It is the common Keynesian misconception that recessions are caused by reduced consumer spending, thus justifying greater government spending to make up the difference. Savings becomes an evil.
But savings are not the problem; it is the CHANGE in savings that either increases or decreases current consumption. If we just maintained a constant savings rate and everything else was the same there would be no change in consumer demand.
But if the savings rate declined from 10% to 5% that would unleash a lot of spending power; likewise an increase in the savings rate from 5% to 10% would consume a lot of current spending power. But there is more to the savings rate than the impact on mere current consumption. Savings reflect consumer’s fears and outlook.
The change in the savings rate can be a result of the decline in interest rates. A worker approaching retirement once hoping for a 5% safe return must save twice as much money to get the same dollar income if the interest rate drops by half. After a loss in equity and retirement accounts we may want to save more to make up for the loss in assets.
Savings can be a sign of optimism and stability. We save for the future because we look forward to it; because we are comfortable that our property is safe. No one saves in a country fraught with revolutions, instability, and confiscation.
We also save for security. We want to be able to survive a job loss or periods of a loss of income. We want to be able to retire early without burdening others.
We are motivated to increase or decrease savings by tax policies and legislation such as social security which is really just a form of forced savings that we do not control. High taxes on investment income and tax deductions for select investments like your home, incentivizes us to save less and buy bigger homes. An increase in home value does not count as savings, but the realization that homes are not as a secure savings vehicle as we once thought may make us save in a way that is counted.
A high savings rate provides the capital for investments and growth in the ability of business to produce, hire, and innovate. The debate over demand or supply driven recovery is just silly. We obviously need both.
The demand that we are trying to replicate was a demand driven by market distorting monetary growth and tax policies. All you have to do is count the empty buildings to see how many building were built that we did not want or need.
The higher savings rate we now experience is simply a correction of the giant misallocation of capital resources caused by foolish monetary and fiscal policies.
Those who believe that this saving is bad and impedes a recovery should consider that the real damage was the reduction of the savings rate. Perhaps we are trying to stimulate a demand that was never really there.
Loose money makes us all stupid and makes us buy stuff we really do not need. In a tighter economy perhaps we find that not only do we not need as much, but we may be happier for it. Perhaps we just want to consume less.
Savings makes consumers more robust; able to withstand shocks without multiyear government unemployment benefits. Savings makes us more independent, mobile and self confident. The transition to a higher savings rate may delay the recovery, but it will make for a stronger and more stable economy.