At a press conference in early 2009, President Obama was asked how stimulating consumer spending would fix a recession caused in part by excessive consumer spending -- especially at a time when households needed to save in order to repair their balance sheets.
"[T]his economy has been driven by consumer spending for a very long time," the president responded. "And that's not going to be sustainable. You know, if all we're doing is spending and we're not making things, then over time, other countries are going to get tired of lending us money. And eventually the party's going to be over."
A valiant attempt to answer a tough question. Not that we can blame him: The inability to answer this question sensibly is a centuries-old problem. John Maynard Keynes called it the "paradox of thrift": When everyone's saving, they're not spending. When they're not spending, there's no income. And when there's no income, there's no saving. Chase tail until satisfied.
Where it matters
The real issue is this: How have saving and spending habits changed since the recession began? And what impact will these changes have on the economy? That we can answer coherently.
There's been a long-term decline in average savings rates over the past half-century:
|
Period |
Average Savings Rate |
|---|---|
|
1960s |
8.3% |
|
1970s |
9.6% |
|
1980s |
8.6% |
|
1990s |
5.5% |
|
2000s |
2.9% |
Source: Federal Reserve.
That all changed around 2008. As soon as the recession scared us silly, savings rates spiked:
|
Period |
Average Savings Rate |
|---|---|
|
Q3 2008 |
2.2% |
|
Q4 2008 |
3.8% |
|
Q1 2009 |
3.8% |
|
Q2 2009 |
5.4% |
|
Q3 2009 |
4.5% |
|
Q4 2009 |
4.6% |
Source: Federal Reserve.
Big whoop
Now, an increase of one or two percentage points might seem trivial. But remember: This is a $14 trillion economy. The dollar amount difference between 2005's saving rate and 2009's saving rate is nearly $400 billion. That is, we saved $400 billion more last year than we did in 2005. When you think of how large $400 billion is, it becomes clear why a multiyear $800 billion stimulus package is scarcely more than a small bandage. And it becomes clear why companies like Home Depot (NYSE:HD) and Ford (NYSE:F) saw sales get absolutely crushed compared with 2007.
To be more specific, the finance blog Calculated Risk ran a regression model to measure the impact an 8% savings rate (the long-term average) would have on GDP growth. It found that 8% savings suggest "that real [personal spending] growth will be about 1% below trend per year."
Again, 1% "below trend" doesn't sound horrific. But over the past several decades, GDP growth has been exceedingly reliant on personal spending. Even in the boom years of 2006 and 2007, the personal spending component of GDP typically added between 1% and 3% to the final growth figure. Hack out one percentage point from the effects of increased saving, and you've got an economy with a growth rate approaching bupkis.
Look down the road -- way down the road
There is, however, room for hope. For starters, increased savings have a fantastic impact on companies that help us save money. Costco (NASDAQ:COST), Wal-Mart (NYSE:WMT), and even McDonald's (NYSE:MCD) are three such examples. The cheaper we are, the more we open our wallets to these companies. Maybe that's the paradox of the paradox of thrift.
But where optimism abounds regarding the savings rate is the impact it has long term. More saving means more capital for investment -- itself a source of higher GDP growth. It means less reliance on foreigners to fund budget deficits -- probably the single most important issue of the next several decades.
It means an economy less susceptible to booms and busts. It means a retirement community less dependent on market returns. It means a consumer less beholden to the gods of Visa (NYSE:V) and MasterCard (NYSE:MA). It means lower long-term interest rates. No one can argue that these aren't tremendous benefits to the economy. And they'll ultimately lead not just to higher growth, but stable, sustainable growth.
Granted, these wonderful days might be years away. No, they almost certainly are. But perhaps the biggest paradox of all is that what's killing the economy today is setting us up for a much happier economy down the road. A small reason for hope, but we'll take anything we can get these days.
Thoughts? Share away in the comments section below.
