OR…Is Saving Money Bad for the Economy?
I came across this article a few weeks ago, Industrial output falls as consumers cut back spending, and have been trying to decide what it is about it that I find so disturbing. I’m not targeting it as some sort of special case; in fact it’s one of hundreds of articles I’ve read saying pretty much the same thing. News program talking heads trumpet it all the time. Loosely, what’s good for your bank account is bad for the country. Borrowing money, it seems, truly is the American Way.
Do we actually believe that line of thinking, or do we just politely tolerate it? Surely we have to know better!
Now, I try not to do macro economics on this site, but it seems to me that this idea that the citizenry saving money is bad for the economy is some sort of article of faith that no one questions, at least in higher circles. And I don’t buy any of it!
From where I sit, it seems that the absence of savings is at the heart of our economic troubles. When a person has no savings, he lives paycheck-to-paycheck and is forced to borrow or turn to the government when he needs money in excess of his regular cash flow. In most households, this will happen most of the time—life’s just that way I suppose. But that conundrum is what gets the debt treadmill going, and once you’re on it, default is just a matter of time.
Multiply that by millions of households and you get…about where we are right now.
When were savings banished from “The American Way”?
I get what economists, politicians and business leaders say about the connection between spending and economic growth, but that mantra has been emphasized too many times in too many places and without serious reservation. The public has bought into it, and why not? After all, consumption feels good–and savings? Well…that’s kind of boring. It doesn’t fit with the media messages we’re getting, and besides, the experts and leaders say it’s bad for the economy. It’s our patriotic duty to spend!
If you’re addicted to spending, but you don’t have sufficient income to support your consumption, what do you do? You borrow.
I’ve even heard borrowing as a twisted version of “The American Way”. Some take comfort in reciting it just before signing on to a new loan or taking yet another swipe of a well worn credit card..I’ll just borrow to pay for it; after all, it’s “The American Way”. Really? Maybe that’s our credit version of “everybody’s doing it”.
By all accounts, borrowing IS a major part of life in America. We even have laws guaranteeing everyone equal access to credit. By contrast, no similar laws exist guaranteeing us equal access to food, electric power, heat, water or the internet. And millions continue to do without affordable healthcare – even doing so under penalty of law. What does that say about our priorities?
Despite the fact that millions have grown up in a world that only knows easy credit as a means of consumption, it wasn’t always true. Not even for most of our history.
There was a time when you only bought with “cash on the barrell”; or put another way, if you had to borrow to buy, you couldn’t afford it. Then there was “a penny saved is a penny earned”—early patriot Ben Franklin, I believe—but it sounds so quaint now, doesn’t it? And not so long ago when I was a kid, you’d almost rather fall on your sword than file for bankruptcy or enter foreclosure. When did all of that go away? Are we better off that it did?
How is a bigger bank account a bad thing?
Here’s where I have an issue with the experts: while it may be true that millions of people suddenly saving money will slow the economy, I think it’s just the kind of remedy needed to give us long term prosperity. Economists talk about credit as the magic bullet that juices the economy; you never hear them talking about savings rates. Perhaps they think they’re irrelevant.
For an individual, a fat bank balance is the very definition of prosperity. Rampant consumption is it’s hollowed-out, idiot cousin—a mere facsimile of the real thing. While too much money going into savings may be bad for the economy in the short run, it’s virtually the best thing any of us can do for ourselves and for the long term health of the economy.
Borrowing can juice the economy short term, but once people reach the limits of their ability to pay their debts, a crash follows—sound familiar? If the economy were filled with people living within their paychecks, stashing some for the future, and buying only gradually—but continuously—we’d have steady growth without all the painful recessions we’ve been having.
Slow, steady, predictable growth may not provide the buzz many have been getting from the short term credit induced bubble-booms, but they would allow us to make long term plans, and that can only help us, the economy and the country.
It was the kind of household budgeting that was going on back in the “good old days” of the 1950s and 1960s. Is it merely a coincidence that the US savings rate was collapsing in the early 2000s, just before the start of the financial meltdown? I doubt it.
On an individual level, having a large bank balance gives us options; we can…
- save up for major purchases, rather than borrowing
- use it as insulation from a job loss or some other crisis
- use to pay off debt (side benefit: being debt-free gives us more control over our paychecks, allowing us to save even more)
- choose to invest some of it, earning still more money
- use it to start a business (or to keep us going while we build up a cash flow)
- just sit on it and feel better about life.
If you have no savings, you may be doing your patriotic duty by helping the economy with borrow and spend, but you can’t do any of the above!
With a cash cushion to back you up, life becomes more predictable. You aren’t being battered by every missed paycheck or every unexpected expense that rears it’s ugly head. You can make long-term plans, long-term investments and build long-term prosperity for yourself, your family, your community and the country.
Is there anything unpatriotic about that?