Consumption Junction: 2 Thoughts on the Declining Savings Rate

From Yglesias, we get this chart showing the declining savings rate, something I think about quite a bit.

Americans have not been saving very much. Part of this chart is a dodge, because it doesn’t include the savings people thought they were getting through home price appreciation. But even correcting for that, we see Americans saving less than they have in the past. There are two thoughts that frame this graph for me. Let me share them with you.

1: Materialism and Wasteful Consumption

The first answer is that we have become more materialistic. This is a standard line on the left, that we are slaves to advertising, work too many hours to buy too much stuff we don’t need, etc. Picture me age 19, with some copy of a book that’s all about how evil logos are (sigh). You hear this line a bit in the schadenfreude some have with gasoline prices and the housing collapse: take that, you gas-guzzling McMansion-owner! Here is popmatter’s economic blog, Marginal Utility, in January, putting this argument well: “The danger in a depression now is not so much that people will starve but that we will be deprived of the usual consumerist tokens we have come to depend on to express our identity.” Food is cheap, building an identity out of shopping, an identity as shopper, is not.

This attitude is very much on the “crunchy con” right as well. There’s a hope that, in the wake of all this financial collapse, "localism" and other community-based virtues will spring up to reinvigorate us morally. I’m very skeptical, to say the least, that as we become poorer, hungrier, more desperate and more concerned about our short-term survival we will also become more virtuous. Matt Frost threw some cold water on that fantasy in a great “Nothing But Flowers” post last fall that you should read, and he should definitely follow it up a bit more if he still is in broad agreement, and especially if he is not.

Now note that this attitude has very little direct tension with a more libertarian or economic focused opinion on the matter. McArdle, a year ago:

Now, in fact, I agree that people overleveraged themselves in the last eight years, encouraged by ultra-low interest rates…Americans need to pay down some debt, and that process will be unpleasant. But they have adequate resources to do so, and the debt they have taken on largely represents an improvement in living standards and a transition to an ownership society that I think is overall a very good thing.

Alas, the ownership society. I knew it well Horatio.

McArdle probably has different opinions on consumerist tokens and to what extent going to the store is a good or bad activity for the inner-self, but she more-or-less reads the data and the trends the same way. Some economists, notably Robert Frank, think that Keeping Up With The Joneses is like a prisoner’s dilemma, a game where a person feels no better off if everyone has the same stuff, but a lot better off if just he has the nicer toys, which is a spin on something like the McArdle position.

2: Risk Shifts, Income Traps, Middle-Class Living

There’s another way to read this chart, one more in the vein of Jacob Hacker’s The Great Risk Shift and Elizabeth Warren’s The Two-Income Trap. Here the narrative is switched. People were buying more things, but things are so much cheaper now that we spend less on them. The real problem was that the staples of a middle-class existence – education, health care, home – were growing in cost so fast people were getting priced out. Risks that the public or corporate sphere had been absorbing were being transferred to individuals. And individual income had actually stopped growing, so the only way to increase income to pay for these increases was for the second parent to enter the workforce. You end up with fixed monthly costs being over 50% of your income, so if either of the heads of households lose their job a bankruptcy is more likely – the two income trap. The only way to stay in the game is to become more leveraged, and thus riskier.

For the finance-nerds, translated Warren is saying that as (a) non-secured debt increases, (b) income becomes more volatile, (c) various additional costly risks are transfered to the household in an “ownership society”, and (d) safe income-generating capacity is pushed to its ceiling (two-parents working) then (e) bankruptcies increase. That’s like a simple Merton Model of credit risk, where equity is simply a call option on the debt.

Boston Review: What’s Hurting the Middle Class?

