Savings Rate IncreasesOctober 30, 2008
Just a short blog this morning.
The Bureau of Economic Analysis released the their preliminary GDP figures for Q3 this morning. Those measures include a measure of savings as well. Over the last two quarters there has been a small uptick in the rate of household savings. The numbers are still very low — around 2% — but even that is an increase over the zero and negative savings rates we have seen in recent history. I would like to offer two short comments
- It is good — not bad — that Americans have decreased their expenditures on current consumption. Although decreases in current consumption will have a negative impact on the short run prospects of the economy it is a positive development for long run sustainable economic growth. Much like our financial institutions need to unwind their debt (leverage) positions in order to set themselves up for future growth and financial stability, U.S. households need to dig themselves out of debt and create a pool of personal savings in order to put themselves on a firm financial footing.
- Given our short election cycles, there will be political pressure to pass legislation that encourages spending at the expense of savings and in so doing make the recession as short as possible. If we take actions today that discourage households from firming up their own balance sheets (i.e. allow tax penalty free borrowing from retirement accounts) we are sewing the seeds for another financial meltdown in the future. A lack of household savings helped get us into this mess. We should bite the bullet and resist the temptation of short-term, and short-sighted solutions.