THE BEAR'S LAIR Where have the savers gone?
By Martin Hutchinson
Amid the recent financial crisis, the United States made some progress towards
solving its biggest economic problem of recent years: the lack of US savings.
Regrettably, in the latest figures, the beginnings of economic recovery have
brought backsliding, with the savings rate dropping back to 4.3% from 6%.
Without more savings, as global liquidity declines, the United States will
quickly become a capital-starved economy, losing investment to capital surplus
countries where savings are plentiful. The difficult questions are: what caused
the savings decline, and what can be done to reverse it?
During the halcyon years of the 1950s and 1960s, the US savings rate - the
percentage of disposable personal income that is saved - was consistently over
10%. That is nowhere near as high as the 40% savings rates consistently seen in
China (though questions
remain over the quality of Chinese statistics), nor the 25% to 30% of the other
major East Asian economies during their takeoff phases. The United States was
always a culture not particularly given to saving, and 10% is not a brilliant
savings rate - it is for example lower than Germany's level even in today's
culture, of a solid 11% - but it was sufficient to allow the great economic
growth of the 1950s and 1960s to be financed domestically.
The US savings rate began to decline during the 1970s. That was not surprising;
during that decade the stock market went nowhere (declining heavily in real
terms) while interest rates were steadily negative in real terms, even lower
when you take account of the fact that savers had to pay tax on gains and
interest income that was eaten away by inflation.
After the 1970s, one would have expected the savings rate to rebound. Real
interest rates were very high in the 1980s, inflation came down from 1982, and
the stock market embarked on a generation-long bull market that was to raise
the Dow Jones Industrial Average to 10 times its 1982 level. Yet instead of
rising, the savings rate fell. From an average level of 10.8% in the 1960s and
8.6% in the 1970s, the savings rate declined to an average of 5.8% in the
1980s. The deep 1981-82 reduced it, as one would have expected (the savings
rate went negative during the worst years of the Great Depression), but it
never recovered thereafter.
The savings rate declined somewhat further, to 4.9%, during the 1990s; again it
dipped during the early 1990s recession, then recovered in that later 1990s,
when real interest rates were low but stock market investment was uniquely
appealing.
Then from a peak of 6% to 7% in 2000, the savings rate declined to depths not
plumbed since the bottom of the Great Depression, reaching 1.8% in 2003, near
the bottom of that relatively mild recession, then failing to recover
significantly before plunging again in 2007-08 to a level currently assessed at
exactly zero.
There appear at first glance to be three factors that may have affected the
trend in savings rates:
The first and most important is the return available to saving. If as at
present or in the 1970s, deposits and fixed-income investments provide savers
with a return that is less than the rate of inflation, then savings rates are
bound to decline. People won't save because they are being penalized for doing
so. This is why the expansive monetary policies favored by former Federal
Reserve chairman Alan Greenspan, his successor Ben Bernanke, and others are so
misguided. A capitalist economy cannot survive if its risk-free rate of return
is below or close to zero for prolonged periods because people will have no
incentive to defer consumption and so capital will disappear. You only have to
look at the unhappy fate suffered by the German Weimar Republic and various
Latin American countries in bouts of hyperinflation to see the result of
de-capitalizing the economy in this way.
Argentina is for this reason no longer a rich country. Its people are perfectly
industrious and 97.2% are literate, its education system is adequate, its
natural resources are abundant, its climate is healthy, yet through bouts of
hyperinflation, its governments have de-capitalized its economy. Without a
recovery in the savings rate, the United States is heading down the Argentine
route to perdition.
The second reason why the savings rate may have declined is the revolution in
consumer finance since the 1960s. This supposition is reinforced by the higher
savings rate in Germany, a country with a more generous pensions and healthcare
safety net than the United States (which should depress private savings), but
with less overwhelmingly available consumer finance. This factor may explain a
large part of the savings rate's decline in the 1980s.
