Post by: CNN's Amar C. Bakshi
February 16th, 2012 09:00 AM ET
Courtesy Of "CNN"
Amar C. Bakshi: U.S. household saving rates peaked in the 1980s at around 11 percent, and by 2005, they had plummeted to near zero. How did America go from a nation of savers to a nation of consumers?
Sheldon Garon: Well, in fact, before World War II we weren’t a nation of great savers. We were a nation of OK savers. Those who did save, saved a lot. But as late as 1910, most Americans didn’t have a savings account. Unlike Europeans and Japanese, they lacked access to savings institutions that would accept very small deposits—such as savings banks and postal savings banks.
But then in the two World Wars, and particularly in World War II, the federal government intervened to encourage ordinary people to save in ways the Europeans and Japanese were doing at the time.
The U.S. government undertook two innovations. First, it introduced U.S. savings bonds right before World War II, and they became very popular and very accessible during and after the war. So that was one of the ways people saved and became good savers in America.
And the other way was the Federal Deposit Insurance Corporation, introduced in 1934, which guaranteed the deposits of small savers in most American banks. So during the Great Depression and after World War II for several decades, we saved at pretty good rates - between about 7 and 11 percent, from 1946 to the 1980s.
Then in the 1980s, Americans stopped being good savers - at first slowly and then very rapidly in the 1990s, particularly as housing and consumer credit became available to Americans in amounts unlike anything seen in the rest of the First World.
First, the credit card industry was deregulated as the result of a 1978 Supreme Court decision. Now able to impose any interest rate they pleased on unpaid balances, credit card firms aggressively expanded their customer base beyond the affluent to target middle and lower income households. By the 1990s, most Americans held not one but several credit cards, and more than half of those cardholders carried unpaid balances.
Second, home equity loans—which had heretofore scarcely existed—exploded. This occurred after the 1986 tax reform made home equity loans one of the few types of credit in which interest remained tax-deductible.
From the 1990s to 2005, homeowners borrowed more and more against their equity as home prices skyrocketed. Americans essentially stopped saving. Why save when you could borrow so easily?
This reliance on easy money came to a crashing halt when housing prices collapsed in 2008.
Why the Great Recession Didn't Change American Behavior
Amar C. Bakshi: U.S. household savings increased after the shock of ’08, but then it dipped again. If the financial crisis of ’08 didn’t get us to save more, what will?
Sheldon Garon: Yes, that’s a very good question. Initially after the 2008 financial crisis and housing meltdown, there were all sorts of media stories that said that Americans were returning to frugality or adopting a new frugality and that savings rates would go above 10 percent.
And, indeed, briefly, for a couple of years after the 2008 crisis, Americans actually increased their savings compared to where they’d been. Personal savings rates went up to about 5 to 6 percent.
But in recent months, the savings rate has trended downward, falling below 4 percent (in December, it rose a bit to 4 percent). Those are not very impressive savings rates.
It is interesting that the crisis didn’t really get Americans - ordinary Americans - to start saving again, partly because so many Americans are now trapped in debt. While more affluent Americans were able to increase their savings rate easily, those in the middle and lower income strata have made efforts to reduce debt, but they are so indebted and have so little savings that it’s been difficult for them to significantly increase saving.
The Composition Of U.S. Household Debt
Amar C. Bakshi: Let’s talk about household debt in the United States. We hear a lot about government debt, but household debt is even bigger. What is the composition of this debt? Credit card, housing, education? How does the composition of our debt compare with other countries?
Sheldon Garon: Well, we tend to have very high debt levels relative to our disposable income. The lion’s share of this is housing debt: people’s mortgages, their first mortgages, but also their home equity loans—that is, their second mortgages. So if you take both of these housing loans, they amount to by far the largest portion of American debt. Then you throw in credit cards, etc.
Another big expenditure is what we have to spend on health, either by paying health insurance premiums or, for those people who don’t have good health insurance, what they pay out of pocket. Health is a big component of our consumption. But housing is the really big component of debt.
Amar C. Bakshi: Now we hear politicians across the political spectrum sounding the alarm about America’s national debt. To what extent does America’s low savings rate at the household level contribute to the problem of America’s national debt? Are they separate phenomena or are they related?
Sheldon Garon: They tend to be fairly separate. You can go country to country and find all sorts of different combinations. Japan and Italy have very high levels of national debt as a percentage of their GDP, and yet both countries have very good situations when it comes to household saving.
Sometimes it’s said that the Japanese can support a higher national debt because the ample savings of the Japanese people easily finance that debt. So the cost of servicing national debt in Japan is actually quite low because of the high household savings rate.
In our country too the cost of servicing the national debt right now is fairly low, not because of our household savings, but because of savings coming from the rest of the world – especially from East Asia. And the Europeans, to a lesser extent, are also financing our national debt and making it relatively cheap. So there really isn’t that much correlation between household debt and national debt.
Why Asia Saves
Amar C. Bakshi: Turning to China and Asia, a lot of people explain high Asian savings rate in terms of cultural factors. You don’t. You disagree. So what policies have Asian nations, particularly China and Japan, undertaken to spur personal savings?
Sheldon Garon: It’s true that I don’t think culture is as important as we think it is, at least if we’re treating culture simplistically and saying there’s an Asian or a Confucian culture.
In Japan, historically, from the end of the 1800s, the Japanese actually emulated what Europeans were doing to promote saving. They adopted various European policies such as savings campaigns and school savings programs. In particular, the Japanese introduced a British-style postal savings system, where you could bank at any post office that would take any deposit, no matter how small.
