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I recently read Robert Samuelson’s weekly economic editorial in Newsweek titled, “What’s the Biggest Threat to the U.S. Economy?”. To my surprise his answer was “a steep rise in personal savings”. I couldn’t believe it. I consider Samuelson too good of an economist to utter such an absurd statement. Does he not know that the low savings rate in the U.S. is the most serious challenge to the American economy? It has put the consumer in a straight jacket tied by the cords of exploding debt; it has resulted in the national need to borrow abroad at unprecedented levels, mushrooming the trade deficit and weakening the dollar; and worst of all, it will greatly exacerbate the upcoming baby-boom retirement crisis because of the anemic growth in American owned investment.
Then I reread the article. Samuelson did blame the current predicament upon the precipitous drop in saving during this decade which has acted as an “afterburner” to the U.S. economy this decade, but has left the consumer burdened with $13.4 trillion in consumer debt, 82% higher than in 2000. His worry is that the consumer excesses of this decade which have been partially stimulated by over-inflated asset markets (first tech stocks and then housing) cannot be sustained in the long run. Were the savings rate to rise back up right now to its normally pathetic 5% level right now, it would imply a “massive $500 billion” cut in consumer spending. That would be the making of a serious recession.
Yet, what is left out of the article is the equally serious implications of maintaining a zero or even negative savings rate. The longer we forestall the return to savings, the more vulnerable the economy will eventually be to a consumer correction and the more serious will be the recession such a correction would entail, much more serious than the consequences of the stock market crash of 2001 or the housing market crash this year. Still, he is correct in pointing out the dangers of a “steep rise” in savings right now.
The problem is that an increase in savings is the only way that America will be able to cushion the impact of the retirement explosion that lies ahead and the subsequent decline in workers per population. American productivity must increase at record levels in order for us to provide a modestly rising standard of living for workers and support the retirement of today’s baby-boomers. That increase in productivity can only occur with large amounts of U.S. investment which we Americans can make claim to. Investment in the U.S. does us little good if it is owned by foreigners, which is what has been happening over the past 10 years. If anything Americans not only need to invest in America, but in other parts of the world as well where the potential returns to that investment are particularly attractive. This can’t occur if we continue to consume more than we produce. Such a scenario requires us to sell off our assets instead and increase our debt obligations to foreigners. That’s not going to provide the “income” necessary to sustain our maturing demographics.
One reason for our national denial of this serious predicament is that inflating asset prices have given us the sense that we are saving, that is, our wealth is rising. Inflated asset prices are merely a pecuniary illusion, however. A doubling of home prices does not entail a doubling of the consumptive value we attain from housing, just as the quadrupling of tech stocks didn’t match up with the increased value of tech production. What really counts is the actual amount of goods and services we produce and can lay claim to. Rising asset prices unaccompanied by commensurate increases in “real productivity” will simply delude us into believing all is well and that we can easily weather the storm ahead. The only protection we can buy is to increase real productivity which will expand the national pie of consumer goods and services available for the enormous demand of the decade ahead. That requires increased savings.
The other reason why the need to increase savings has been ignored by both politicians and economists is the very predicament Samuelson points out - returning quickly to the even low savings rate of 5% could bring with it serious adjustment pains. Thus, we continue to pursue old Keynesian policies dependent on high consumption levels to forestall the inevitable.
There is an alternative, however - a planned, orderly return to more normal savings in which increases in government investment in infrastructure and private sector investment in productivity-oriented capital gradually replaces the lost consumption associated with a more responsible consumer. That will require policies that more aggressively stimulate private investment and a change in mentality regarding government spending. Right now, the political rhetoric is dominated by the ideology of reducing government spending, but what we end up doing is reducing government spending on real services and social infrastructure and keep allowing government transfer payments, entitlements, and future unfunded liabilities to grow. The government spending I have in mind to fill in the gap created by a gradual reduction in excess consumer spending is government investment in such things as roads, airports, parks and research and development that will provide lasting returns over the years. That along with an increase in private investment will help meet the needs of the new American economy of the next two decades.
Samuelson is right, a sudden uncontrolled return to a normal savings rate out of panic and fear could easily result in a serious recession. He just needed to add to the story the equally serious consequences of maintaining zero savings. Policies to bring us gradually back to reality are desperately needed and are needed now.
Dr. Barton Smith
Director, Institute for Regional Forecasting
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