American Savings and Growth

February 28, 2012

On Bloomberg Radio’s Taking Stock, Barry Bosworth discusses why saving rates in the United States have fallen and the consequences this has had for growth and business. Bosworth talks with Bloomberg’s Pimm Fox and Vonnie Quinn. Audio of the session is available at Bloomberg’s website (MP3).

Pimm Fox: Are we addicted to the idea that higher savings means better economic growth? Lets find out more about savings. I want to bring in Barry Bosworth. He is a Senior Fellow and economist at the Brookings Institution in Washington, DC. He is also the author of the book The Decline in Saving: A Threat to America’s Prosperity? Barry Bosworth, good to have you with us here on Bloomberg.

Barry Bosworth: Thank you.

Fox: So in reading the book this weekend, I was struck by some of the conventional wisdom – the assumptions that people make about savings and economic growth. You found something different.

Bosworth: Yeah, there is not a very close connection in a modern society between savings of an individual country and how well it is doing in growth terms.

Fox: So why do we worry so much about the savings of individuals?

Bosworth: I think in terms of those individuals’ welfare it is still important. But companies in the U.S., for example, they can borrow from other countries abroad. It is a big global market nowadays. So the fact that Americans don’t save very much doesn’t constrain American business firms to invest. But if as an individual you are trying to accumulate for retirement it is still important to try to set some income aside for those future years.

Vonnie Quinn: Well, the savings rate has been going up a little bit and it has been seen as a good sign, right?

Bosworth: I think at the micro level it is a good sign. Individuals are kind of rebuilding their balance sheets – that is what they ought to be doing – and get their wealth position a little bit stronger after this big financial disaster.

Fox: Barry Bosworth, how does the government compute savings? Isn’t that an important question, too?


Bosworth: Yes. There has always been a lot of debate over this. But essentially what the government is doing is just people’s income that they earn from production – the normal things we think of our salaries, etc. – minus our consumption. It is the amount of resources that we produce as a country that we do not consume. So we set them aside for purposes of investing or we could export to other countries.

Fox: Are there demographic issues that affect the national savings rate?

Bosworth: Very much so. You’re going to build up your wealth when you’re young, and then when you’re older you are going to start to run it down. So countries like, say, Japan that have an aging population have very much been influenced by a lower rate of savings as that whole process has accelerated. The U.S. is kind of surprising because we had this decline in savings when the Baby Boomers were, supposedly, at the height of their working capabilities. You wonder what is going to happen to them now as they start to retire.


Quinn: Well Barry, are there typical things that people do given what point we are at in the business cycle? Do we always see savings going up at certain times and always see them going down at other times? Can you draw any conclusions from the last few business cycles?

Bosworth: I think it always tends to go up at the end of the business cycle or boom. People get scared. They pull back. They hang. They postpone some durable goods expenditures – exactly what we have been doing for the last couple of years. And then we turn optimistic again, and we revert back to the old spending ways. And, at times (as happened, I think, in the middle of the last decade) we get so optimistic we actually go off on a consumption binge and we overdue it and we end up with a disaster.


Quinn: Is it optimism or is it the exact opposite? I mean, in this environment where do you put your savings except in a mattress? So why not spend them?

Bosworth: I don’t think we find very much sensitivity of savings to interest rates and the rate of return on it. It influences things, but it can be just as much an income effect that goes the other way. When people were having large stock market gains and were feeling wealthy back in the middle of the last decade, they spent a lot. So I do not see much connection between your saving and your rate of return. You are really saving in preparation for retirement. This seems to be the major motivation. It is easier to do if your income is rising rapidly. It is hard to do when you do not have a job and your income is falling.


Quinn: Pimm, they have a little ceremony in the morning, on the morning radio show John Tucker, [he] opens his 401(k) but it has become a 201(k)…

Fox: 201(k).Yes, indeed. Well, Barry, speak, if you can about housing because that also affects peoples’ perception about how much they should save.


Bosworth: Yes, that had a lot to do with when we said we had these big wealth gains over the last decade. A very large proportion of that was in housing. Unfortunately, some people thought it was permanent so they went and took out a second mortgage, or a home equity loan, and they spent a lot of the proceeds, and the level of debt relative to housing went up quite sharply. I think people bought homes that they could not afford because they expected the capital gains to continue in the future so they could refinance and take some of the profits and use it to lower their mortgage cost. All that, it seems to me, has come to an end. The losses have been very painful and now people are in the process of trying to rebuild their balance sheets. I think that is going to take, at least, another five years or so for people to get back to positions that they’re comfortable with.


Quinn: Barry, tell us what your impression is of what the safe asset is now – the safe haven. I mean, at one point it would have been your home because home prices were expected to continue to march higher. What is it now?

Bosworth: It is really hard to say, isn’t it? You don’t want to necessarily invest a lot of assets in governments anymore, as we have learned with Greece. So the people that thought that debt of the government was a safe thing to invest in are learning that is not true. I think the only real advice we can give people in this system is to diversify very broadly. The best investment strategy is one that diversifies across a very wide range of assets and doesn’t concentrate on any one. So a lot of the old canards that we used to have like investing in real estate don’t turn out to look very good. Buying bonds doesn’t look very good. So it is kind of hard. Investing is a lot more risky than people thought, and I think the response to risk is to diversify.


Fox: Barry Bosworth, compare what happened in Canada right now, our neighbor to the north, because you have written how their savings rate has evolved differently than ours.

Bosworth: Yes, Canada is kind of interesting because their savings rate a long time ago when ours went down in the mid-1980s, Canada’s was going up quite sharply. But then in the 1990s they kind of paralleled us and they had this big decline, just like we did. I think it was driven by different things. It was driven by raw material prices. In the 2000s with the emergence of China as a big consumer of oil and other commodities, Canada did very well but Canada also avoided all this reliance on these high-risk financial activities. Hence, Canada never really had a financial crisis in 2008 and 2009. They have emerged from it quite unscathed. So it turns out it was a safer place to invest. But Canadians, too, had the same phenomenon as Americans that the savings rate came down dramatically over the last decade. I think it is mainly in both countries because we felt we were rich – in the case of Americans because of the stock market and housing; in the case of Canada because of raw material prices going up so much.

Fox: I want to thank you very much. Barry Bosworth, Senior Fellow and economist at the Brookings Institution in Washington, DC – he is the author of the book The Decline in Saving: A Threat to America’s Prosperity?