I want to call everyone’s attention to this excellent Fall 2005 issue of the Boston Review with the series of essays What’s Hurting the Middle Class?, from many people including Jacob Hacker (a favorite around here). From Elizabeth Warren’s lead essay:

As American families have sunk deeper into debt, they have endured relentless criticism from economists and sociologists, lobbyists and politicians, and the popular media. The accusations are sharp, the assertions are confident and unambiguous, and the tone of condemnation is unmistakable….If the problem is that today’s families are blowing their paychecks on designer clothes and restaurant meals, then the data should show that more is being spent on these frivolous items than ever before….

a family of four spends, on average, 21 percent less on clothing today than in the early 1970s, according to our analysis of data from the Bureau of Labor Statistics….so much so that today’s family of four is actually spending 22 percent less on food overall than its counterpart of a generation ago….Manufacturing costs are down, and durability is up. When the microwave oven, dishwasher, and clothes dryer are considered together with the refrigerator, washing machine, and stove, families are actually spending 44 percent less on major appliances today than they were a generation ago…Furniture may now be leather and super-sized, but its cost has shrunk—by 30 percent in a single generation. Today’s families pay more for their new car than their parents did, but they hold onto it longer too…

A 2000 study conducted in Fresno, California, (population 400,000) found that, for similar homes, school quality was the single most important determinant of neighborhood prices —more important than racial composition, commute distance, crime rate, or proximity to a hazardous-waste site.

People buy more stuff. But stuff is a lot cheaper than it used to be; for many things, a lot cheaper. So the idea that American households aren’t saving enough because they are spending on luxuries loses some of its charge when you look closely. What does stand out, when you look closely, is spending on housing, especially as proxy for children’s education, health care, and the cost of having a second car, a necessity for two working people living in most suburbs. And what stands out is that the flexibility of the American workforce also makes it more volatile and much more likely to have bad spells where savings get exhausted and bankruptcy ensues.

Now this is in tension with the first argument. Here’s Juliet Schor, author of The Overspent American (which I discuss here), someone very much in the first camp above, with a rebuttal (my underline):

Let’s start with three questions and three answers. First, does the United States have a problem with declining quality of life, a shrinking and more insecure middle class, rising poverty, and an escalating failure to provide for people’s most fundamental needs? Yes. Second, does the United States have a problem with “consumerism” as defined, for starters, by an excessive orientation toward spending, as well as consumption-related problems with the environment and global equity? Yes. Is this “consumerism” the cause of rising bankruptcies in the United States? No…

Consider apparel, a commodity that Warren and Tyagi discuss. The number of new apparel items purchased on a per capita basis has increased dramatically. In 1991 the average American bought 33.7 pieces of apparel; in 2002 that number was 48. Rising acquisition has been followed by rising waste, a trend some in the industry have called “disposable clothing.” Many discarded clothes end up in the weekly trash bin—in 2001 the EPA estimated that the average household discarded 30 kg (66 pounds) of textile waste…

So part of the story is that American homes are filling up with stuff because stuff has gotten so cheap. The government’s index of department store prices, a broad measure of consumer prices, fell from 542.9 in February 1993 to 494.3 in February 2005. Durable goods prices at department stores have fallen even more, from 457.6 to 381.0….

This brings me to issues of consumer culture and materialism. For me, the most distressing aspect of Warren and Tyagi’s paper is their abrupt dismissal of the “moral” question of “whether families are . . . consuming too much of the world’s resources.” While it may not concern them, I believe it is the paramount consumption issue of our time. With less than four percent of the world’s population, Americans account for roughly a quarter of resource use, greenhouse gas production, and other environmentally degrading activities. Scientists have recognized for some time that most of the world’s ecosystems are in precipitous decline. The United States bears more responsibility for this decline than any society on earth, and to make matters worse, U.S. corporations are aggressively promoting our lifestyle around the globe.

So when I think of that declining savings rate, these are the two arguments that go through my mind, and will hopefully now go through yours. Years ago, I was an angry young man, and I was much more concerned about attitudes of consumerism as a poison on our mental well-being. As I’ve gotten older, I became a lot more focused on the broad second set of concerns with access and the sustainability of a middle-class life in this country.

This is not strictly an either/or situation. You can want better access to health care and education for more Americans, while also being concerned about how wasteful we are with our gasoline consumption and meat production (neither priced anywhere near their externality cost). There’s a switch one can do also, and assume that the middle-class life itself is the ultimate unaffordable luxury, an accident of a historically contingent Fordist distribution agreement, and it should be given up as a socially just goal, in favor of a simpler life. I don’t make that switch, at least not when there is more fighting to be done, and when the second group of issues can be resolved with a more rigorous social contract.

