In the April 6th edition of the Wall Street Journal, Kelly Evans discusses the United States’ savings rate in, “Frugality Forged in Today’s Recession Has Potential to Outlast It.” He quotes Richard Berner from Morgan Stanley by saying that, “consumer spending will grow at an inflation-adjusted 2% to 2.5% annual rate over the next several years, compared with 3.5% in the decade ended in 2007.” In a previous blog, Professor Tufte explained that people save because they:
Lack insurance
Lack social security
Lack a pension
Lack material possessions
Are more worried about the future than the present.
Based on these incentives, it is no surprise that Americans are saving more. While Social Security hasn’t really changed, the other four incentives have had an effect on the personal savings rate. Many Americans have lost their jobs and with that they have lost benefits such as insurance. Due to the financial crisis, many citizens have lost their entire pensions or have at least lost a good portion of it. During the recession, discretionary incomes are lower; therefore, material possessions are not necessarily in abundance. With countless doom and gloom reports or at least reports that do not look favorably on the near future, expectations of the future are grim. The personal savings rate should be expected to increase during these conditions. Is it not true, however, that the savings was always there it just was not counted? Most Americans previously stored their savings by purchasing homes, which was counted as investment. Due to the financial crisis, investments in homes have decreased. This has resulted in moving our way of saving to a type that is now counted.
This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
4/09/2009
Shifty Savings
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3 comments:
This is all good.
I think we can say that this particular way to measure savings should be going up, and it has.
Most of the arguments that pundits make that saving is too low rely on some degree of not responding appropriately to incentives. The behavior over the last several months should make clear that people do respond the way we think they should.
This should make all the doomsayers go back and explain why savings was so low before. The explanation that fits that is that there wasn't much need to save when your wealth was rising quickly. At the time, economists did point that out. Pundits didn't.
I agree with Gracie that Americans are more worried about the future then the present. The combined cost of the Social Security and Medicare programs is projected to grow to 12 percent of the GDP in 2030 and 17.2 percent of the GDP in 2083. I think that it is a terrible situation that the Social Security trust fund is expected to be exhausted in 2037. Also the percentage of Medicare benefits covered by the Medicare tax will decline from 81 percent in 2017 to 50 percent in 2035. As far as I see, the economy nowadays does not have that many options to close the Social Security and Medicare gaps. For instance, I would not advise increasing the retirement age for collecting Social Security or Medicare benefits, because it will not be fair to people who have been paying into the system for many years. On the other hand, a huge tax increase on the earnings of the country’s highest trained people will most likely reduce the desire of younger people to get an education and move forward in their careers. But unfortunately, no matter what decisions will be made by the government; the American people will most likely have to face up to the problem.
Julia: 50/50.
Unfortunately, the problem is too many people collecting and too few paying. There are only two solutions: reduce the number of people collecting, or increase the collections from those paying. Politically, it seems like the latter is more popular.
The real issue has been the improvement in life expectancy, the efficacy of medicine, and the unwillingness of politicians to recognize those in the past. Every time we live longer, we increase the collectors and reduce the payers. Every time we use a medical advance to keep someone alive, we increase the costs without increasing the payments. A better system all along would have been to recognize these incrementally by raising the retirement age. But, we didn't choose that path.
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