Savings vs. stimulus

Posted by on September 20, 2010 @ 11:22 am in Personal finance

The current economic recovery is weak, but that’s hardly news. There are many explanations for this meager improvement, but perhaps one of the most telling is a large jump in personal savings in the United States.

Here’s what Americans have saved in recent years:

Personal savings rate

Imagine where we would be today if Americans were at their old spendthrift ways, saving only $200 billion a year. We might be enjoying a “private-sector stimulus” of over $450 billion per year—the difference between the 2010 and 2007 figures.* Americans would probably be spending more than half a trillion dollars on a wide range of goods and services in lieu of putting that money in (for example) CDs and other savings vehicles. The economy would be booming, relatively speaking, and unemployment would be falling.

I’m not suggesting that Americans should revert to their old behavior. Many long-term benefits will accrue from the new thrift. But a quick economic recovery is not one of them. This is the sad—indeed, tragic—truth.

It took a near collapse of the U.S. financial system for Americans to recognize that the prosperity of recent years (of many decades, a true pessimist would say) was built on a weak foundation of poor household savings practices.

And today, while households hunker down and rebuild their balance sheets, the near-term effects of reduced economic activity and destructive unemployment are clear.

* Technically minded readers will observe that personal savings in years past may have been low because spending was artificially inflated by debt financing, not simply by consumers spending more of their current income. For simplicity’s sake, I’m including both income (flow) and balance sheet (stock) effects.

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