The culture of saving
Are Americans becoming more thrifty? Personal savings rates are up, the government statistics tell us. This fact has engendered a wide-ranging debate. Is this just a short-term deviation from America’s obsession with spending, or is it a permanent change?
I believe it’s a permanent change, but not for the reasons you might think.
No, the financial crisis and recession have not administered some type of shock treatment on the American psyche. Rather, it’s my view that the crisis has administered shock treatment on the financial institutions that gave rise to a high-debt culture—a culture of high credit card and installment balances, no money down, minimum monthly payments, and negligible savings.
Here’s my hypothesis: The steady decline in American savings rates over the past quarter-century was largely due to growing access to easy credit. It was a structural or institutional shift, not a behavioral one. Americans in the 1950s, who saved at a much higher rate than Americans today, were not somehow morally superior in their fortitude or self-discipline. Rather (in my view) they just couldn’t say “charge it” every time a new consumer product caught their eyes.
The institutional impediments to spending were strong. Credit cards were nonexistent. When it came to borrowing to buy a new car, it was a short-term installment loan and required a hefty down payment. And when it came to buying a home, there was no PMI—it was 20% down, in cash. (And who remembers layaway?)
Now, with tightening credit standards, Americans actually have to save money to buy things—they need cash to buy a car or new appliances or a home. Hence the rise in savings. From this point of view, many of the recent complaints about availability of credit have a silver lining. They will encourage those Americans who are overreliant on debt to consider saving for the future, rather than borrowing from it.
Recently, I heard a radio interview with an author who complained about rapacious credit card practices. He talked about credit limits being sliced and minimum payments raised sharply. There were a number of legitimate points he raised.
And yet I couldn’t help thinking that maybe we want and need debt and borrowing to have a “bad rap.” Longer-term institutional restrictions on credit may be exactly what America’s meager savings rate might need. They will contribute to a savings culture—a culture where saving, not debt financing, is the automatic response to every consumer impulse.
An unusual yet logcial view about reasons for Americans saving more because credit access
being more difficult…hopefully it is a long term happening. Many reason why this wd be healthy
for the purse and the body…. less eatiing out, which is a killer…..perhaps more home gardens…
less shopping out of boredom…more interest in alternative fuels and vehicles…and if less worry over high debt then better sleep. All of these small benefits create a more peaceful way of life.
I find it interesting that a regular working girl like me managed to put money into a savings account despite the fact that my last full year’s pay was less than $36,000 — I worked full time as a reporter and part time in a doctor’s office and in my spare time wrote (and had published) four non-fiction books. I am now living on $726 a month from Social Security and my savings as well as what I can earn. I saved money even though there was absolutely no incentive by banks to do so by paying an interest rate above inflation; I also paid into a SARSEP plan at work that my employer did not match. What I have I earned, but if I had not stayed home to raise four children while my husband worked, and if I could have earned my BA with honors earlier (didn’t take out any loans and did it over ten years) then I could have earned more and perhaps not be living on the edge. Saving is good, education is better, equal pay should be mandatory.
I have have a beef that makes me feel like a fool for scrimping and saving over the years. For years, my wife and I (who have always had meager incomes)have driven 10 yr old cars and live in the same house we paid off 10 yrs after we were married. (I was 26 and she 22 when we married.) We have now lived here 30 years. Our friends are always asking why we have not “traded up” houses as far as another larger, swankier home as our incomes have risen over the years. We have always lived below our means and have always invested in the stock market via mutual funds and individual stocks. Because we have accumulated some notable wealth due to our frugal spending and depriving ourselves of the new cars, vacations, etc., we cannot get any financial aid for our son’s university education. Reason: because his mom and dad managed to save a little money over the years. Those same parents who have spent money like drunken sailors quailify for financial aid because guess what? They have no net worth!!! So, my wife and I are penalized because we saved…aren’t we great candidates for Village Idiot?!!!
The commenter with his money in land seems to have a good idea on how to save. There is really no incentive to save now, savings account rate for my son’s account are at 0.1% at Wells Fargo and our credit union isn’t much better. CDs rates are really low, 0.9% for a $25K 12 month and less for less money and time at the credit union. It’s ridiculous.
Your analysis as to what is driving the savings is right on the mark
That’s fine in the short term, but the sellers of goods will lobby for easy credit as soon as this crisis is past. Congress, always listening to the special interests, will give in again. As usual, our problems are caused by the government, not resolved by them.
Credit cards did exist in the 1950s. The cards were purchased and used for primarily for convenience, not to borrow money. Many, if not most, people who used the cards then and are still alive today pay off their debts monthly and get rebates. The others pay dearly for their “free” cards. Some use the abominable “debit” cards, and subject themselves to a modern form of usury.
