NYTimes Asks: Why Aren’t You Saving Money

The Grey Lady recently asked in their Room for Debate feature why more people are not savings money. I guess the editors felt this was a timely topic given recent figures showed the personal savings rate dipping to 5.3% in December after reaching 7% during the troughs of the Great Recession in 2009. Both these figures stand in contrast to previous years, when the rate hovered just north of zero. The savings rate actually has come a long way.

Perhaps we are making too much of this indicator. I have some concerns about the extent to which this metric adequately captures how many families are allocating their resources since it is largely driven by the consumption patterns of the more well-to-do. But I do welcome elevating the discussion of what’s driving savings behavior and this conversation offers a good place to start. I’m particularly partial to Mike Konczal’s contribution which focuses on the mortgage mess and Tyler Cowen’s concise four point entry.

What is clear to me is that families respond to economic uncertainty by increasing their savings. Job loss or the threat of job loss is enough to get people to cut back on their spending. And given the onslaught of the Great Recession was largely linked to historic levels of debt, many families are still de-leveraging and focusing their efforts in getting out from under of their debt overhang. And as cheap and easy credit contracts, I expect the profile and importance of savings will continue to rise. For better or worse, savings will once again be seen as an essential ingredient in promoting economic security and seizing economic opportunity.

While there may have been some decline in savings over recent months, I suspect that this reflects a fluctuation in a longer trend of increased savings. For starters, the performance (or lack thereof) of the economy continues to generate uncertainty. It’s possible to pick out a few indicators of an economic upswing but this recovery has been stingy at best. The housing market remains a mess and the job numbers continue to disappoint. We’re hardly out of the woods. In fact, the recession has gone on for so long that there is naturally some pent-up demand for some spending. The belts have been tightened but people still have to eat. And yet, people may start to eat differently. I suspect that there will be a growing appetite for a more sustainable mix of spending and saving.

That said, there are scores of obstacles in place that prevent people from savings. We should be thinking about how to create the set of incentives, institutions, and policies that allow families to more effectively manage the resources at their disposal. The point I often try to make in policy discussions is that the we should be focused on getting the policies in place now that can facilitate increased savings once the economic recovery takes hold. At the household level, this will allow families the opportunity to build up a stock of resources that they can deploy strategically. And collectively, while savings may not be the answer for short-term stimulus, it is likely to be a significant component of a prosperous economy over the long run.

I think we are still at the beginning of what may considered a new era of thrift rather the reconstitution of our high-consumption, low-savings economy. That model was clearly unsustainable and shouldn’t be resurrected.