Monday, August 11, 2008

Why isn't savings a hot topic?


The fiscal deficit is going to be over $450 billion and could get worse. The capital account is improving slightly but the debt we produce has to be bought by foreign interests.The Chinese are the key financiers of the US deficit. We are in a recession with tax rebates propping up the economy yet no one is discussing the issue of savings.

I just finished the book, Whatever Happened to Thrift?: Why Americans Don't Save and What to do About It? by Ronald Wilcox. It was a good introduction to the savings issue and potential solutions to get Americans to save more, but you come away from analyzing this issue with the belief that there are no quick fixes.

Explaining the lack of savings still requires a lot of work. The relative income hypothesis and the idea that credit has been socialized are good explanations but cannot provide a reason for why other countries still have higher savings even when they are provided a greater retirement safety net. The US cultural phenomena of being a consumer society is deeply rooted and seems to be a uniquely American ideal.

The incentive structures that can be used to increase savings involve changes in tax policy that would be significant by US standards. The solution lies in taxing consumption so there is a a desire to save. A consumption tax is very far afield form what any presidential candidate s thinking. Yet, tax reform cannot be fully discussed without bringing in the savings issue.

The most obvious way to provide for more savings is to provide incentives, tax breaks for those who do save. Unfortunately, those are the people who have more money! In the short-run, it is at odds with the objectives of other policies to provide tax breaks for the less wealthy and hit the higher income brackets.

We need a change in tax structure to allow for more savings but we will have to see the problem get worse before some meaningful change is presented to Americans.

2 comments:

Anonymous said...

Thanks for your review Mark. I hope you enjoyed the book. Let's hope that savings does indeed become a hotter topic.

Ron Wilcox

Mark Rzepczynski said...

It was a good book. A fast read on the topic which focused on the key elements of the savings issue. As noted, I am still surprised by our ability to understand the low savings rate. The cultural issue of saying that we are a consumer society is at best descriptive.

I do remember a book by Grant on the history of credit. He makes a good point that we have seen the socialization of credit through the extensive of credit cards for shopping starting with retailers like Sears.

I don't remember if you commented on consumer credit extension but one hypothesis would be that economies that have greater access to credit cards and consumer credit will have lower savings rate. Following that extension, countries where mortgage financing is easier to obtain or which require less down payment should have lower savings.

I know that you have focused on mutual fund research. It wold be interesting to see whether efforts by mutual fund companies have been successful at raising the savings rates for their customers through their marketing efforts. You mentioned some of the behavioral literature which focuses on 401K choices, but can mutual funds get more "consuming" of savings as a good?