Years ago I suggested to a Vanguard telephone answerer that your company offer checking accounts (without the $250 minimum limit) and issue credit cards. I still think it would be better for both Vanguard and its customers than dealing with banks. Banks have gone into your business (among others they shouldn’t have), why can’t yours enter their’s?
I see from some of the other comments that many people believe that when it comes to government spending habits, Congress is the one that has to be reigned in. It is rare, however, when the Congress actually appropriates more money than the President has requested in his budget.
For all Ronald Reagans complaints about how we spent to much in the Congress (where I was serving on the staff of the House Committee on the Budget during his entire Presidency), we actually cut his request every year, and we had his Cabinet Members calling on us in protest of our cuts. And remember, all of the big entitlements originated with the President, including that budget blockbuster, Bush’s RX drug program. Earmarks? Yes Congress is guilty, but makes room for them with other cuts. Sometimes eliminating more worthy items, but still they are not adding to the spending with the earmakrs.
Just thought you might want to know.
Many of us did a poor job of teaching our children, who are now young to middle -aged adults, to save more, spend less and not use their credit cards except for special purchases or emergencies. The whole concept of allowing someone to pay 0 down for a home loan was ludicrous and is part of what got us into this mess in the first place. If a person(s) could not pay anything down on a home, how could they pay monthly notes, moving expenses, utilities, cable, phone, car notes and all the rest? Banks were greedy and did a terrible disservice to home purchasers who really were not financially qualified to even think of a mortgage, much less take one on.
By all means we need to save more - the government will need to feed deficits from somewhere, right? Let’s just hope they don’t find a way to raid our 401ks.
A deeper issue not discussed above is the fact that wages for most people in the United States, when allowing for inflation, remained flat from the 1970s forward. This is basically the same reason why women entered the workforce more extensively in that period — they had to. It follows that the availability of more extensive credit arrangements to purchase necessities and obtain needed services, with certain obvious exceptions of luxury goods, was taken up as one way people hoped to make up for the freeze in wages.
I agree that Americans probably are not saving more because they finally get it. But I don’t necessarily think it’s all about the availability of credit either. Quite frankly, I think Americans are scared. They don’t want to put money in the market because it could be gone tomorrow.
This is an interesting hypothesis. Do you know of any academic work that is attempting to tease out the various factors that contributed to the low savings rate in the late-20th century U.S. and the recent turn-around? I would be interested in learning more.
I remember watching my dad in the 70’s cut up a bunch of credit cards. The great depression was brought on by easy credit ,this one’s no different . And I would differ from the author to this extent-The secret untold truth amidst all this govt. handwringing,something they never like to say in front of the cameras is that we, the people brought it on ourselves.
People always complain about taxes. I wonder how many people think about the hidden “tax” of impatience. The best example is impatiently buying things on credit so that all you can afford is minimum monthly payments on your card debt. All future purchases on credit are “taxed” at the card rate. This could be 20% or more. By patiently saving for purchases and then buying or paying off your credit debt each month the ‘impatience tax can be completely eliminated. As Ben Franklin
famously said “A penny saved is a penny earned”.
I think workers are really worried about their retirement after the financial crisis we have been in. Because of decreased retirement savings, they figure they have to work longer before they can retire, so putting more away toward their retirement makes more sense in order to be able to retire.
Those of us who grew up in the 1930s have always expected a return of hard times; we were not successful at teaching it to our children.
Amen! People seem to feel it is their priviledge to have any consumer product that they want at the moment..without having the “real” money to afford it. Things used to have much more signifance when you had to work and save to have the things that you wanted! thanks you for your observations.
partially correct. but adults of the 1950’s were children of the great depression,and were scarred by that experience. they were different than today consumers.
We will become a nation of savers when governmental policies change to make saving attractive. Tax policy determines many of my investment decisions. Risk taking, which is essential for our economy, only makes sense if federal tax policy treats gains from risk taking favorably. The current tax policies RE interest and dividends make investing to capture such income unattractive. The long term impact of these policies tends to make investing less attractive. This is exactly the wrong message our govt. sends to us. Perhaps electing people who have a stronger understanding of Econ. 101 might help.
The points made about the reason for saving do make sense. However, I think the conclusion that current saving trend as reinforced by the institutional restriction will lead to a culture of saving is premature.
I will call it, short-term saving fix to allow for a level of consumption that may be the same or less than the pre-rescission level. It may it it may not lead to long term change in behavior toward long term saving fix.
A story:
A credit card I had expired, was not used.
I called up to re-activate, they said yes, but they would have to cut my limit form the old value.