China is an interesting case, because under Chairman Mao, from 1949 to the 1970s, we would have never said that Chinese culturally save a lot. First of all, there wasn’t much money, but also there was a very low savings rate of not more than 1 or 2 percent – well below American savings rates at the time.
And then, with a change of institutions after Mao’s death, the Chinese regime established various banks and a post office savings bank in the1980s. All of a sudden, tens of millions, even hundreds of millions of Chinese gained access to savings institutions, and they began to save a lot.
So it really seems to be a story more about institutions than about “culture.” We have thrifty Europeans, and we have thrifty East Asians. They have very different cultures. And yet they save in similar ways and with very similar institutions.
Why Europe Saves
Amar C. Bakshi: Let’s focus on the European case. European welfare states, in theory, should promote less savings, because people have a fallback option – the state. You’d think in the United States, with a slightly weaker social safety net, people would save more. So why is economic theory wrong here?
Sheldon Garon: Well, economic theory, in this case, is more or less dead wrong. Since the 1970s in American economics departments, it’s been gospel that if you have a Social Security system—what’s called a national pension system elsewhere - this will disincentivize people from saving, because they know they’re going to get their retirement savings and other social benefits from the government, so why should they bother to save?
It’s accepted, as I said, as the gospel in America. Often economists invoke this theory to argue that Americans have low savings rates because we have a welfare state and a Social Security system.
The odd thing is that when you go over to the core economies of Europe, the Germans, the French, the Belgians, the Swedes, they all have had very high savings rates of over 10 percent for a long time, and yet they have super welfare states.
Although it’s not clear why welfare states actually correlate with high saving I think there are a couple explanations. One, by keeping most people from falling into destitution, welfare states ensure that most households remain financially stable. This automatically results in a higher national savings rate. Whereas in our country, although stable households also save at pretty good rates, we have a significant portion of our population living in poverty.
They have to borrow to make ends meet, and so they go further into debt. In other words, credit has become America’s welfare policy.
They have to borrow to make ends meet, and so they go further into debt. In other words, credit has become America’s welfare policy.
Also, I think welfare states increase saving by providing citizens with national healthcare and free or low-cost higher education. Healthcare and education are big costs for the average American household. These expenditures, I think, further diminished our savings rate.
How To Help The Indebted
Amar C. Bakshi: Indebtedness is a problem in the U.S. and around the world. Belgium has an unusual way of dealing with debt, with indebted people. The government comes in and restructures the indebted person’s mortgages; it swoops in to provide social services to address underlying causes. Is that what the United States needs - that level of intervention?
Sheldon Garon: Well, that’s probably a bit much for most Americans. It’s very paternalistic. However, there is something that the Belgians and other Europeans do that I think we could learn from. First of all, the Europeans are keenly sensitive to the problem of their households becoming overindebted. “Overindebtedness” doesn’t even exist as a word in America, much less as a legal term. So we don’t have policies that address the problem of people getting head over heels in debt.
There’s another thing we can learn from Europeans. When people do experience debt problems in Europe, it is state institutions that run the credit counseling services that try and get people out of debt.
We have debt counseling services here, but rarely are they a public service. Rarely are they part of the government. They’re often managed by the finance companies themselves. They’re often run for profit. These debt-counseling services carry fees. If you declare personal bankruptcy in this country, obviously you also have to pay lawyers’ fees.
If we made debt counseling much more of a social service from the government, we might do a better job of preventing people from becoming overindebted.
How To Get Americans To Save More
Amar C. Bakshi: In your book, you write about cultural figures like Benjamin Franklin who encouraged thrift in America and around the world. Does America need a cultural shift today? And how can that be brought about?
Sheldon Garon: Well, cultural shifts are very difficult to bring about, but there are some things I think we can do. At the very least, I would say institutionally we need to universalize financial education courses in our schools. Financial education has replaced the older idea of school savings programs.
Financial education prepares students for the real world. They would learn all sorts of things, not only about saving but also about investment—as well as the dangers and the opportunities in credit cards, mortgages, and student loans.
But presently we don’t do a very good job in this country of disseminating financial education. Some states and some school boards require financial education courses, but most do not. We really need comprehensive financial education because that, more than anything else, will begin to reshape our culture. It won’t be a culture where people are misers and just save everything, but rather one where Americans become financially literate and understand the risks of credit.
Amar C. Bakshi: Finally, What Needs To Be Done To Get Americans, On Average, To Save More?
Sheldon Garon: It depends on which Americans? If you’re talking about lower income Americans, we have to increase their access to the banks. This is a big problem among lower income people - some 25 percent are what’s called “unbanked.” They have no savings or checking account in any bank.
This is rarely their fault. It has to do with our banks charging high fees and assessing high minimum balances in ways that make it very difficult for small savers to start and maintain accounts.
Most other First World countries have policies of “financial inclusion,” where banks and post offices are mandated to take very small deposits and to create small savers’ accounts for lower income and young people. So I think this is one of the main ways that we can promote saving.
We don’t necessarily need to roll back consumer and housing credit, but we do need to protect Americans from predatory lending, which went on far too long in the 1990s and early 2000s, either in the form of subprime loans or credit cards that came with 30-page contracts nobody could understand and that assessed high interest rates on unsuspecting people who carried unpaid balances.
Both to decrease debt and increase savings, we need to curb predatory lending and increase financial access for small savers.
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