Comments

[Jeff Nielson:]

A very well-written essay, and I was very surprised by some of the numbers. I do question the graph on the U.S. savings rate, as my previous understanding is that it had dipped below zero for over two YEARS, not just a few months.

To me, drastically rising debt-levels for U.S. families - DESPITE two incomes cannot be explained away as just more money spent on housing and health-care.

Instead, what this confirms is an ugly truth hidden from the American people (and those of other Western societies): apart from the top 15% (the so-called economic 'elites'), REAL wages have been steadily falling in the Western world for 30 YEARS - which much of this decline simply hidden by fraudulent inflation numbers.

May 15 06:06 PM

[johngonole:]

I disagree with an earlier poster here that the author answered the question as to why two incomes are now required for a family to enjoy the middle class lifestyle. I thought the amount we consume in measured in terms of textiles was very poor. Here are the reasons I would list.

1) bigger houses
2) more cars per family....which account for a huge part of your budget. More than food and maybe even your house when maintenance, insurance, gas and depreciation are considered.
3) New must haves - computers, cell phones, etc..
4) Higher medical cost - driven primarily by the fact that they can do more and more things that didn't even exist years ago
5) More interest is being paid on debt.

More importantly however is why with two people working can't the difference be made up? Why with all the productivity advances are we worse off financialy than previous generations? With productivity advances one would think that one person working could afford all this new stuff in additoin to the old.

I believe the main contributing factor is that while productivity has increased it has been offset by government beurcracy. When all levels of government are considered (city, county, state, and federal) we have like 10 times the amount of government workers pushing nothing but paper. Sitting around surfing the internet, etc... Think about the guy up in the bucket of the cherry picker while 7 guys are on the ground watching him work. This is happening everywhere. Government workers all work themselves into positions where they don't have to work. Too many mangers of managers. Not only are they hardly working but they are racking up huge retirement benefits in the mean time.

Along with the growth in government is the concept that government has grown in part because the lack of people to govern themselves. More people are in jail then ever. We have cheats in politics, lots of cheats in financial sector, etc.. When Katrina hit New Orleans everyone was waiting around for someone else to help.

The point is that while two people are working they are only producing in terms of goods and services (that actually hold value) that of one person. We spend way too much time doing things like suing each other because people think that if their isn't a law forbidding it than its OK to do it.

I could go on but I think I've made the point.

May 16 01:51 AM

[johngonole:]

One more point. One real disparity that I see is that you have illegal immigrants being paid very low wages when they are producing way more than the average government worker. Way way more. They pick our crops for pennies. Meanwhile there is some guy heading up some government committee to discuss some minor procedural change to some kind of process. The meeting has 15 people in it and last all day. They then need to meet 3 more times to change the language of two sentences in some kind of procedure. Tax payer cost amounts to $8,653 for three days of work that essentially produced nothing. Meanwhile that is equivalent to third of a year of work picking crops. Now we can talk about working supply and demand. But why did we write rules that requires 15 people with college degrees to change a simple sentence. This stuff really happens people. Worse this meeting might have taken place at some conference resort.
We are drowning, the family is being shaken apart, and our morals are suffering because kids aren't being raised to be loving adults anymore. Why! Because of this kind of stuff.

Until our governments become lean and mean (which will never happen anytime soon) the middle class will continue to be ripped apart.

May 16 01:57 AM

[danf:]

Low savings is a rational choice of people responding to the incentives baked into the environment by those who rule over us. Put your money into a bank savings account over the last decade and you find yourself earning 1% or less (on average). Layer on direct taxes and an indirect inflation tax and holding cash becomes a loosing game.

The state is the largest debt holder. The state has every incentive to inflate that debt away. Any fool can see that the state is desperate to debase the currency. People make a rational choice to avoid holding cash. Our one hope here, ironically enough is that the market power of china in the debt market will impose some constraint on the ability of the US to debase it's currency.

It is the state that is at war with virtue because virtue is the enemy of the modern state desire to gather all unto itself..

The state subsidizes education, so one should expect prices to go up to capture that subsidy. Insurance subsidizes medical care, so one should not be surprised to see the cost of medical care go up to capture that subsidy. One simply has to compare the costs of human medical care with costs of animal care to see the impact of insurance.

