Winehole23
10-19-2009, 02:58 PM
U.S. Savings Bind (http://www.nytimes.com/2009/10/18/magazine/18FOB-wwln-t.html?ref=todayspaper)
By ROGER LOWENSTEIN
Published: October 14, 2009
In his Labor Day (http://topics.nytimes.com/top/reference/timestopics/subjects/l/labor_day/index.html?inline=nyt-classifier) weekend address on the American worker, President Obama (http://topics.nytimes.com/top/reference/timestopics/people/o/barack_obama/index.html?inline=nyt-per), with little fanfare, announced some initiatives to help Americans save more money. One such step will allow employees to receive their tax refunds in the form of U.S. Savings Bonds (http://topics.nytimes.com/your-money/investments/stocks-and-bonds/index.html?inline=nyt-classifier) instead of in cash. Another will promote automatic enrollment in retirement funds for workers at medium and small firms so that employees will have to opt out of saving, rather than opt in. Studies show that this results in more saving.
[/URL] http://graphics8.nytimes.com/images/2009/10/18/magazine/18wwln.1-190.jpg Andrea Manzati
http://graphics8.nytimes.com/images/2009/10/18/magazine/18wwln.2-190.jpg Source: Moody’s Economy.com, 2009.
All these steps should add to the national savings rate. It is a goal Obama campaigned on — and one that policy wonks and pundits have been screaming about for years. The United States is staring at frightening retirement deficits, infrastructure needs and health care liabilities. How else to meet them but to start saving and stop borrowing money?
Here’s the funny part. The American consumer kicked the borrowing habit more than a year ago. The country, you may have noticed, is in an economic crisis, and most economists say the only way out is for consumers to start spending money. Spending is the opposite of saving.
Since consumer spending accounts for 71 percent of the gross domestic product, an enduring rise in personal saving would make for a weaker recovery, with fewer jobs. One main purpose of the $787 billion government stimulus was to provide a buffer until private spending revived.
Usually, saving recedes when recessions end. Some economists think the current financial crisis was such a shock — on a par, psychologically, with [URL="http://topics.nytimes.com/top/reference/timestopics/subjects/g/great_depression_1930s/index.html?inline=nyt-classifier"]the Great Depression (http://www.nytimes.com/2009/10/18/magazine/18FOB-wwln-t.html?ref=todayspaper#secondParagraph) — that people will feel the need to save even after it is over. If their predictions are right, the United States would need to enact a stimulus every year to get the economy back to where it was. That is why the federal government enacted the cash-for-clunkers program; it wants people who have been accumulating savings to buy automobiles.
The government’s mixed message may sound grossly inconsistent, but it isn’t. Economists often give different answers for the short term and the long term. What is unusual is that the financial crisis has brought these divergent agendas into such sharp relief.
The prescription that we should save more isn’t wrong. Household saving is the total of what people earn less what they spend. If you want to describe the history of the U.S. economy over the last 50 years, in shorthand, you could do worse than this: Americans saved. Then they didn’t.
For the 35 years after World War II, Americans dutifully set aside about 9 percent of their income. Their savings were plowed into stocks and bonds and formed a pool of capital for investments and new technologies (and a couple of wars, not to mention the space program). They begat a golden era of productivity and growth and, eventually, the 1990s boom. But by then, habits were changing. Starting in the mid-1980s, the personal-savings rate declined. Credit became more available, and people became used to borrowing what they needed. (The commonplace phrase “saving up” — as in “I’m saving up for a washing machine” — all but disappeared.) Also, bubbles in stocks and real estate convinced people they didn’t need to save much for the future, since even a small nest egg would grow into a big one. By the late 2000s, the savings rate plunged to less than 1 percent.
There is no denying that the spending binge of recent years was wacky. Economics used to teach that people made rational calculations about what to save (and to spend). That was part of the free-market gospel. It has become rather obvious that psychology and emotions also play a part in such decisions. The administration has embraced the profession’s revisionism. Endorsing automatic-enrollment savings plans is another way of saying, “We know you won’t save as much as you should on your own.” The credit binge basically proved that, rational or not, people will prefer to remain poor (i.e., to spend) as long as someone will lend them money.
