Over on the New York Times' Economix blog, Catherine Rampell has a good piece explaining that America's saving again, but still less than it has in the past. She includes the following graph demonstrating this:
She makes the point that this graph shows our saving rate is high compared to the last 30 years, but still relatively low compared to the period before that. I think it could be interesting to think about why that might be.
There's one reason I hear over and over again. Over the past few decades, Americans have been very concerned with keeping up with the Joneses. As a result, they've been spending every last penny they've got on fancier cars, bigger TVs, newer iPods and anything else advertising executives can convince them they need. But now that things are bad, they're worried about the future, so they're saving. Besides, the Joneses are unemployed anyway.
This explanation relies on the assumption that we've become a society of instant gratification and have little concern about the future. As a result, we want to spend our money immediately, rather than save. Yet, if that were the case, then why would a recession make us save more? If we never cared enough about our future before to save, why now?
I'd propose that we may have taken the future into account after all, but our expectation about the future has changed dramatically for two reasons.
First, many people were assuming they could one day cash out their house and retire. Since housing prices have plummeted, that's a lost hope. The home-as-a-nest-egg philosophy is probably gone for good: as investment returns for homes settle back into a more reasonable 2% to 3% per year pace, people will look for better returns on their investments.
Second, Social Security becomes more uncertain with each year that passes. And when our national debt expands by several trillion dollars in the course of a few years, Social Security's fate looks even worse. Social Security has long been a political hot potato that each Congress and President throw to their successors. Eventually, however, it will have to be dealt with. Now, more than ever, it seems like Washington will have to soon raise the age limit significantly or decrease benefits. With Social Security less certain, people will have to rely more on savings for retirement.
One, both or neither of these explanations could explain the recent surge in saving. Despite CNBC commentators constantly complaining about our savings rate going up, I think it's a good thing. Whether it's for the reasons I suggest or not, I think saving more is a rational action because of those reasons.
If people have more money saved, they don't have to worry as much about their homes' values or rely as much on the government. Sure, it may lead to less consumption in the short term, but I'd rather the recession last a little longer in exchange for a brighter future because of that saving.