A Return to Saving

Americans could not have gotten the timing worse. During the three booms of 1983-2007 the economy grew well, and by the end of the period the first baby boomers had reached their peak earning years. Yet households’ saving rates fell almost to zero in 2005-07. Meanwhile the government ran record deficits, reducing national saving even more (in the 1980s and 2000s; the only surpluses were at the end of the 1990s). It is ironic that the pro-capital orientation to the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 was largely sold as an incentive to increase saving and investment, and yet household saving fell sharply subsequent to both policy changes — let alone national saving. The increase in the after-tax return to saving did not lead to a “return to saving.”

The saving rate could only rise, from its very low pre-crisis level, even if the timing has been awful. Incidentally, that the first substantial increase in American saving rates in 30 years has come in response to the worst recession in 70 years should put a nail in the coffin of macroeconomists’ practice of lavishing attention in their models on the mathematics of intertemporal optimization. (But it probably won’t.)

Presumably the magnitude of the current economic dislocation is teaching many blind-sided individuals the value of precautionary saving. We certainly will need further increases in saving as soon as the recession is over. But have we seen a major permanent change in Americans’ anti-saving culture? I fear not. Even now, it does not occur to people that it is desirable to pay cash for auto purchases or other consumer durables, or eventually to pay off their mortgage when possible. Even now, it does not occur to any politicians to change the pro-housing bias in the tax law, by eliminating the tax-deductibility of mortgage interest for example. Moreover, the very first baby-boomers have now started to retire. Increasingly, the higher saving rate of those who see retirement looming ahead (many of whom now “have religion”) will be counteracted by the dis-saving of those who do retire.

The same thing will probably happen in other countries. Indeed, in Japan, which reached the retirement bulge first, the saving rate fell correspondingly. Europe and China will probably follow. I declare the end of the “global savings glut.” Real interest rates will have to rise.