That ended with the financial crisis. As households scrambled to repair their finances, the savings rate shot up to 6 percent. Recently, it has hovered around 4 percent, but many economists predict a return to the high single digits. Credit is less available. Americans owned about 425 million bank credit cards in 2008; that number has plunged to 344 million. Regulators tightened the rules on mortgages; banks are also more cautious. That won’t last forever, but if capital requirements are strengthened, as is expected, banks will not be able to repeat so casually the sins of yore.
And for now, spending psychology is working in reverse. The total wealth of households fell, peak to trough, from $64 trillion to $51 trillion — the steepest decline in postwar history. No one is counting on rising home values to provide for retirement. People are not only poorer, they feel poorer. The wealthy expect to be socked with higher taxes to pay down deficits; middle-class Americans fear for their jobs. Neither group is in a mood to spend.
If you ask economists which is more desirable — saving or spending — they tend to stammer. Understandably, it depends on the context. We wouldn’t want to return to the consumer-mad economy of the 2000s, because it was unsustainable. Maybe a consumer economy is not where we should be headed at all. In the future, exports (selling products to other countries) will be more important; so will investments. But neither of these sectors can take up the slack right now. In the short run, to the extent that people don’t spend, the government will.
“After so much lamentation about low saving, it may be a bit hard for the public to stomach economists’ new worries about a drop in spending,” Christopher Carroll, a Johns Hopkins economist wrote in June. Carroll, who has since joined the staff of the Council of Economic Advisers (http://topics.nytimes.com/top/reference/timestopics/organizations/w/white_house_council_of_economic_advisers/index.html?inline=nyt-org), likened the seeming paradox to the dilemma of St. Augustine, who after a youth spent in pleasure famously prayed, “Lord, make me chaste — but not quite yet.” The government faces a trade-off on financial chastity. This will enter into all sorts of policy decisions, like when to start paying down its deficit. It is the same trade-off — spending now or saving for later? — that the private sector thoroughly botched.
By ROGER LOWENSTEIN
Published: October 14, 2009
In his Labor Day (http://topics.nytimes.com/top/reference/timestopics/subjects/l/labor_day/index.html?inline=nyt-classifier) weekend address on the American worker, President Obama (http://topics.nytimes.com/top/reference/timestopics/people/o/barack_obama/index.html?inline=nyt-per), with little fanfare, announced some initiatives to help Americans save more money. One such step will allow employees to receive their tax refunds in the form of U.S. Savings Bonds (http://topics.nytimes.com/your-money/investments/stocks-and-bonds/index.html?inline=nyt-classifier) instead of in cash. Another will promote automatic enrollment in retirement funds for workers at medium and small firms so that employees will have to opt out of saving, rather than opt in. Studies show that this results in more saving.
[/URL] http://graphics8.nytimes.com/images/2009/10/18/magazine/18wwln.1-190.jpg Andrea Manzati
http://graphics8.nytimes.com/images/2009/10/18/magazine/18wwln.2-190.jpg Source: Moody’s Economy.com, 2009.
All these steps should add to the national savings rate. It is a goal Obama campaigned on — and one that policy wonks and pundits have been screaming about for years. The United States is staring at frightening retirement deficits, infrastructure needs and health care liabilities. How else to meet them but to start saving and stop borrowing money?
Here’s the funny part. The American consumer kicked the borrowing habit more than a year ago. The country, you may have noticed, is in an economic crisis, and most economists say the only way out is for consumers to start spending money. Spending is the opposite of saving.
Since consumer spending accounts for 71 percent of the gross domestic product, an enduring rise in personal saving would make for a weaker recovery, with fewer jobs. One main purpose of the $787 billion government stimulus was to provide a buffer until private spending revived.
