The Savings Rate Continues Its Downward March

The BEA released it’s March Personal Income and Outlays report yesterday. There’s good news and bad news included in this month’s report. The bad news is that personal saving continues it’s downward trend in 2010, here’s the report:

“Personal saving as a percentage of disposable personal income was 2.7 percent in March, compared with 3.0 percent in February.”

That’s compared with a rate of 4.0 percent in December of 2009, and pretty much a straight line downward from the beginning of the year until now.

Now for the good news, there’s been some increased economic activity, and many economists believe that the increase in consumer spending is a sign of an improving economy.

Even better, this month’s release has touched off a pretty entertaining chain of commentary around the web on this very subject.

Calculated Risk kicked it off with a comment that’s fully consistent with their past opinions:

“The saving rate fell to 2.7% in March. I still expect the saving rate to rise over the next couple of years slowing the growth in Personal Consumption Expenditures (PCE)…This is a solid report for PCE, but PCE growth is not sustainable without jobs and income growth.”

Paul Krugman pithily stated the crux of the whole matter a little while later:

This can’t go on; American households have to bring their debt levels down. And yet …

We’re still in a liquidity trap, with Fed policy constrained by the zero lower bound. And a liquidity trap world is a paradox-of-thrift world, in which the virtuous individual decision to save more is a vice from the point of view of the economy as a whole. For now, it’s actually a good thing that consumers are behaving irresponsibly.

So my wish is that we be made chaste, continent, and thrifty — but not yet.

And then Andrew Leonard from Salon chimed in with his thoughts on the matter, in a piece called “Nothing Can Stop the Spendthrift American:”

The personal savings rate has declined to the lowest point in 18 months…Krugman is hoping that imprudent, unthrifty spenders help get the economy on a firm footing. But what happens when that happy day is achieved? Once unemployment starts falling and wages rising, why would Americans have any incentive to start saving for a rainy day again? The better the economy gets, the more we’ll spend, and continue to exacerbate the unsustainability of our lifestyle.

This would all be terribly entertaining if it weren’t sad and scary in many ways. We’ve made the case before that structural reforms are necessary to promote saving in the long run. Savings products need to be accessible to a wider swath of the American public and we need to find ways to encourage those that are disinclined to save to take advantage of that accessibility. If the experience of the last 18 months doesn’t engender long-term behavioral change, it’s safe to wonder if anything will.