The two income family is a tax trap more than anything. People are mesmerized by the education argument and yet the minds that we see coming out of the education factories seem more formulaic, post-critical and entitlement focused than anything else.

May 16 02:47 AM

[danf:]

My biggest cost is carrying the burden of government: And my fellow americans have voted to increase that burden upon me.

As a percentage of my actual income

15% federal tax
3% state tax
7.5% Fica (another 7.5 paid by my employer)
4% sales tax
3% property taxes
2% in other hidden taxes - taxes buried in the costs of other things I buy

34%


On May 16 01:51 AM johngonole wrote:

> I disagree with an earlier poster here that the author answered the
> question as to why two incomes are now required for a family to
> enjoy the middle class lifestyle. I thought the amount we consume
> in measured in terms of textiles was very poor. Here are the reasons
> I would list.
>
> 1) bigger houses
> 2) more cars per family....which account for a huge part of your
> budget. More than food and maybe even your house when maintenance,
> insurance, gas and depreciation are considered.
> 3) New must haves - computers, cell phones, etc..
> 4) Higher medical cost - driven primarily by the fact that they can
> do more and more things that didn't even exist years ago
> 5) More interest is being paid on debt.
>
> More importantly however is why with two people working can't the
> difference be made up? Why with all the productivity advances are
> we worse off financialy than previous generations? With productivity
> advances one would think that one person working could afford all
> this new stuff in additoin to the old.
>
> I believe the main contributing factor is that while productivity
> has increased it has been offset by government beurcracy. When all
> levels of government are considered (city, county, state, and federal)
> we have like 10 times the amount of government workers pushing nothing
> but paper. Sitting around surfing the internet, etc... Think about
> the guy up in the bucket of the cherry picker while 7 guys are on
> the ground watching him work. This is happening everywhere. Government
> workers all work themselves into positions where they don't have
> to work. Too many mangers of managers. Not only are they hardly
> working but they are racking up huge retirement benefits in the mean
> time.
>
> Along with the growth in government is the concept that government
> has grown in part because the lack of people to govern themselves.
> More people are in jail then ever. We have cheats in politics, lots
> of cheats in financial sector, etc.. When Katrina hit New Orleans
> everyone was waiting around for someone else to help.
>
> The point is that while two people are working they are only producing
> in terms of goods and services (that actually hold value) that of
> one person. We spend way too much time doing things like suing
> each other because people think that if their isn't a law forbidding
> it than its OK to do it.
>
> I could go on but I think I've made the point.
>

May 16 02:55 AM

[donzelion:]

Striving for balance in this debate is misplaced One side seeks to rationally describe real-world behavior (Warren). The other skips such niceties, leaping to moral judgments (Schor). Cheap morality crowds out rationality.

Illustration 1: Family goes bankrupt from credit card debt. Cheap moralist asserts “profligacy.” Rationalist examines actual spending behavior, discovers (as Warren did with her research) that health crises account for close to half of such bankruptcies, as a family seeking to save a family member’s life “at any price” maxes out all credit cards and takes on unworkable debt.

Illustration 2: Family buys a large home just beyond what they can afford. Cheap moralist blames them for “keeping up with the Joneses." Rationalist, upon review, finds the family (1) gambled that its income would increase, (2) gambled that the home’s value would increase, and understood the tax-advantages of a home v. a savings account, and (3) viewed the home as a dual-use base, a potential office, and a hedge for other family members should they lose their jobs or have divorces and need the family home as a backup.

Illustration 3: Family 1 acquires closets full of clothing. Family 2 puts its money into gold jewelry instead. Which family is “saving” and which is “wasting”? Cheap moralist answer (Schor): both are wasting, but Family 2's jewelry can be resold, so they made the better judgment. Rationalist answer (Warren): why were these clothes purchased? Miscalculations about fashion hardly evidence moral laxity. Are the “bad choices” resold on eBay, or given away? Other facts are necessary before determining the activity.

