Will More Saving Help or Hurt the Recovery?
Many economists have lamented the news that credit card delinquencies are declining and Americans are saving more. They say that consumers and businesses need to spend-spend-spend to strengthen the recovery. Garett Jones, an economics professor at George Mason University and a member of the Mercatus Center's Financial Markets Working Group, disagrees. While he understands the Keynesian argument for additional spending, he sees greater benefit from fiscal responsibility on the part of consumers, businesses, and the government. I interviewed him about his views.
Me: You theorize that fewer delinquencies will be interpreted as meaning Americans are more trustworthy borrowers. How does that translate into a better economy?
Jones: It means that banks are going to look at people, and say, "Hey, I'm willing to lend to you. I think you keep your promises more than you did a year or two ago." With falling home prices, banks were wondering if everybody was going to start defaulting, and when they started doing that they were wondering if people who had started defaulting on their mortgages were going to stop paying their credit cards too. I think there was a lot of uncertainty about what it would all mean. People are cleaning themselves up now, so now banks can go through and pick through the wreckage and say, "Okay, these are the people who are behaving and these are the people who aren't"
So, in essence it's kind of a bit more certainty about how consumers are treating their obligations compared to how they did in the past?
Yes, there's probably both more certainty in terms of them being able to separate the sort of people with good prospects from people with bad prospects, plus the fact that, on average, people are getting better. That, by itself, just makes banks more willing to offer credit cards with higher limits.
Along with fewer delinquencies, we're also seeing Americans paying down some of their debt and saving more. Is that also going to have a positive effect?
I always remind my students that paying down debt is just another form of saving. In the simplest Keynesian world, saving is bad in the very short-run. But we're three years into this crisis, so I don't think we're in the short-run anymore. I think we're back in the world where saving is pretty good news for the next 18 months to two years. People are giving resources to banks; people are giving resources to their mutual funds; and those funds are going to wind up somewhere.
Many economists think if Americans spend more, then the recovery will be more robust. Does the benefit of more saving outweigh that of additional consumer spending?
Yeah, I think it does. On some level we're going to have to be financing our own deficits more over the next few years. Larry Summers was making this point right around the month when Obama was elected. He was saying we're going to have to become an export-oriented nation. We're not going to be able to borrow as much from overseas. There's going to be a lot more do-it-yourself on the savings side. We can't rely as much on foreigners. I think that's a perfectly reasonable guess. That's something he's been right on. So we're going to have to do the savings ourselves because we can't rely on other countries wanting to lend to us as much.
Are there any historical examples of an economic recovery where more saving had a positive effect?
That's just normal. I can't really point to any example, because it's a normal thing that happens after a recession. Recessions are usually balance sheet shocks. They're really something that messes up the balance sheets of households and the balance sheets of businesses and the balance sheets of banks. This time around, businesses got left pretty unscathed on average. It was banks and households that got hit hard. And they're cleaning up their balance sheets so we can all look like good dates. We're all cleaning up our match.com profiles.
Right! Does the value of fiscal restraint extend to the government and municipalities as well?
The state and local governments are going to have to do it, since they're not getting bailed out. I'm enough of a Keynesian that I think having the government borrowing when the rest of us can't is a good way of smoothing out the bad shocks. But we're at the point now where the gap between what's coming in and what's going out looks like it's going to last for a decade plus right now, $8 trillion over the next few years of extra deficits. That's more than the market wants to see. So I think the U.S. government needs to start behaving trustworthy, and that's why having a deficit commission is not just a bunch of window dressing. It's really important.
Got it. Anything else to add?
If I could add one more thing about the nature of cleaning up these balance sheets and the falling delinquencies. There's been a lot of attention in the last few days about how corporate profits are at a surprisingly high level. What the credit card stuff is showing, what the fact that people are paying off debt is showing: it's showing that households are doing the same thing as corporations are doing. There are a lot of people fretting over the fact that companies are sitting on a lot of cash. If they're fretting about that, then they should probably spend some time fretting about the fact that households are sitting on a lot of cash. But they're both doing same thing, which is trying to look better.