The first unsolicited credit card offers were sent out by Citigroup in 1978,
and by the middle 1980s cards were proliferating and it was perfectly possible
to carry several of them. Total consumer debt outstanding remained constant as
a percentage of gross domestic product (GDP) in the 1970s, falling to 12.4% of
GDP from 12.5%; it then took off around 1980, rising to 13.8% of GDP in 1990,
16.3% of GDP in 2000 and 17.7% of GDP by its 2008 peak. Thus from 1980 to 2008,
consumer debt rose annually by an average of 0.19% of GDP (in addition to its
natural rise from economic growth) - about 0.3% of personal consumption. That's
a significant albeit modest contribution to the savings rate's decline.
The third reason, impossible to quantify, is the attitude to saving of the US
population itself. The generation who were adults in the 1950s and 1960s had
experienced the Great Depression. That did not simply make them cautious; it
also gave them a high regard for the value of substantial savings - which had
after all increased in real value by 25% in the first years of the Depression.
Conversely, the baby boomers and their successors, the adults of the 1980s or
today, have not experienced real financial hardship and, in the 1970s, saw
inflation eat away inexorably at the value of savings. One need not grind one's
teeth at the moral inferiority of the baby boomers to realize that their
different life histories might reasonably have given them different attitudes
to saving. The same effect seems to have occurred in Japan, where savings rates
dropped to around 5% today from 25-30% in the 1970s; the stock market slump and
economic stagnation are unlikely to provide a sufficient explanation for this
change.
To restore the US savings rate, we thus need three things: higher savings rates
(painful, but easy, and necessary in other respects), tighter consumer finance
availability (tricky), and reversion to the pro-savings attitudes of the 1950s
and 1960s (very difficult.) Nevertheless, the goal is sufficiently worthwhile
to the long-term future of the US economy that a number of policies leading in
its direction might be tried, as follows:
Prolonged period of interest rates at least 3% above inflation, together with
tax changes allowing the elimination of inflationary erosion of capital from
investment income.
Elimination of tax-deductibility of mortgage and other interest, and of all
government subsidies to home ownership, including in particular Fannie Mae and
Freddie Mac guarantee programs. In today's private market, 20% down payments
for home mortgages would be required by banks forced to hold mortgages
themselves. This would force massive saving.
Rapid elimination of the federal deficit, reducing the government's
contribution to national de-capitalization.
A "Tobin tax" on securities transactions, primarily affecting Wall Street
trading operations, but also removing the percentage of national wealth
acquired through short-term speculation. [1]
Heavy excise on casinos, hotels and transportation to casino destinations, and
abolition of state lotteries, reducing the gambling propensities in US society.
"Get rich quick" methodologies of all kinds must be discouraged.
Full funding by government of the requirement that indigent patients receive
treatment in hospital emergency rooms. Also tight limits on medical liability
damages and removal of restrictions on inter-state purchase of health care.
Apart from making medical care affordable, this would reduce the truly
exorbitant charges by urban hospitals, eliminating much of the medical
bankruptcy risk and making savings more attractive through reducing the risk of
some leech hospital seizing them.
Elimination or drastic reduction of the "death tax" to encourage capital
accumulations in families.
Elimination of the double taxation of corporate dividends, by making them
deductible at the corporate level (while fully taxable at the individual
level.)
Prohibitions against unsolicited mass credit-card mailings and their e-commerce
equivalents.
If necessary, a credit tax on all purchases not paid for in cash or by debit
card or check. This would have the effect of a limited value-added-tax, but
applied to credit transactions only.
As you can see, there are innumerable unpopular but fairly easy steps that
could be taken towards raising the savings rate. We can't recreate the
psychology of the 1950s, but these changes taken as a whole would push society
in that direction.
If the alternative is an Argentine future, the pain would be worth it.
Note
1. Tobin tax, named after economist James Tobin, was originally a suggested
low-level tax on cross-border currency trades, imposing a penalty on short-term
speculation in currencies. The original tax rate he proposed was 1%.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-2009 David W Tice & Associates.)
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