The worst aspect of cheap morality is crowding out further inquiry. Whether from the leftist fringe (e.g., the “anti-materialism groups”) or the mainstream right (e.g., every born-again pulpit preaches the same line), cheap morality obscures reality, forcing a premature, prejudiced judgment and then seeking confirmation of one's prejudices. It's always and everywhere to be avoided, rather than dignified with the respect required to debate it.

May 16 05:55 AM

[Gregman2:]

Really top notch work. I would add that the laissez faire policies behind such cheap credit allowed our society to largely squander
access to underpriced credit on such things as big screen TVs, SUVs, etc. when such credit might have been used more wisely had there been real leadership and a plan.

May 16 09:57 AM

[Suppo176:]

Nothing has been mentioned about the absolutely ridiculous concept of putting your money in the Bank. Current interest rates (on savings) are aprox. half of the inflation rate, and then our beloved government demands a double digit tax on the paltry amount that the Bank is obliged to report as interest income for the poor chump that is willing to hand hard earned money over to them to loan out at 4 times the amount they pay to use it. Hard to be a Capitalist with these terms.

May 16 11:22 AM

[thiazole:]

That is a good point - if we all limited ourselves to what was available in 1950 (small houses, one car, one television with 3 channels, old drugs and if you get a serious illness, there is no expensive treatment - you just die, no internet, etc, etc), then the cost of living will definitely prove to have gone down dramatically.

Sorry to bring politics into this, but I have to in order to explain why people keep saying the cost of living is going up. Among liberals who think capitalism only benefits the upper class and who are always obsessed with comparing upper class to lower class (because a big discrepancy there is somehow worse than if EVERYONE was lower class), they feel the need to push the idea of "cost of living" as meaning "cost of keeping up with the Joneses", The "cost of living" is incredibly cheap right now in the US. If all you needed was "living", you could get by on a very tiny amount of money. The cost of keeping up with the Joneses has gone up dramatically. Why? Because the Joneses represent the STANDARD of living, not the cost of living. The standard of living (unlike communist countries where there is no discrepancy between classes) has gone way up, but not the cost of living.


On May 16 01:51 AM johngonole wrote:


> 1) bigger houses
> 2) more cars per family....which account for a huge part of your
> budget. More than food and maybe even your house when maintenance,
> insurance, gas and depreciation are considered.
> 3) New must haves - computers, cell phones, etc..
> 4) Higher medical cost - driven primarily by the fact that they can
> do more and more things that didn't even exist years ago
> 5) More interest is being paid on debt.

May 16 11:41 AM

[pftittl:]

OUTSTANDING!


On May 15 01:06 PM User 353732 wrote:

> 1.A middle class is not an "unaffordable luxury" as some have said,
> but the very foundation of a civil, dynamic and moral society. Take
> away the middle class and you take away a volunteer military, social
> mobility. most useful innovation, almost all entrpreneurship and
> of course, democracy itself. The middle class is an essential, irreplaceable,
> basis for the rule of law, the protection of property rights , free
> speech and individual liberty. An attack on the middle class is an
> attack on freedom , prosperity and civil society itself.
> 2. For others to assert that inanimate resources are more important
> than people is to engage in the most primitive form of idolatory.In
> any case it is not resource consumption per capita that is the intellectually
> honest metric but resource consumption per unit of GDP or GNP. The
> resources are not consumed: they are transformed.
> 3. The global spread of property rights,the vast expansion in international
> trade and the triumph(even if incomplete and today precarious) of
> democracy over totalitarianism is America's great contribution and
> in many cases unrequited gift to our fellow human beings across the
> world. It is the blood and treasure of Americans, mostly middle class
> Americans, that underwrote the spread of freedom, prosperity and
> hope in the 20th century. Maybe our time is coming to an end(which
> is by no means a given in the absence of an obvious successor) and
> it is fashionable to see only our sins and ignore our historical
> virtues but without America and its middle class tyrrany would have
> been the common lot of humanity.

May 16 12:35 PM

[Moon Kil Woong:]

"Risks that the public or corporate sphere had been absorbing were being transferred to individuals." I can't agree with this statement more.

If you look at your costs today for families health care and education are much higher. They are not luxuries, they are necceseties and are positive for the individual as well as the public. It is shameful that the government has constantly increased its spending yet has increasingly shirked it's responsibility to insure the population stays educated and healthy.

