Sunday, November 15, 2009

The US Savings Rate

Why does the US have the lowest savings rate in the world? This was a question that would not have been asked in the 1950s and 1960s, because the US did not have the lowest savings rate in the world back then.

So, why did the US savings rate plunge to zero after the mid 1970s?

The answer to this question tells us what will happen to the savings rate for the US of the future.

Most pundits argue that Americans will increase their savings in the future because "they have learned" that leverage is dangerous. Is that what Americans have learned? Or have they learned the exact opposite?

Americans began to save much more of their income after the great economic difficulties of the 1930s battered the economic prospects of average Americans. The new higher savings rates persisted right through the second World War and right up until the mid 1970s. Then what happened?

What happened is that Richard Nixon and a Democratic Congress expanded the entitlements known as Social Security and Medicare to the point that the vast majority of Americans realized that the need to save was now greatly reduced. Why save for the future, if the government will take care of that future? After the expansion of Social Security and Medicare, the savings rate collapsed.

Savings has increased over the past sixteen months, but that increase will dissipate when (and if) the economy begins to show some signs of life. Why should anyone save for medical emergencies, if the government takes over the medical system and outlaws insurance schemes designed to deal with medical emergencies? No reason. Why should Americans save for their old age if the government guarantees income for their old age? No reason.

Americans rationally choose not to save. Once the fear of the current economic climate goes away, Americans will return to that rational choice and the savings rate will slide back to zero or negative territory.

Why do the Chinese save over forty percent of their income? Because they have to. There is no government safety net to encourage Chinese to spend as much of their current income as possible, as there is in the United States. The Chinese high savings rate will persist. The US savings rate will go to zero once more.

What is the significance of the savings rate? Those who save will eventually own everything and those who dissave will work through their assets till they no longer have any. What this means is that, over time, the great wealth of the United States will be transferred to those who save. Americans' wealth will be reduced and Chinese wealth will be increased.

These trends have been in place for decades and will, once the US regains its economic footing (presumably, after Obama has been retired back to the community organizing world), resume. Entitlements reduce and perhaps eliminate the need and the desire to save.

1 comment:

Fmalik13 said...

Professor Burton,

There is a lot of news about Madoff and Ponzi schemes.

I was asked a question the other day, if the I thought Social Security was a huge Ponzi scheme...

Thanks.