The Magazine

There Is No 'Paradox of Thrift'

Neither a borrower nor a spender be.

Jun 15, 2009, Vol. 14, No. 37 • By DAVID BLANKENHORN
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As a group, however, Americans have never been at serious risk of oversaving. Over the past eight decades, the personal savings rate in the United States--the difference between earnings and expenditures--averaged about 7 percent. It reached about 11 percent in the early 1980s and then began a long, steep decline. By the time the nation entered the 21st century overleveraged and in debt, the personal savings rate had sunk to zero or below.

In recent months, as the economic horizon has rapidly darkened, the U.S. personal savings rate has soared. Last week the Commerce Department reported it at 5.7 percent, according to the Associated Press. By the end of the year, according to some economists, it may reach 7 or 8 percent. In other words, if they are right, by 2010 Americans may be saving at about the same rate that we've averaged since 1930.

No one would call this dangerous oversaving. On the contrary, even the current modest increase in the savings rate is good for families and the nation. The reason is simple: Savings--money diverted from consumption--are the only source of money for productive investment, and productive investment is the lifeblood of the economy.

By the same token, economists overwhelmingly agree that a high-debt, zero-saving society is one that has put itself at long-term risk. For a time, it may be possible to live the high life on borrowed money. Having other nations largely finance our ever-growing debts may allow us to kick the can down the road while continuing to shop as if there were no tomorrow.

But it's ultimately unsustainable. Over time, a thriving economy and a successful society require citizens who are willing and able to save for the future, and this fundamental fact will not change.

The "savings glut" described by Keynes and others, when the desire to save overwhelms our willingness to invest, may be a theoretical danger, but the weight of evidence suggests that it is not happening today in the United States.

The banking and finance crisis of recent months--which may already be easing--appears at least to some degree to have unnaturally frozen the flow of credit. And there appears to be a hesitancy among many investors. But no one is seriously suggesting that this problem could be solved by returning to the practice of shopping with money we don't have. After all, if that were the solution, there would never have been a crisis in the first place.

According to most analysts, the root of our financial crisis is enormously large, interlocking, and ultimately toxic structures of debt. And if piled-up consumer debt is part of the problem, running up still more consumer debt can hardly be the solution.

In fact, the solution lies in the opposite direction. An 8 or 9 percent personal savings rate in 2010, allowing households to reduce their debt and begin to live within their means, might actually ameliorate the banking crisis, insofar as it would once again position millions of Americans to become investors and wealth-builders over the long run.

More broadly, if we bracket for a moment the immediate and probably short-term failures in our banking system and take a longer view, the danger of a genuine American savings glut--savings in excess of productive investment--appears to be all but nonexistent.

Fundamentally, our economy is wide open and extremely dynamic. We value, and frequently reward, risk-taking and entrepreneurialism. Stand on any American Main Street and you can hardly throw a brick without hitting someone who is itching to start a business, make a new product, try out an idea, risk all to follow a dream. People around the world admire us (and occasionally despise us), and some of them end up coming here, for precisely these reasons. It is unlikely, under any reasonably foreseeable circumstances, that this deep-rooted American characteristic will disappear, or turn into its opposite, such that we suddenly have too many saved dollars chasing too few new challenges and new ideas. In America, saved money typically is productive money.

4. For individuals and families, it's always wise to live within your means.

Consider a 27-year-old woman from Missouri, a graduate of a community college, working as a sales representative for a big greeting card company. She is recently married. Her husband also works in corporate sales. Their annual income is $84,000. They have no children, but hope to start a family soon. And owning a home is one of their dreams.