Curious Capitalist

You’re Spending Too Much!

Why saving -- not spending -- is what the economy really needs.

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The U.S. economic recovery has, by many metrics, been gaining steam over the last few months. The most recent job numbers were stellar, consumer confidence is as high as it’s been since the financial crisis, and the real estate upswing continues. Yet there is another side to this story. Consider that while more Americans are debt free than they were in 2000, those who do carry debt have 40% more than they did back then, according to the Census Bureau. This is in large part because debt carried by vulnerable groups, like seniors and students, has burgeoned.

These topics were very much on the front burner at the Aspen Institute summit on financial security, which I attended last week.  The conversation was an unusual one in economic terms, because it focused on consumer saving, rather than spending. We live in a consumption economy, after all. Most of the time, when we hear that retail sales and consumer spending are up, we cheer – because 70% of our GDP growth is determined by what you and I buy.

But over long periods of time, low savings rates are ultimately associated with lower national investment and lower growth. Consumer spending today may bolster the economy in the short term, but it can actually cut into growth over the long haul if it depletes funds available for investment in the economy. Individuals’ savings, deposited in banks or poured into asset markets, gets funneled back into the economy via loans and capital purchases that allow companies to grow and expand and hopefully to hire better skilled workers, ultimately increasing GDP growth. “While increasing savings might dampen consumption in the short term, it can increase future consumption through the higher incomes it generates,” according to a report entitled “Savings in America,” co-authored by the Urban Institute and the Goldman Sachs Institute.

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A lack of savings can also inhibit growth-stimulating risk taking. Urban Institute senior fellow Gene Steuerle believes one key reason for the declining number of jobs being created by new businesses is that people have exhausted their personal savings (which are used by most entrepreneurs, in lieu of loans, to fund small business).

Right now, our savings rate in the lowest since the Great Depression, and growth is also sluggish. Together, these factors might argue for a higher national savings rate. The problem is that the U.S. tax code is set up to reward spending over savings. It dramatically favors debt over equity, as evidenced, for example, by Apple issuing bonds to raise money for investment rather than repatriate overseas funds; and the fact that the majority of benefits from, say, the home mortgage tax deduction flow to middle and higher income people who are buying McMansions — after all, the larger the house, the bigger the tax savings.

But even the well-to-do may have to sell their homes to fund retirement. Historically low savings rates, combined with the end of traditional pensions, mean that many Americans not only have no emergency fund, they have no long term retirement plan. A 2012 study by the EBRI found that a third of American aged 45 to 54 had saved nothing for retirement. And many who have saved will end up dipping into 401(k)s to send children to school or care for aged parents.

All this has spurred a number of policy makers to start pushing a variety of new ideas that are designed to spur saving rather than spending. The state of California, for example, has passed a bill creating the California Secure Choice retirement savings program, which would establish automatic retirement accounts for the 60% of workers in the private sector who don’t have access to a company sponsored retirement plan. Other states are looking into child savings accounts, modeled on a British program which gives every child $500 at birth. (Children with savings accounts in their own name are six to 10 times more likely to attend college.)

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Meanwhile, Steuerle and many other policy wonks are pushing for a rethink of the tax code that would help support low-income savings, rather than higher income spending. “Savings is non-ideological, and non-partisan,” says California state senator Kevin de Leon, who sponsored the state’s retirement bill. “To me, this is a national security issue.”

As the bifurcated recovery gains steam, and a larger group of Americans feel left behind, he may well be proven right.

cat_plus_plus 1 Like

Except that saving is bad for economy. Imagine if you had freedom to spend 90% of your paycheck fully each month, only saving  ahead for big purchases or reasonably anticipated expenses like car maintenance. You would then eat out in restaurants, hire a gardener/babysitter, donate to charities and do countless other things that benefit your local community. Today you need to figure that you MIGHT get cancer or you MIGHT eventually have children that will need college education or MIGHT live till 100 and need to stretch your 401K. If you are responsible person, you can pretty much never live up and spend. But everyone doing this collectively chokes the economy, especially innovative sectors making products which are not 100% essential or have higher than bare minimum quality and aesthetics. 

