The Decline in Thrift & Deterioration of American Savings Rates

Economic metrics are awfully smart tools to paint a particular picture of the state of America with. For example, fingers are often pointed at current low unemployment and economic growth figures to suggest Trump’s effectiveness. But the truth is that the overall economic picture is not quite so lovely and ideal. Which is to say, there are some financial trends that we avert our eyes from and that are not particularly popular with politicians (and for good reason). Now, assessing the macro-financial state of our country is very tricky, especially considering the multitude of variables, the distinction between national and individual/household finance, and a rapidly changing economic climate.

On the one hand, standards of living purportedly have increased, GDP figures fatten every year, and as of recently unemployment has indeed hovered at record lows. On the other hand, our nation is saturated with increasingly high rates of debt, wages have been mostly stagnant, and savings rates have declined to threadbare levels. All this said, the full picture is frustratingly complex and in all honesty, it’s hard to know what data will be most instrumental to how we fare, as a nation and as individuals, in the future.

One of these metrics is a bit more hush than the others, however. And this is the deterioration of American savings. The paycheck-to-paycheck lifestyle is hardly confined to the exhausted overworked minimum-wage worker these days and instead, is applicable to a large swath of the middle class, who earn decent salaries and yet repeatedly struggle to cover mounting expenses with the cash deposited in their bank accounts every two weeks.

Roughly 1 in 4 Americans have no money set aside for emergencies and retirement outlays are dismal. Savings rates (percentages of disposable income set aside) hovered around 12 percent in 1970 and yet today they stand at a low 3–5%, depending on the source. A good question would be, how did this all come about and what conditions slotted into place to produce this outcome? And still some others may ask, even if this is all painfully true, do savings even matter? Why are withering savings rates worth shedding tears over at all?

Cultural Attitudes

Thrift was once a very prominent American virtue (and it’s hard to say the same in today’s environment). Nowadays, as far as many people are concerned, the concept of savings conjures up images of money uselessly sitting in a bank, stagnant and ineffectual. “Thrift” is not very popular (though that’s not to say that shopping bargains don’t have their usual glittering appeal, for instance). The notion of thrift simply does not retain the kind of moral cachet it once lay claim to, and furthermore, it appears to many to be a musty, old idea that has minimal current relevance.

The idea of it is even slightly mocked in our culture, and is imputed to curmudgeonly, pitifully fearful old people who are supposedly too cautious and economical for their own good. People are apt to chuckle at the image of the thrifty, penny-pinching elderly person for they lack the thrill of financial risk and seem parochial in attitude. Indeed, time and the cumulative effect of history have rendered changes, one of these a shifting perspective on the merits of socking money away.

While attitudes towards thrift have indeed moved from respectability and a signal of virtue to being faintly snubbed, this is far from the full explanation for the changes passing decades have wrought. Some commentators may remark that it is for sheer lack of self-discipline or willpower that Americans have failed to clutch their money for safekeeping instead of allowing it to be effortlessly extracted from their obliging hands. That is to say, they insinuate that it is moral erosion that accounts for this shift from prudent savings to reckless consumption.

After all, it is often popular, time and again, for those in society’s present generation to insist “character decay” is the explanation for a host of negative developments or national predicaments. But this is a sloppy insinuation. Tangible shifts in the nation’s economics play just as much a role as opinion shifts.

Skyrocketing Costs

A sizable portion of the explanation belongs to the highly inflationary nature of health care, higher education, and preset-day taxes. All of these expenses have steeply risen relative to income growth. Health insurance eats up truly demoralizing chunks of earnings and college has been nearly impossible for many without incurring large debt loads. Feeling pressed and pinched and pressured on all sides, some American families aren’t faced so much with a choice to save but instead, are faced with a rather small chance to save.

It’s worth mentioning that financial stress is deeply damaging to individuals and families and thus, the general social fabric. People grow unhappy in the face of prolonged uncertainty. And all this financial stress and uncertainty is coming from the government (for they affect all three of the areas previously mentioned, and you could even tack on housing as a fourth) who is in no respectable financial shape themselves. And so, it is no wonder that the government’s questionable balance sheet and interest-rate shenanigans would transfer to the microeconomic level — that is, to citizens.

Stagnant wages coupled with rising costs in key areas put a real squeeze on millions of Americans. They siphon off wealth and don’t leave much left to work with. You obviously cannot save money that you do not have to save. That said, many are still left with some sort of disposable income and it does appear that consumption tends to lay claim to those leftovers. Overall, the cost of living has increased in recent decades and yet other economic factors have not been marching in step synchronously.

Wage growth (of which is tellingly weak) is a real economic gain, meaning that it translates directly to individual gain. But we don’t have wage growth and haven’t for some time. Instead, we hear the proud, resounding proclamations of GDP growth. People think that because our GDP consistently mounts every year that that means we have a “healthy, growing economy”. But typically what that communicates is that consumption has ramped up and this simply cannot be thought of as an unquestionable net good.

This distinction matters because to consume, America has to borrow. Which means that the higher our GDP goes, it likely coincides with our equally rising rates of credit, both at the national level as well as the individual level, and this should actually be a cause for concern rather than celebration.

