Why Americans Are Pitiful Savers
Princeton historian Sheldon Garon wrote a great article for the Federal Reserve recently. "Beyond Our Means: Why America Spends While the World Saves," is the title.
After World War II, Garon writes, most of Europe and Japan "ran massive savings campaigns" to encourage people to save to help finance wartime debt. "Thereafter, enduring cultures of thrift continued to restrain the expansion of consumer credit," he writes.
Not in America, though:
After 1945, however, America again diverged from patterns of savings promotion in Europe and East Asia. The United States emerged from World War II extraordinarily rich while other countries were rebuilding war-ravaged economies. Politicians, businessmen and labor leaders all encouraged Americans to spend to foster economic growth. An array of policies also stimulated the growth of homeownership, which further increased consumer spending. Beginning in the 1980s, several developments combined to stop millions of Americans from saving altogether. Deregulation permitted the financial industry to offer massive amounts of credit on strikingly favorable terms -- even to very poor households and students. The new instruments included credit cards, home equity loans and subprime mortgages. Many Americans wondered: Why save when I can buy things with easy money?
Our savings rate, in other words, is abysmal:
The highest our savings rate has been in the last 50 years is about 11% to 12%, with an average of 7%.
Japan's average savings rate over the period was 14.2%. Western Europe, as a whole, has averaged about 10% savings since 1960. Neither are exactly posterchilds of prosperity, but the differences are stark.
Clyde Prestowitz, president of the Economic Strategy Institute, once elaborated on how policy changes influenced American consumption after the end of World War II:
15 million men and women [were] being demobilized from the armed forces all coming back looking for jobs, and the question was, "Wow where are the jobs going to come from?" And with Europe in ashes and Japan in ashes, it was obvious that an export-led drive was not likely to be successful, and so the focus was on promoting domestic consumption as a way of replacing the wartime production and providing jobs for the returning demobilized service people. And so G.I.s were given preferential assistance in getting mortgages for houses. People were able to deduct the interest on payments for consumer debt -- all kinds of measures were taken to make it easy to consume.
And in my e-book 50 Years in the Making, I wrote:
A large rise in consumer debt from the 1950s through the 1970s was met with an equal rise in income gains. Starting in the 1980s, however, household debt began climbing far faster than income growth. Households' debt-to-income ratio, which hovered near 60% in 1960, hit 80% by 1990, and ballooned to 130% by 2007.
Here's something I think about a lot: The rise in our personal savings rate from about 1% in 2005 to around 4% today walloped the economy, as consumer spending growth fell (as it has to when savings rises). What would the economy be like today if we had a savings rate of closer to 10%, as most of the rest of the developed world does?
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