US Personal Savings Hits 74-Year Low

Yesterday, the US Commerce Department reported that Americans spent everything they earned last year, plus 1 percent. That negative 1% savings rate (repeat: -1%) is the lowest in 74 years. A quick arithmetical and historical calculation shows that the only time it was worse was 1933, at the height of the Great Depression, when it was negative 1.5%. Back then, though, 25% of the workforce was unemployed, and it’s natural to go through savings when there’s no income. There’s no such excuse now.

The savings rate is a very simple calculation: personal income less taxes (in other words, disposable income) minus all spending. When the number that results in negative, it means one has spent more than one has earned. This has happened only four times in American economic history 1932, 1933, 2005 and 2006. In other developed countries, negative savings rates aren’t even within the realm of science fiction.

Economists give various explanations for the current situation, and the reasons only go to show that if all the economists in the world were laid end to end, they still wouldn’t reach a conclusion. Some on the Pollyanna side believe that stocks and other investments have performed so well (as had the housing market) that Americans feel little need to save. Those less enthusiastic suggest that the working classes and the poor are so far behind the 8-ball economically that they have no choice but to spend more than they make just to stay alive. The shrinking size of the middle class appears to tilt the argument to the skeptics.

As a society, this is a particularly worrisome development. The retirement of the Baby Boomers and what that means has been in the popular press for years. In short, 78 million Americans are about to retire and overburden America’s (admittedly rather stingy) welfare state. Since personal savings are evaporating, they will have to accept lower levels of benefits and/or sell off the stocks, bonds and houses. In the case of the former, it means a decline in the living standards of the average elderly American. That is, by definition, a bad thing. Worse, if those with means try to keep their well-to-do lifestyle by liquidating assets, a slump in those markets is guaranteed. And because this wave of retirements will take 15 years or so to run its course, that’s a lot of selling pressure for a long time adversely affecting the financial markets for the next decade or two.

In order to fix this, Americans simply have to spend less of their income. Yet in a society addicted to buying crap at the mall with money borrowed from Visa and Mastercard at 15% (and to tax cuts without spending cuts), that’s easier said than done. Sometimes, the hardest thing in economics has nothing to do with equations and everything to do with human urges. Those are much harder to change than prices.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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