These are issues that baming the individual can't easily solve. Likewise, supporting a unsustainable mortgage bubble, although giving the illusion of wealth has also crimped the budgets of millions. Yet, no one in the early 2000's were debating why housing was unaffordable. Greenspan should have been considering where all the easy money he was making was going but he was getting too big of pats on the back for his mumbling rants to bother I guess.
Keep interest rates low and let the next guy worry about it seemed to be his motto.

Although individuals may have a long way to go to becoming more fiscally prudent, I personally look at Macro issues that have put the economy out of whack before I start wondering if females buyt too many shoes. The errors of the millions can't compare to the delinquency of banks to adequately judge risk or protect the depositors who put their money into them (not to mention the equity investors and bondholders). The lack of affordability in housing should be an issue with the Fed's easy money policies more than people taking unusual risk. The runaway health care and education costs show a shirking of resposibilities by the State and Federal government to properly manage and subsidize them with increasingly high taxes.

Thanks for the article and chart. It gives us a lot to think about. At least it's nice to see a reveral into the positive for the savings rate even if it is because of declines in the wealth effect as people's theoretical assets dissapear. We will al live better lives with a bit more thrift and a focus on entertaining ourselves with what we already have.

May 16 01:44 PM

[rosey99:]

Couldn't agree more. Preachy moralizing is something we are seeing on both sides (left, right) of this debate, and is a real obstacle to reasoned analysis. Warren seems to be a relatively clear thinker and relies on her interpretation of facts. IMHO, Schor's arguments are pretty specious by comparison, and ultimately short circuit reasoned discussion.

As for those that would seek some solution in the inherent "greatness of America and Americans," this too can be a real obstacle on the road to an honest appraisal of our difficulties. I was born here, I served my country, and I love this place and (most of) the people in it. I worry that our notions of American exceptionalism can also refract our view of reality, short circuit debate, and help us to look backward when we should be looking forward. Any reliance on historical inevitability resembles Marxism in some ways, and as for resting on our laurels. . .We all know how that typically works out.

Thanks for a good piece.

For those interested a link to a video of a Warren lecture on the topic follows. It's a bit lengthy, and the title may be somewhat provocative, but it is interesting nonetheless:

www.youtube.com/watch?...


On May 16 05:55 AM donzelion wrote:

> Striving for balance in this debate is misplaced One side seeks
> to rationally describe real-world behavior (Warren). The other skips
> such niceties, leaping to moral judgments (Schor). Cheap morality
> crowds out rationality.
>

May 16 02:30 PM

[StreetMedic:]

Fantastic article. Long time reader, and this was the first time I felt compelled to create an account to make note of this fact. I am a middle class person. Household income only slightly above the median $48,000. We have a tremendous debt-income ratio that has only recently begun to decline through our efforts to tackle this situation.

I get particularly irritated when I hear the cries about the "credit crisis." Frankly, it was easy and cheap credit that fueled this. We, as a society, borrowed against the future for the present. And look at the net. Credit should be hard, not easy, to get.

As far as I'm concerned, the price of risk is not readily included in credit, either at the corporate or pesonal level. When credit is expensive, and exclusive (namely to those that can actually afford to pay it off) there is a pretty obvious dampening effect on the promiscious spending by consumers.

Because risk was not priced appropriately, the dominoes fell.

For my own part, I'm learning the hard way the benefits of having little to no debt in this dep/recession. Look at the deals. Now is the time for spending. I've resolved to never again lose this chance to make fantastic deals while others struggle.

Chance favors the prepared mind, as it is said.

May 16 03:25 PM

[Fred Voetsch:]

Yes, things ARE different this time.

May 16 05:33 PM

[Crocodilian:]

A declining savings rate was an entirely logical response to an asset price bubble. For many years, borrowing as much as you could, and buying as many assets as you could yielded higher returns than saving.

That's changed. The great thing about money is that it changes behavior without having to convince anyone of anything. When gasoline is $5 a gallon, people drive less. When its revealed that home prices can fall as well as rise, home purchases are measured against the cost of renting, instead of being a leveraged asset speculation.