Usually, saving recedes when recessions end. Some economists think the current financial crisis was such a shock — on a par, psychologically, with [URL="http://topics.nytimes.com/top/reference/timestopics/subjects/g/great_depression_1930s/index.html?inline=nyt-classifier"]the Great Depression (http://www.nytimes.com/2009/10/18/magazine/18FOB-wwln-t.html?ref=todayspaper#secondParagraph) — that people will feel the need to save even after it is over. If their predictions are right, the United States would need to enact a stimulus every year to get the economy back to where it was. That is why the federal government enacted the cash-for-clunkers program; it wants people who have been accumulating savings to buy automobiles.
The government’s mixed message may sound grossly inconsistent, but it isn’t. Economists often give different answers for the short term and the long term. What is unusual is that the financial crisis has brought these divergent agendas into such sharp relief.
The prescription that we should save more isn’t wrong. Household saving is the total of what people earn less what they spend. If you want to describe the history of the U.S. economy over the last 50 years, in shorthand, you could do worse than this: Americans saved. Then they didn’t.
For the 35 years after World War II, Americans dutifully set aside about 9 percent of their income. Their savings were plowed into stocks and bonds and formed a pool of capital for investments and new technologies (and a couple of wars, not to mention the space program). They begat a golden era of productivity and growth and, eventually, the 1990s boom. But by then, habits were changing. Starting in the mid-1980s, the personal-savings rate declined. Credit became more available, and people became used to borrowing what they needed. (The commonplace phrase “saving up” — as in “I’m saving up for a washing machine” — all but disappeared.) Also, bubbles in stocks and real estate convinced people they didn’t need to save much for the future, since even a small nest egg would grow into a big one. By the late 2000s, the savings rate plunged to less than 1 percent.
There is no denying that the spending binge of recent years was wacky. Economics used to teach that people made rational calculations about what to save (and to spend). That was part of the free-market gospel. It has become rather obvious that psychology and emotions also play a part in such decisions. The administration has embraced the profession’s revisionism. Endorsing automatic-enrollment savings plans is another way of saying, “We know you won’t save as much as you should on your own.” The credit binge basically proved that, rational or not, people will prefer to remain poor (i.e., to spend) as long as someone will lend them money.
That ended with the financial crisis. As households scrambled to repair their finances, the savings rate shot up to 6 percent. Recently, it has hovered around 4 percent, but many economists predict a return to the high single digits. Credit is less available. Americans owned about 425 million bank credit cards in 2008; that number has plunged to 344 million. Regulators tightened the rules on mortgages; banks are also more cautious. That won’t last forever, but if capital requirements are strengthened, as is expected, banks will not be able to repeat so casually the sins of yore.
And for now, spending psychology is working in reverse. The total wealth of households fell, peak to trough, from $64 trillion to $51 trillion — the steepest decline in postwar history. No one is counting on rising home values to provide for retirement. People are not only poorer, they feel poorer. The wealthy expect to be socked with higher taxes to pay down deficits; middle-class Americans fear for their jobs. Neither group is in a mood to spend.
If you ask economists which is more desirable — saving or spending — they tend to stammer. Understandably, it depends on the context. We wouldn’t want to return to the consumer-mad economy of the 2000s, because it was unsustainable. Maybe a consumer economy is not where we should be headed at all. In the future, exports (selling products to other countries) will be more important; so will investments. But neither of these sectors can take up the slack right now. In the short run, to the extent that people don’t spend, the government will.
“After so much lamentation about low saving, it may be a bit hard for the public to stomach economists’ new worries about a drop in spending,” Christopher Carroll, a Johns Hopkins economist wrote in June. Carroll, who has since joined the staff of the Council of Economic Advisers (http://topics.nytimes.com/top/reference/timestopics/organizations/w/white_house_council_of_economic_advisers/index.html?inline=nyt-org), likened the seeming paradox to the dilemma of St. Augustine, who after a youth spent in pleasure famously prayed, “Lord, make me chaste — but not quite yet.” The government faces a trade-off on financial chastity. This will enter into all sorts of policy decisions, like when to start paying down its deficit. It is the same trade-off — spending now or saving for later? — that the private sector thoroughly botched.