Popularity of Credit

Credit flows freely these days, and has for quite some time. The rise in available credit and a populace willing to seize it probably coincided with the financial proliferation beginning (in its early stages at least) in the 1980s. Whereas previous generations prized frugality and eschewed credit as much as they could, current generations treat it less as a crisis measure to be used at last-resort and more as a convenient tool that can be called upon with ease and frequency.

Credit card debt as well as student debt stand at historically high levels. When you look at the discrepancy between household earnings and household spending, there’s a glaring gap. And how could this be possible, to spend more than you have, particularly if your savings are paltry, if not nonexistent? In many cases, the large, but silent secret is credit and the implication is that droves of people are spending money they don’t have.

Many people dismiss as hopelessly old-fashioned the idea that credit is, to some degree, dangerous and that if you could, it’d be wise to avoid it. Often it is the case that these naysayers who embrace credit criticize the old-fashioned types to justify their own use of loans and reckless credit card activity and the various forms of debt unfortunately clinging to their person. People will always rationalize their financial decisions, after all, in a way that legitimizes their own money habits so that they do not need to question them or change them.

Ever since the post-war, fairy-tale 1950s decade of the capital-rich, economically-booming America, consumerism has been a main fixture of our culture. Consumer goods kept traveling into the hands of customers, credit cards continued swiping and houses accumulated ever-shinier and more innovative gadgets and appliances, even when our macroeconomic conditions started to go south. Hovering on the brink of debt and feeling financially stretched thin did not appear to deter many Americans from dipping into the credit pool. Lifestyles had to be maintained after all.

Living standards perpetually rose and new products angled their ways onto store shelves and pixelated screens and many people weren’t going to let the pesky limitations of having no money get in the way of them having what they wanted. Maybe we’re spoiled. Maybe many of us cannot stomach living within our means. And yet maybe we’re also being unfairly siphoned from, sapped of money from forces hopelessly out of our individual control.

I do wonder, however, if there is not an addictive quality to such hungry lurching towards credit. Credit is too easy and thus, a lure, and it has painful consequences if not handled with care. When people become accustomed to certain lifestyles, it is terrifically hard to get them to adjust their ways of life to something more in line with their financial reality, to something more within their means.

And what does “within one’s means” even mean to these people, for that matter? As far as they’re concerned, no such limitation really exists so long as someone will be standing close, itching to offer financing. We can’t assume that people will act in logical ways with their finances if easy credit, unnaturally sustained over years, is not logical itself. Think about it. (Remember, it is the government via tampering with interest rates that presides over the national availability of credit.)

Prioritizing Consumption

Earlier I mentioned that GDP was not a stellar indicator of financial health (and a little misleading) precisely because it merely conveyed economic output, which is heavily tied up with consumption. Investment and savings are the real engines of honest economic growth — not consumption. This has always been true. And yet, America runs on consumption. Which we then must admit, by implication — America also runs on debt.

The whole edifice would collapse were it not for spending money we don’t actually have. The idea (that we’ve appeared to latch onto and run with permanently) is that consumer demand should be stimulated perpetually. This is a Keynesian idea, but it’s actually a rather grotesque, radical extension of Keynes’ original desire to have the government/financial authorities stimulate demand only in recessions and encourage savings during boom times.

But it’s apparent that the Federal Reserve won’t want to relinquish its interest-rate manipulation anytime soon. In recent decades, beginning with Fed chairman Alan Greenspan, incentivizing consumption has been all the rage. (There are many reasons for this, one of them being its political popularity.)

Most Americans are blind to the fact that they are reacting to the Fed’s intentional prodding, that they are but cooperative participants in a mass project that is a bit of a mirage and that probably won’t ensure their long-term well-being. In fact, most all financial-realm public policy of the 21st century, and perhaps a bit before, has been in pushing consumption at the expense of stowing money away for one’s individual or familial prosperity. And there’s a reason for that…

An Inflationary Climate

Inflation makes her mark throughout decades of American history. She shows up again and again. By now, it is simply expected that prices will rise every year. We assume it is natural and grant it little thought. It warrants little but a shrug of our shoulders these days.

In effect, inflation is a kind of embezzlement of purchasing power. What is worth $1 today will probably be worth less than that next year. And so, by this logic, people aren’t incentivized to hold on to their money. Because why hold on to your money if the longer you hold it, the more its worth is just evaporating?

This is a partial explanation as to why savings are so seemingly unimportant to many people. But the government tends to do this on the purpose and in inflationary scenarios, it is they that make off with all that “evaporated wealth”. They want you to spend, after all.

In any case, an inflationary climate is also to blame for the dismally pathetic interest rates available on savings accounts and other traditionally worthwhile “static” investments such as CDs. Interest rates are a core reason for people saving in the first place and if interest rates are something like hundredths of a percent, why bother?

There is no one satisfactory reason for the decline of savings and thrift in America. A complex interrelation of forces are at work. The funny thing about economics is that tangible shifts correspond to surprising psychological alternations in the mass consciousness, so to speak. We don’t exactly know all the consequences of a deterioration of thrift in our society, but we’d best keep our eyes peeled and in the meantime, remember the wisdom of financial prudence.

Writer of economics, psychology, and lots in between.

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