One aspect of a high savings rate that's escaped most people's notice is that it dramatically eases the problem of financing deficits. An increase in the savings rate of %5 represents approximately $600 billion per year in additional demand for financial assets.

May 16 06:17 PM

[bricki:]

Excellent article. It points out the real places were family incomes are impacted; home, post secondary education and health care.

My family is middle class with a somewhat above average family income - and since I was raised to be debt averse I've managed to stay away from loans except for the mortgage on my house (which I have recently been able to pay off). I can easily see where a bit less income would have made it a lot harder to stay away from debt, especially with regards to education.

One of the things that concerns me is that the profile of these major expenses is heavily placed on those with children. With two children vs. one child the quality of life of the parents is very different. Another factor is the explosion of post secondary education costs along with health care outrunning inflation. Soon I think these factors are going to lead to significant changes in America. What those changes will be is a huge political question for the next two decades.

May 16 09:05 PM

[Lin:]

Rorty

Great article !

May 16 11:53 PM

[Fighting Yoda:]

Good thought provoking article. Yes the fact of the matter as we all have known - too little savings and too much spending. This borrow and consume mantra has been preached by our leaders - Politicians, economists and corporations ofcourse. The most larimng thiing is the consumption binge was going on at a time when real incomes ahve been actually stagnant, for last 7-8 years. What were the Fed, thrift supervision departments doing - when debt was being racked up? I guess cheering the bubble.

The argument that people were spending as they 'felt' rich because of higher asset prices - seems plausible but is not necessarily true. As you still had to pay the high mortgage and even higher property taxes. Unless ofcourse you took the whole thing to the next level of home ATM, and ran a personal Ponzi scheme - borrowing against the home to pay for the home. We know lots tried it, much to the eventual dismay.

Just because there is a SALE sign does not mean you have to buy it.

We as a nation have to get back to basics (Econ 101) - Save -> Invest -> Produce -> Consume.

May 17 02:46 AM

[Simon Smelt:]

Nice article but sloppy around the edges:
1) Whilst savings have dipped until 08, wealth has been growing consistently - that's allowing for asset price increase, not just in housing, but equities etc too. So, the household sector believed the market and found their wealth was on average growing in line with historic norms without having to save much or at all. Implication, savings rates are going to stay higher.
2) All that cheap stuff was substantially because of growing imports from e.g. China. The same globalization forces also kept U.S. wage rates down.
3) Median real wages have indeed been static or falling. But total remuneration has been going up as more $ have gone into health and retirement packages. Households have also been devoting more to that - a feature of an ageing workforce.

Overall, I see no basis for either finger pointing or feeling sorry for the middle class U.S. household. The trouble is right now and how much tough policy voters can stomach.

May 17 03:07 AM

[thiazole:]

This is exactly what I'm talking about: tinyurl.com/pjdkhq
Now some day, for whatever reason, a lot of that "savings" is going to be unloaded right back into the economy and all these decades of stimulus will happen all at once and Japan will have hyperinflation. It is an unfortunate reality, but there really needs to be a balance between saving and spending. There is so much preaching that a nation of people can't save too much, but that is just incorrect.
I've said it before, and I'll say it again, but one the greatest influences on the global recession right now is the fact that many nations in Asia are "over-saving". They sell their products across the world, and then hoard the currency they get in exchange instead of buying goods from other nations. The self-impose a monetary shortage in their own nations, and force monetary shortages everywhere else by hoarding international money.


On May 15 05:29 PM thiazole wrote:

> This is going to sound crazy, but I'm not sure "savings" really means
> anything. Let's say we are like Japan, and everyone saves like crazy.
> What do we get? 20 year long recessions with persistant deflation
> (gee, I guess deflation is what happens when you don't spend). Now
> what will happen when there is a real national emergency and people
> need that savings? Just because a nation of people have umpteen trillion
> dollars in savings, doesn't mean there are umpteen trillion dollars
> in goods and services available to purchase - that means a lot of
> money will be chasing too few goods, ie hyperinflation will eat all
> that savings into nothing. So what good did the savings have? It
> stunted economic growth while people were saving, then it did no
> good when they all needed the money.

May 21 10:34 AM