Thursday, May 05, 2005

NYT and Saving

The NYT has an editorial today bemoaning the fact that the saving rate in the US is as low as it's been in 70 years. It covers the usual culprits, explaining how American culture is too focused on consumption. It even complains about spending driven by the increase in home prices and equity. All in all a vague picture is painted of future dire consequences. Maybe they're right and there will be serious long term consequences for the US economy.

But what's the real problem here:
The biggest culprit is the Bush administration's profligacy, with tax cuts the most glaring driver of the swing from budget surplus to budget deficit over the past four years. Currently, the deficit offsets most of the economy's net private savings.
And the solution:
The most powerful way to increase national savings is to cut the budget deficit. To do that, President Bush and his allies in Congress must defer the gratification they would derive from showering more tax cuts on the affluent.
It's all those pesky tax cuts! Wars, famine, pestilence and lack of savings can all be traced back there! If we just stopped cutting taxes everything would be better. It's not said, but the implication is also that we'd need to raise taxes again (sorry, "roll back" those cuts) to balance the budget. I wonder if it even entered their heads that maybe Congress could balance the budget by cutting back on federal spending. That way with lower taxes people oculd keep more of their own money, which would make it easier to save.

Their final suggestion: "Lawmakers should also refocus their efforts on increasing personal savings," in particular by encouraging particpation in employers retirement plans. As usual, the suggestions are all paternalistic: "including automatic enrollment upon hiring and the automatic allocation of employee contributions." The government should make you contribute however much they decide because the folks in Washington know better than you do whether you can afford it.

Let's be honest here. The federal government can't legislate and enforce a "savings" culture in this country. Attempting to will only result in lots of unintended consequences. If people want to save they will.

Disclaimer: I think people are usually foolish if they don't contribute to 401k plans (when available) at least to the max employer match, though I can imagine circumstances where someone couldn't afford it. Regardless it's still an individual's right to decide what to do with his own money, even if it's a stupid decision.

2 comments:

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Krzys said...

One of the main reasons the personal saving rate is so low is the way it is calculated. Mainly the fact that education and R&D expenses are not treated as an investment (investments count towards personal and national saving rate), but rather as a consumption. BTW USA has one of the highest (if not the highest) rate of education and R&D spending, and it's been raising for last 10 years.
There are also other problems with the statistical measures of saving rates, like the way it treats capital gains and taxes on them, but it all pails compared to R&D and education.