If all of these "MIGHTS" were covered by our collective civilized government and society and people only had to save for reasonably anticipated expenses, economy would be much stronger and less concentrated to outsourced manufacturers of cheap essentials like Walmart.

DogDancer 1 Like

How much can we save when wages are flat and all costs have risen -- groceries, gasoline, clothing, healthcare? What hasn't increased in costs? The median household income is *lower* than it was a decade ago. The U6, the more accurate unemployment rate shows the June level to be more than 14%. The rate is much higher within youth segments, and jobs available now are increasingly ones that pay much lower than jobs held by those prior to becoming unemployed. This during a time of record corporate profits in which the fruits of workers' labor and increased productivity are being shared only with major shareholders not with workers. 

If "rethink of the tax code" means changing capital gains taxes and increasing taxes on upper income brackets to levels prior to the Bush tax cuts for the rich, and incentivizing corporations to pay higher wages -- a question of how since many pay few taxes already -- AND lowering taxes for the bottom tax brackets, then perhaps we'll see more savings. 

MichaelSweden 2 Like

The US is in an economic depression. The public and private and public consumption is the engine of the economy. Your spending is my income. There is a mutual interdependence. If people and the government start saving in this situation, the country will be cought up the paradox of thrift. The more you save the poorer you will become. The US and much of the world can not afford not to use it's workforce in a productive manner. Ernst Wigforss, the minister of finance in Sweden, asked the key question already in 1932: Can we afford to work?

If the US and Europe continue and increase it's efforts to save, the effect will be similar to switching off the engine of an aeroplane during take-off. Their economies will crash and burn.


@MichaelSweden I agree with you. However, I don't think the article here is exactly saying the old argument that we need more saving overall. Rather, I think the major distinction being made here is that individuals need to save enough for themselves personally, to have savings for retirement, and because the financial security that a little savings on hand brings to people makes them more able to take the risk of starting a new business.

I think we can probably both agree that the lack of spending in the economy is not due to the little guy spending too little. Maybe in the short term, since they've been forced to spend less, but at least in the long term, they are spending everything they can afford to, and sometimes more.

MichaelSweden 2 Like

@timofmars @MichaelSweden No, the whole article is about policy decisions for the whole economy. Also it proposes for example: "Consumer spending today may bolster the economy in the short term, but it can actually cut into growth over the long haul if it depletes funds available for investment in the economy."

This argument is wrong, if their is low activity in the economy, there will be little investment. And there will be low activity in the economy if the consumption is kept lower than it should be by saving.Thus poliicy decisions NOW should focus on increasing consumption. For the reasons I just wrote about above.

One important reason that people do not save in the US: The work force is very productive and work very long hours, they put in their lifes blood to get the job done. Before the american worker got a share of the profits when he or she was productive whereas during the last decades they dit not. The value of the increased productivity went to the owners to a much higher degree than before. In short, the american work force is underpaid, they therefore don't save.

And why don't they get their share of increased productivity? They don't have any unions, you can not put demands on a corporation by your self. The union busting has been sucessful, very harsh methods have been used. To the detriment of the USA.

And thank you Goldman Sachs, I don't think we need any more advice from you guys, first, they pressed for deregulation of the financial markets, then they literlally made the financial market into a casino. They should have gone bust, if the tax payers hadn't saved Morgan Stanley.

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I know the fed is pushing interests rates as far down as possible, but if there were a demand for investments, wouldn't it raise interest rates and/or cause inflation?  Neither is happening. 

So if there were an upswing in savings, wouldn't that cause interest rates to drop further along with a drop in spending (and therefore wages)?  

I can see the case for increasing savings long term, but doing it now seems like it would be a disaster.


Of course, we ahould have money to spare in order to save and also the interest rates for savings deposit make it worthwhile.


