Two questions come to mind after reading an Associated Press story about how Americans have begun to aggressively save money, summoning up images of "their penny-pinching, Depression-era grandparents."
1) Just a couple of years ago, there was much hand-wringing concerning the "negative savings rate" of 0.5 percent registered in the U.S. in 2005 -- for the first time since the worst depths of the Great Depression. But now, we are told that the turn to a positive savings rate -- 2.9 percent in the fourth quarter of 2008 -- "couldn't be happening at a worse time." Consumer spending accounts for 70 percent of the economy, reports the AP, so the individual impulse to save turns into a collective disaster.
The motivation to save is itself a natural response to economic contraction, just as the inclination to spend is a product of flush times. Which makes me wonder whether it is even possible to avoid this pattern of wild swings. We want people to save during good times and bad, but not too much during the bad, and not too little during the good. Seems to me that left to ourselves, we will inevitably swing from extreme to extreme. So how does government policy encourage prudence in a booming economy?
2) Left out of the AP story is any voice connecting the dots and drawing the obvious conclusion: If a national impulse to save is strangling the life out of the economy, government is the only entity powerful enough to break the deadlock. But tax cuts, as noted umpteen times here last week, would just give Americans more wherewithal to pay down their debts and build up their nest eggs. Which is clearly not a bad thing, for you and me in our individual scenarios, but wouldn't do much to break us out of the liquidity trap that we are currently struggling through. Therefore, if Americans are saving while the economy is contracting, the government must spend.
And just for historical purposes, I present to you here the last two paragraphs of a 2006 AP article reporting the dip into negative territory of the national savings rate.
One major reason that consumers felt confident in spending all of their disposable income and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a "wealth effect" that supported greater spending.
The concern, however, is that the housing boom of the past five years is beginning to quiet down with the rise in mortgage rates. Analysts are closely watching to see whether consumer spending, which accounts for two-thirds of total economic activity, falters in 2006 as Americans, already carrying heavy debt loads, don't feel as wealthy as the price appreciation of their homes would seem to indicate.