I was worried they cut it to a thousand or so, not enough to buy
an appliance or something.
I said: will be cut to what?
They: $25K.
I said: $25K is the LOW limit?! Cut from what?
They: $50K.
I said: $50K??!! Since when did I have 50K limit??!! I don’t remember such a thing. Did you guys bump it up gradually over the years, automatically?
They: Yes, but that is no longer the policy …
Just think of all the credt card adds that bombarded people before 2008 and then compare that to the number of ads advising people to save. Definitely an institutional policy that created a trend.
I agree with the responder who indicated that the present environment for saving money is ridiculous. Its not worth stashing money away for 2 or 3 years for the grand and glorious rate of 1%. You will actually be better using available cash to buy current goods at the deep discounts now being offered to stimulate sales. In essence, you will actuallly save more by spending now. Saving implies watching your money grow, and if it is not growing, its really not saving. Rather, it is lending money to the bank at a ridiculously low rate of return and only the bank’s wealth is growing. The reality is that true saving can be accomplished only by purchasing long term investment instruments or mutual funds that offer higher yields and then hanging on to them.
Before the crash, anyone could get credit and most people could get more credit than they should have given their income, exisiting debts, regular expenses and credit score.
Now, hardly anyone can get credit regardless of the fact that they have an excellent credit score, no debts, etc.
This is completely irrational.
People are saving because they have no choice, not because they have learned a lesson.
Once the latest debacle has faded from memory and credit becomes more readily available, most people will go back to their old ways.
Ditto to the feeling of being victimized by living a frugal life style. I had the same experience while helping put my kids through college.Also equally puzzling was that after getting divorced I could no longer deduct the interest earned on Savings Bonds used to pay for educational expenses even though they were in both my children’s name and mine. That is one twisted piece of legislation there. Why not further penalize someone when they are in a financially vulnerable situation. What a government we have.
Here is another good reason to save: There will not be any “recovery” from this recession, regardless of what the politicians say. This country no longer has any significant manufacturing base, so our economy in recent times has been driven approximately 65-70% by consumer spending. We will never recover our manufacturing/export base because of the availability in “emerging economies” of incredibly cheap labor and a business environment free of environmental and other regulatory costs. The disappearance of the easy credit that brought us to this point means that we can no longer serve as the world’s ultimate consumer. In the new global economy, there is little we can do to control our own economic destiny. Americans are in for a long-overdue and lengthy period of “belt-tightening” and so everyone unwilling or unable to rely on government assistance of one kind or another is well-advised to maintain a nest egg to cover his or her inevitable unforeseen medical and similar expenses.
Saving is an illusion that has been fostered off on us as something for our benefit but really funds the plunder of the country (and world) by Wall Street and its cadre of revolving employees at Treasury. How are the jail sentences for Enron executives explained when Wall Street firms get bail outs and bonuses funded by our tax dollars? Enron was not a Wall Street bank.
Eat, drink, and be merry, for tomorrow we will be broke.
I think the author’s hypothesis makes a lot of sense, and I think the person posting on February 5, 2010 at 2:23 pm makes a good point as well, that the pendulum may well swing the other way. What I don’t understand is that person’s glib assertion that “as usual, our problems are caused by the government,” when two sentences before that they observed that companies were sure to start lobbying for looser restrictions on lending as soon as the crisis was past. Wouldn’t it be equally logical (maybe more) to cite this as an example of the short-sighted greed of corporate America? Can we finally discard these nostrums in favor of more thoughtful analysis? I hope the corporate world AND the government are able to learn from this crisis, even if that hope is naive.
Americans, have been told to spend to keep our economy going. That also contradicts with the government’s message, “We can’t take care of you when you retire so, we are going to have all of in mandatory 401k’s”! People want everything for nothing and that is what business and our government knows. Think about this. If people continue to spend and another financial tsunami happens (and it will), the older citzens will go back to work for pennies on the dollar. You now have another pool of cheap labor to work for your business. Therefore, you have low wages and a higher profit margin. Don’t believe me! Look at what is happening now and where we are headed in the future. Kids want everything right now and other than passing and taking tests, you now have a highly educated workforce that is great at following directions but can’t think independently for themselves.
Article is correct because people seldom change. They can try and put an effort in the beginning but in the end will succumb to their bad habits, in this case, their bad habits of buying on credit. In the end, we go back to our old ways and that is why the economy behaves the way it does - endless cycles of bubbles and recessions. Until we learn to think independently and become immune to sheep mentality (But everyone else is doing it - I like to call it ipod mentality), the vicious cycle will continue.
Why no mention of an expectation of savings with little or no interest return. We are at 1 or 2%? That is an insult.