Economists Are Still Hooked on the Myth that Saving Is Bad for the Economy
According to new data from the US Bureau of Economic Analysis, the personal saving rate in the US in September 2019 was 8.3 percent. That puts it near a six-year high, and comparable to the saving rate we saw during the early 1990s.
Indeed, the personal saving rate has been heading upward steadily for the past eighteen months. And that's a bit of an unusual thing. For at least the past fifty years, the saving rate has tended to increase when the economy is doing poorly, and decrease when the economy is doing well.
We saw this in the last 1970 and early eighties during the age of stagflation and the 1982 recession. We certainly saw it in the wake of the 2008 financial crisis, when the saving rate quickly rose from a near-low of 3.8 percent in August 2008, more than doubling to 8.2 percent during may of 2009.
But if the BEA's numbers are correct, that pattern appears to be over, and Americans appear to be more willing to save even when job growth continues to head upward.
This change could be a result of several factors. It could be Americans are less confident about their prospects for future earnings, even if the current job situation appears bright. Many could be less confident that the assets they do have will provide a cushion in case of crisis. For example, many Americans may have learned their lesson about the myth that "housing prices always go up."
The fact that these numbers are averages makes it especially hard to guess. After all, surveys suggests a very large numbers of Americans are saving very little.
For example, CNBC reported in January that "Just 40 percent of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings..."
A separate survey "found that 58 percent of respondents had less than $1,000 saved."
Regardless of who is doing it, however, increased saving can be a good thing for the economy overall. For instance, even if only the rich are the ones saving more, their saving increases the amount of loanable funds, decreasing the interest rate, and making lenders more likely to lend to riskier borrowers. That's good for farmers and small business owners.
Moreover, as the wealthy refrain from spending, they increase the value of cash held and spent by people at all income levels. For example, if the rich are spending less on restaurant meals and pickup trucks, this means the prices for those items are not being bid up as much. When the rich save, that means fewer dollars chasing goods and services, which can lead to more stable, or even falling prices. That can be good for many people at lower income levels.
Nonetheless, many mainstream economists continue to get hung up on the idea that saving "too much" hampers economic growth. For example, in a recent article at the Wall Street Journal titled "Americans Are Saving More, and That Isn’t Necessarily Good" Paul Kiernan writes:
if saving outstrips investment opportunities for a long time, some economists say, it can hold down interest rates, inflation and economic growth. Such “secular stagnation” may leave less room to cut interest rates, making it harder for the Federal Reserve to boost growth during downturns.
“Rather than being a virtue, saving becomes a vice,” said Gauti Eggertsson, an economist at Brown University.
This is an old story we've been hearing for years, and the idea that there is too much saving certainly received its share of promotion during the 2001-2002 recession, and during the 2007-2009 recession.
Economists do recognize that more saving helps increase loanable funds — and thus puts downward pressure on interests rates — and reduces inflation. But more saving does not, as they think, reduce real economic growth.
True, it might reduce economic growth as measured by government stats which mostly just add up money transactions. But properly understood, economic growth increases with saving, because the capital stock is increasing, making it easier for entrepreneurs to deliver new goods and services — and more goods and services — to consumers. As Frank Shostak explains, we need more saving to create more and better goods:
What limits the production growth of goods and services is the introduction of better tools and machinery (i.e., capital goods), which raises worker productivity. Tools and machinery are not readily available; they must be made. In order to make them, people must allocate consumer goods and services that will sustain those individuals engaged in the production of tools and machinery.
This allocation of consumer goods and services is what savings is all about. Note that savings become possible once some individuals have agreed to transfer some of their present goods to individuals that are engaged in the production of tools and machinery. Obviously, they do not transfer these goods for free, but in return for a greater quantity of goods in the future. According to Mises, "Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., temporary abstention from consumption."
The common view among many economists today, however, is that it's better for economic growth to make sure more people spend every last dime on trinkets at the discount store. Those who have been around long enough to remember previous business cycles will remember that this idea manifests itself during times of recession as pundits insist it's our patriotic duty to spend more, in order to create economic growth.
In truth, in a time like today, the best thing people can do is save more. We live in a time of multiple economic bubbles and non-productive sectors of the economy fueled by inflationary monetary policy. When recession finally does come, vast amounts of debt will never get paid back and immense numbers of "assets" held on balance sheets will evaporate. The result will be a lot of lost jobs and a lot of failed businesses. The only real cushion will be real savings which will be badly needed in a time of recession.