The Personal Saving Rate Bubble

Oh no, another bubble. With apologies to Daniel Gross, I’m not very excited about this one. We’ve been paying a lot of attention to the personal saving rate (PSR) lately as the measure has rebounded from historic lows. It’s an important measure, widely available and frequently reported. It also has told a story that has fit well within a lot of narrative structures that we’re prone to embrace–stories about a return to thrift, and a growing awareness of the benefits of living sensibly within your means and making productive investments in the future for both the individual and society.

Now along come Amanda Logan and Christian Weller from the Center for American Progress with a timely piece about recent trends in the PSR. Here’s the upshot:

The most recent data available from the Bureau of Economic Analysis show that the personal saving rate has climbed by 3.7 percentage points since the recession began, from 1.5 percent in fourth quarter of 2007 to 5.2 percent in the second quarter of 2009-a relative increase of almost 350 percent (see Table 1).

If we dig deeper into the figures, however, we see that the drop in spending-the increase in the saving rate-appears to be largely a result of lower energy prices and less spending on cars, which are likely caused by fewer people having to drive themselves to work and less access to consumer credit. Importantly, this change in consumption and saving will likely not persist, since families’ incomes have not risen and they do not appear to have changed their other spending very much. Policies that increase Americans’ financial security are therefore necessary to make sure the savings rate doesn’t fall again as the economy recovers.

Pop.

So the recent boost in the PSR is short-term and Logan and Weller suggest that it’s related more to shifts in need as opposed to shifts in attitude. I think this is a critical distinction and it reinforces the notion that our household (and national) savings needs are not going to be met magically. Affirmative steps need to be taken.

I also want to point out that I’m in full agreement with the last sentence in the above quotation, “Policies that increase Americans’ financial security are therefore necessary to make sure the savings rate doesn’t fall again as the economy recovers.” However, I’d make the argument that the authors are limiting themselves in terms of the policies they ultimately suggest. In order to promote savings they argue that the middle class and particularly middle class incomes must grow–fair enough. They then recommend enacting EFCA, EITC expansion, universal health coverage, and improved energy efficiency as the best ways to do that. Higher incomes could lead to more saving, but there’s no guarantee of that. As a matter of fact, I’d recommend looking at the data on personal saving circa 2005 when incomes were higher and the PSR was at some of its lowest recorded levels.

What is needed to ensure high rates of personal saving are innovative and proactivie policies to encourage and facilitate the creation of savings habits (these are the lessons of behavioral economics, as we’ve discussed frequently in the past). For starters, I’d add in the White House’s proposed Auto-IRA plan, our Saver’s Bonus, the ASPIRE Act, and SAFE-T Accounts.

The Logan/Weller piece is important and worth the read. The key point is that the current high PSR is not sustainable–it’s a bit of a bubble. A high PSR is a good goal and we are not yet in a place where we will be able to maintain a sufficient level of personal saving. The smart thing to do is to put policies in place that limit the volatility of the savings rate and lead to greater economic growth and stability. That way we can stay away from bubbles–or at least have the resources in place to avoid their worst effects.