@robertyo7304 With interest bearing savings accounts running about 350% under the current rate of inflation (Savings interest: <0.1%, inflation: 3.5%), you WERE being sarcastic, weren't you?

AlexanderRichey 1 Like

The reason that people are not saving is that wages are depressed. We'd all love to save more money, but we can't afford it until we are paid more.


Because if there's any institution that we've learned we can trust with our money, it's the banks.  


roknsteve 1 Like

Another pipe dream.  The whole system is stacked against saving.  Industry wants to pay workers less and less.  And banks and saving institutions want to game the system and steal all they can from the people.  Go smoke some more crayons. 

Adam_Smith 2 Like

Yes, the whole system is stacked against savings -- that's the point. We need a systematic reform. One of the important ways debt financing is favored over equity and retained earnings is the tax deductability of interest. This should be eliminated and compensated for with a reduction in corporate tax rates to be revenue neutral. This would "punish" companies that rely on debt over equity but that is exactly the intent. It also makes sense for dividends to be taxed only once, either as before tax earnings or as income to share holders but not both. If you look at all the different ways tax policy favors debt over savings it adds up to a tremendous pro-debt bias which to me spells economic distortions, misallocations of capital and periodic bubble bursts which can only be delayed and magnified by monetary policy rather than eliminated.

tom.litton 1 Like

@Adam_SmithWouldn't it make more sense to incentivize investment spending instead?

If there were more demand for investments, then that would put upward pressure on interest rates, which would incentivize savings.  

If you just incentivize savings and not investments, then the money would just sit in banks and do nothing for the economy. 

It's advantageous for individuals to save.  For the economy as a whole, it's only advantageous if there are others out there that can put the money to better use.  Otherwise your just reducing spending (and therefore wages).


@Adam_SmithDeductibility of interest for businesses makes sense. It's an expense, like any other expense, which are all deductible because they are not profits. I would say that deductibility of interest on debt is more neutral than favoritism. You could easily say it'd be penalizing to have it not be deductible, unlike other expenses. But this is all a moot point, since the issue here is debt levels of individuals. I'm not aware of business debt levels being a problem. On the contrary, businesses taking on debt is something that is financed by the savings of individual (and the argument here is that we need more investment like that from people saving).

Also, I disagree with the idea that taxing dividends twice is the problem. The vast majority of income from dividends and capital gains go to a very small portion of wealthy people. These taxes hardly factor into the incomes of average people who simply don't earn enough from dividends and capital gains to even be noticeable against the income they earn from wages. And people who aren't savings aren't even considering the tax rate on passive income in their decisions. Lowering these tax rates isn't going to make them save more.


@Adam_Smith @timofmars The reason to object to lower tax on dividends is because it'd mainly benefit the wealthy. They are already investing what they have, and now would have even more to invest. And because the lost tax revenues must be made up elsewhere, it would most likely be made up in some way that hurts the average person.

The article here is calling for more saving from the little guy because (A) it's a societal problem where people can't take of themselves in the future because they have no savings and (B) a little financial security allows people to take risks like starting a small business or to get an education. This is a different argument than the blanket "we need more saving to fix the economy" argument, which I think is very wrong.


@timofmars @Adam_Smith If they were treated as income, then dividends and capital gains would be taxed significantly heavier than they are now.

The only real gotcha is if they are paid to people outside the US.  Then what?  Are they not taxed at all?

Adam_Smith 1 Like

@timofmars @Adam_Smith I am well aware of the rationale for destructibility of interest. It is an expense -- but not like any other expense. It does not directly purchase materials or equipment or land. It does not directly hire labor. It buys the use of money which, like revenue from sales, can be applied to any corporate purpose including paying real costs of production but unlike sales revenue it is untaxed. There is no law of nature or economics that states it must be tax exempt. That is purely a political decision. As for dividends, the point is to make them more attractive and important but if you think the effect will not "even be noticeable" then why object? These suggestions in my post are not intended to be the exclusive means for reducing the role of debt in financing and encouraging saving. There is more that could be done as well.