killer buffalo

Four years ago, America’s personal savings rate—the percentage of annual income not exhausted on personal consumption that year—dropped below one-percent, not to rise above that point until recession frightened people into survival mode in the second quarter of 2008.  In the third quarter of 2005, the national savings rate had found an all time low: -.7%.  Americans spent more money that quarter than they earned.

It’s a fact that American’s need to save more.  For decades insufficient personal savings has starved the economy of investment, giving venture capitalists—those who have the money in the private sector—unreasonable power.
Insufficient personal savings has made welfare programs like Social Security’s Old-Age Insurance and Unemployment Insurance necessary despite that they provide a service that people could easily provide for themselves, and has exacerbated the country’s periodic recessions through the increased savings that they cause.

In the context of the macro-economy, personal saving ought to be accomplished during periods of growth, when consumer demand isn’t needed to drive the economy.  Economic contraction, however, ought to be accompanied by increased spending—less saving—or what economists call “stimulus.”

For most individuals who don’t base day-to-day decisions on their macro-economic concern,  the opposite happens.  When wealth is expanding and job security is good, savings falls—just as it did during 2005-2007.  On the other hand, the uncertainty of economic decline hits the savings trigger, and consumers begin hoarding the bi-weekly paycheck.

Such a phenomenon has forced governments of developed countries to pursue counter-cyclical policies—increased spending and lower taxes during recession and decreased spending during periods of positive growth.  And it’s this idea of bucking the business cycle by working against it that led to President Bush’s tax cuts in 2000, the Economic Stimulus Act of 2008, and the Troubled Assets Relief Program (TARP) also of 2008.

And yet we’re still in recession; GDP fell by 3.8% in the last quarter and unemployment jumped in March to 8.5%.  The good news is that Americans are saving—in fact they’re doing so at a rate near 4%—but as consumers are also prone to doing, they’re saving when it’s most important to spend.

Indeed the Economic Stimulus Act that was passed in February of last year was more than just a failure; it was a case study on how not to legislate stimulus. Instead of looking to employing laid-off construction workers, of which there were many resulting from the subprime mortgage crisis, the bill provided $300 to $1,200 tax rebates to low- and middle-income Americans.  What the 110th Congress didn’t predict when they wrote the bill, and President Bush when he signed it, was that Americans would save that money.

When economic depression looms, people’s marginal propensity to consume (MPC), the percentage of disposable income that they are likely to spend falls, which means if you give a mouse a cookie, you better hope there’s no recession going on; if there is he’s going to hide it and save it for later.

President Obama has aptly pointed out that because people have a higher MPC when they are employed, ensuring that troubled companies survive and using tax dollars to provide jobs to more Americans will stimulate the economy more effectively than cutting taxes.

If all goes well, Mr Obama’s new pick to head up General Motors, Fritz Henderson, will manage to save the company even if that means entering bankruptcy court.  Perhaps Mr Obama may even avoid nationalization in the financial industry.  Whether or not he does, he at least realizes that nationalization could be necessary, that is, that those finance jobs need to be saved.  The rest is up to Treasury Secretary Geithner.  Mr Geithner: no more case studies.

-David Lamb

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