Everyone keeps on talking about the downside of this recession and how it has taken the wind out of our economic sails, but there is actually an upside to it. No, this is not a very early April Fools joke, it’s not even April yet, for crying out loud! The good thing that has come out of what is now being called the Great Recession is a shift in the way we consume and spend money and in some cases if we spend much at all. The personal savings is now up to 6% and rising, and that represents a figure thrice as much as it was in 2007. A simple search among the pages indexed by Google for the term “personal savings” will reveal several articles either hailing newfound American frugality or goading everyone to get on the bandwagon.
But it’s not as rosy a picture as many have painted it out to be. The personal savings are imaginary, much like unicorns. It’s an accounting measure with little economic content to go by, nothing more and nothing less. Depending on how you go about classifying things, its value is entirely relative to the time in which it is gauged. For instance, something like Social Security contributions being counted will bolster the personal savings rate, but that will come at the cost of recent growth. You can argue that Social Security contributions are personal savings, and you can argue that it isn’t; but it is this very subjective nature that makes the personal savings rate so hard to gauge.
By a similar stretch of logic, tax payments can be classified as personal savings, so you can cushion this rate as much as you want. And classifying funds received from Uncle Sam as borrowings from the government will also affect this negatively. The list goes on and one and it is almost as if it is all open to manipulation. It’s not a problem with the economics of it all; it’s a problem with the labeling. As some say, there are lies, damned lies and then there are statistics. The personal savings rate falls somewhere comfortably in the last bracket.
It’s far more accurate to arrive upon the savings rate by dividing total national savings by the sum of total national income. These are very real, very physical concepts and it measures a country’s output minus its consumption, which is as real as it gets. By this measure, a very different picture comes up; by this account national saving is not positive, but negative 2%. It is quite possible that the U.S. is maybe the only developed country in the world that is saving next to nothing and instead eating into its savings. That’s a classic recipe for ending up as the kid on the corner of the block down on his luck and out of money, or on the verge of being so.
It also gives rise to a vicious domino effect. With no money to invest, there will be less capital poured into machines to be used on the job and there will then be less people to employ. And that, ladies and gents, is how you get low labor productivity which spells out lesser wages, which means you have lesser savings which brings us back to the beginning of it all. Therein lies the tale of America’s economic woes and what’s worse is the fact that the government doesn’t do the math in the way that has been put forth in this article, instead relying on subjective classifications.
Our consumption is still on the rise, but as a nation with an aging population the elderly are the largest consumers via Social Security, Medicare and Medicaid. Together, the spend of these three programs on the elderly was an eye-popping $1.2 trillion, an average spend of $30,000. To improve national savings, we then need to restructure the system to not take money from the young and give to the elderly, or America could slip into a financial quagmire that there might be no escaping from.