A Look at the Historical Savings Rate

This is an old WSJ graphic but it's still interesting and worth discussing, as it depicts the historical savings rate going back to the early 80s:

Graphic courtesy of the WSJ

So one of the constant refrains during this downturn has been that "we need to get people spending again", in spite of the fact that a lot of consumers are overleveraged and aren't saving enough. The basic idea being that in order for the economy to grow people need to "spend like it's "2006 ". It goes back to the theory of "the paradox of thrift", which puts forth the idea that while saving may be good for individuals it's not good for the economy overall.

However when we look at the historical savings rate we see that people can save a lot more than they do now and the economy can still be strong. This suggests that what we really need is to reduce unemployment and get more people spending, as opposed to getting people to spend more at an individual level. The solution is increasing the number of participants in the economy, as opposed to the majority of individuals spending all of their disposable income.

Unfortunately becoming a nation of savers is easier said then done because our economy is (for all intents and purposes) structured in a way that it depends on us being a nation of wild spenders as opposed to rational savers. Several industries ranging from automotive, real estate, retail, etc, have been generating their growth over the last 20+ years from people overspending, as opposed to spending within their means.

The adjustment won't be easy, but it's a necessary part of creating a sustainable economy, as an economy based on being a nation of spenders isn't sustainable.

If the Obama administration really wants to stimulate the economy in a sustainable fashion, they really need to put some thought around how to incentivize savings and other smart financial decisions. As opposed to the usual pattern of trying to incentivize people to spend money.

The graphic comes from a WSJ article that discusses the potential for the beginning of a trend where the savings rate continues to increase even after the economy recovers, which you can read in full here.

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[PastTense:]

One way to incentivize savings and other smart financial decisions would be for the U.S. should switch from an income tax to a consumption tax.

"A consumption tax is a tax on spending on goods and services. The term refers to a system with a tax base of consumption. It usually takes the form of an indirect tax, such as a sales tax or value added tax. However it can also be structured as a form of direct, personal taxation: as an income tax that excludes investments and savings. A direct consumption tax is sometimes called an expenditure tax, a cash-flow tax, or a consumed-income tax, to name a few.

Since consumption taxes are argued to be inherently regressive on income, some current proposals make adjustments to decrease these effects. Using exemptions, graduated rates, deductions or rebates, a consumption tax can be made less regressive or progressive, while allowing savings to accumulate tax-free."

en.wikipedia.org/wiki/...

May 25 01:03 PM

[dybydx:]

consumption tax wont work, even when graded.

to achieve the amount of tax revenue needed to significantly lower income tax, the necessary tax rate will be 3 digits (Denmark has 150% tax on new autos) this will grind consumption to a ridiculously low level.

in addition, rich people like Bill Gates will spend less than 1% of their networth per year on consumption. while as joe average spends 20% to 90%. even after a graded scheme, joe average would still be taxed to eternity of poverty.

May 25 03:28 PM

[Fighting Yoda:]

This article was utter trash, sorry to use harsh words but that is what it is.

Read this recent article from San Francisco Fed about savings and Consumer debt deleveraging, will give everyone a better idea about savings rates and impact on GDP:

U.S. Household Deleveraging and Future Consumption Growth
www.frbsf.org/publicat...

May 25 11:15 PM

[Fred Voetsch:]

"However when we look at the historical savings rate we see that people can save a lot more than they do now and the economy can still be strong"

Good article.

The key is to consider the transition from one phase to another. Once you are in a position of having savings you are fine, it is getting there that is the problem.

The DROP in the savings rate as we also built up debt is why we are where we are. Anyone who thinks we are out of the woods with the data that is in front of us is a fool. Today, tomorrow, next year or 5 years from now, we will have to deleverage.

May 26 04:01 PM