Rackets to End, Not Mend

Published August 14, 2010

Here’s a paradox for you: The U.S. private savings rate has soared even as the reward for saving has tanked.

Americans are doing all they can to reduce their debts and put money away for rainy days, and the federal, state and local governments are doing all they can to pile debts onto our backs, reward borrowing and punish saving.

Some facts:

 The amount of revolving credit debt outstanding — primarily credit card debt — has declined for 20 consecutive months, according to the Federal Reserve.

• The U.S. savings rate has gone from nearly nil just before the recession to 6.4% in June. It has remained above 5% since October 2008. For the past two years, Americans have been putting money away at rates unheard of in the financial bubble years.

• This is happening even though bank savings and money-market accounts are paying virtually nothing. IMoneyNet, which tracks money-market funds, reports average fund yields are just 0.04%, and a quarter of money-market funds yield nothing. With an average return of just 0.04%, a $10,000 investment returns $4 in a year.

• The Federal Reserve has done this to savers by intentionally driving interest rates to nearly nothing. This week Fed officials announced they might pour even more money into bond markets to keep interest rates low.

• The world’s largest borrower is the U.S. government, followed by state and local governments collectively. The national debt stands at $13.3 trillion — about $43,075 for each man, woman, and child in the United States, because they earn virtually nothing on their money.

• Low interest rates reward borrowers by making borrowed money cheap.

• Tax policies reward borrowers by allowing them to deduct interest they pay on borrowed money.

• Tax policies penalize savers by making them pay tax on interest they earn on saved money.

Some White House officials and others, not content with the ways government policies already discourage saving, are trying to encourage people to spend more money, arguing it’s needed to grow the economy.

That was also the reason for the “economic stimulus” package enacted near the end of George W. Bush’s term in office and the much larger ($862 billion) stimulus package under President Barack Obama. They argue the economy needs more consumer spending to get healthy.

Federal Reserve statistics disprove that claim. Between 1980 and 1994 the U.S. savings rate averaged 8%. Most of those were heady years for economic growth compared to what we see today.

Since World War II there have been 11 recessions. The prior 10 recessions averaged 10.4 months in length, according to the National Bureau of Economic Analysis. Our current Great Recession started in December 2007 — 31 months ago.

Can anyone doubt one reason consumer spending has been weak during the Great Recession has been that people went into it with little or no money saved for a cash cushion? Living paycheck to paycheck is no way to weather a financial storm.

Encouraging people to spend rather than save is the wrong policy for the current time. The more money people save, the more financially secure they are. And the more secure people are, the more likely they are to start spending and investing.

Americans are right to be saving money to increase their financial security. Spending beyond our means — both in government and in our personal lives — caused the bubble that led to the crisis. Most Americans know this.

Too bad so many people in positions of government power choose to deny the obvious.

Stanek is a research fellow at the Heartland Institute in Chicago.