It’s as if the entire country had chanted in unison, ““Hell no, we won’t save.’’ By now, the official savings statistics are no secret. In 1998, Americans’ personal-savings rate fell to a post-World War II low of 0.5 percent of disposable income: we spent 99.5 percent of our after-tax income. The apparent paradox is that even though we’re saving less than ever, we feel–mostly as a result of the stock market–wealthier than ever.
Anyone who doubts that the falling savings rate has propelled the economic boom should do some arithmetic. In 1998, Americans’ after-tax income totaled about $6 trillion. The personal-savings rate in 1997 was 2.1 percent of income; so the drop to 0.5 percent represents a decline of 1.6 percentage points. On $6 trillion, that’s al-most $100 billion of extra spending.
This meant, in practice, that Americans spent another $100 billion on computers, vacations, fast food, cars and toys, among other things. Strong consumer buying in turn bolstered business investment. These twin spending streams have carried the economic expansion and offset the huge drag of an ever-widening trade deficit (in 1998 it rose by 1.4 percent of GDP). The dissaving of American consumers has spared the U.S. economy a recession and–through higher imports–aided the ailing global economy.
But can it continue? The plunge in personal savings surprised economists and has triggered intense debate. If it doesn’t last, prospects for the U.S. and world economies would worsen. So let’s examine the debate.
The dominant view holds that, on inspection, lower savings make sense and need not change soon. To understand why, glance at the table above. It’s adapted from a study (““There Is No Savings Crisis’’) by economist Richard Rippe of Prudential Securities. The table depicts the vast increase in the wealth of the household sector (including nonprofit organizations). Since 1987 Americans’ net worth (assets minus liabilities) has roughly doubled to about $35 trillion. Higher tangible assets (homes, cars, furniture) account for some gain. But financial assets (savings accounts, stocks, bonds) represent most of the gain; perhaps $8 trillion of it is in stocks.
Rippe’s argument is not simply that Americans, having won big in the stock-market lottery, are entitled to splurge. The logic is more subtle. As he points out, personal savings make up only one part of national saving. Businesses do most national saving through retained profits and depreciation (the cost of replacing obsolete investment). And business saving has increased. But businesses are owned by shareholders: individuals, pension funds, mutual funds. If companies save and invest wisely, their profits and stock prices rise. What’s wrong with individuals (the real owners) skimming off some gains to augment spending?
Nothing, it would seem, as long as companies save, invest and achieve high-profit growth. The paradox of less saving and greater wealth is resolved. People continue the rituals of saving. They make, say, regular deposits into retirement accounts. But gains are so huge that investors decide they can spend against a bit of their profits. So people sell stocks or borrow. The extra spending drops their reported savings close to zero (spending equals current income). But their wealth–the value of their accumulated savings–is still rising rapidly.
Case closed? Not exactly. Consider now another study (““How Negative Can U.S. Saving Get?’’) from economists Wynne Godley of The Jerome Levy Economics Institute of Bard College and Bill Martin of Phillips & Drew, a London investment-management company. What bothers them is not the low savings rate by itself. The real problem (they say) is that the savings rate must continue to go lower. The other drags on the economy–the rising trade deficit and the government budget surplus–mean that growth depends on an ever-larger counterthrust from consumer spending.
Well, the savings rate has continually dropped. In 1992 it was 5.7 percent of income. Now it’s zero. But will people overspend their incomes by 1 percent, 2 percent, 5 percent? To coax Americans to do that, the stock market must not just stay where it is, say Godley and Martin. It must leap forward in great strides to create ever more wealth for consumers to skim. Sooner or later the process must choke on itself, they say (though they don’t say when). Then the U.S. economy would stagnate or decline. The aftershock would hit Asia and Latin America the hardest, because these regions send a quarter and two thirds, respectively, of their exports to the United States.
Who’s right? My bias lies with the pessimists. The U.S. economy may be surfing on its own euphoria. Overpriced stocks cause consumers to overspend and businesses to overinvest–and none of it can last. The optimistic interpretation is that we’re merely witnessing the advent of a new, unfamiliar pattern of thrift. Either way, low personal saving is an essential catalyst of the present boom. If somehow it were to rise, the American and world economies would face even greater peril.
