeling, like half my lunch was missing. In your last few blogs you haven’t told us why your subject is important or what the consequences will be. We are left hanging.
ReplyDeleteWhy do we care about the savings rate? Fortunately, this subject isn’t filled with insider jargon. It is relatively straight forward, which means that we see that there is lower or higher levels of savings and “wealth” (which needed to be defined). So what?
Well, here’s why, on two levels: As individuals, people are not saving enough to retire (with or without the question of the entitlements or a serious depression) (your blog post on that was particularly disappointing). Excluding equity in their house (if they have any), the average older American has around $50,000 in liquid savings at retirement. Just to have an income of $30,000 a year in today’s markets, he would need over $500,000. Americans have really stopped looking at their futures. They are not planning. And those professionals who would provide that service are being attacked from all sides.
In terms of the economy, savings is capital, that is the stuff necessary to create new businesses, production facilities, and thus higher standards of living. Do we have enough, well, no, although it is difficult to tell with all of the interference from government. We have lots of money floating around, but most of it is fake. But, here is the main thing, much of what capital there is goes to the government. When the government borrows, it borrows capital, savings, and then it spends it. So instead of individuals spending their savings, which is known to be a bad thing, the government is, which is actually really, really bad, but accepted and even often encouraged (as you have done, Darius, in your approval of the bank bail out position). So our capital is going down the drain. Saving more, in these circumstances (especially if you put it into government bonds) may not do much good within the economy. Consequently, we can expect our standard of living to continue to decline.
Thanks for the candid comments.
ReplyDeleteWhen I blog, I have a very specific audience in mind. I see a friend who already agrees with me on the very fundamental aspects of Economics. By fundamental, I mean the types of idea Adam Smith wrote about. I imagine I'm writing a letter to a friend like that, and I would never tell such a person why savings are important unless I came up with a novel angle which I think he would not have thought of before. It would be tedious to tell such a friend things we take for granted: tedious for him to read and for me to write.
Mostly, I only blog things that I am looking into. So, even more than a note to a friend, you can think of my blog posts and a "fair for publication" version of personal notes to myself.
Once again, I appreciate your candid comments.
As for whether the Fed and FDIC should be shut down overnight in the middle of a bust, I'll leave that to another time.
I see your blog when I look at the blog roundup for OBloggers. The people in that group do not fit your audiance discription. For the most part, I have found that they know as little about either capitalism as an economic system or how today's economy works as the typical man in the street. I regard giving them the information necessary to make sense of what I write and what they see in the papers to be vital.
ReplyDelete