NEW YORK — ABSOLUTELY essential to the remarkable economic growth of the United States has been the willingness of its people to refrain from spending all of their income on consumption and to save a substantial proportion of that income. The investment of these savings in new and improved instruments of production and in other capital goods lies at the heart of the nation's economic growth.
During the period 1950-1982, the American people saved an average of 7.2 percent each year from their disposable income after taxes. Early in the 1980s, however, the personal-saving rate began a marked downward move, and in the past four years it had declined to an average of only 3.9 percent.
The personal-saving rate is being squeezed down between a pronounced increase in the proportion of disposable personal income (that is, income after taxes) being spent for consumption and a significant rise in the proportion of disposable personal income that people must pay in interest on household debt.
Total household debt has soared from $1.138 trillion to $2.958 trillion, or by 160 percent in the past 10 years. As a result, the total interest paid by consumers has jumped from $47.4 billion in 1980 to $98.3 billion in 1988, or by 107 percent.
There has also been a marked rise in our national propensity to consume during the past several years. In 1981, total personal-consumption expenditures amounted to 90 percent of total disposable income, but by 1987 the percentage had risen to 93.8 percent. It fell back to 92.9 percent in 1988.
Total interest paid by consumers rose from 2.4 percent of disposable personal income in 1981 to an average of 2.9 percent in the past four years. Thus the personal-saving rate fell from 7.5 percent in 1981 to 3.2 percent in 1987. It rose to 4.2 percent in 1988. The importance of the decline of the personal-saving rate is illustrated by the fact that the actual total personal saving of $147 billion in 1988 would have been $250 billion had the personal-saving rate been the historical average of 7.2 percent of disposable personal income.
Various consumer surveys have shown that older people tend to save a lower percent of their disposable income than younger people or even to use up some savings rather than save more. As the percentage of our population in the older age brackets rises, one would expect to see the personal-saving rate decline.
The fear of continuing inflation quite likely is a factor encouraging consumer spending and working against saving.
Also, consumers are being bombarded with advertising and marketing devices to create new wants and strengthen old ones. More and more resources are being directed to selling goods and services and the effectiveness of these efforts has increased. This contributes to a rise in the propensity to consume.
The climate for the effective marketing of goods and services seems to have strengthened as more and more people, particularly in the upper-income brackets where the saving rate has traditionally been high, seem to be going for the ``good life.''
Finally, the proliferation of ``plastic cards'' must be a major factor in the increase in the propensity to consume and in the boom in consumer credit. So must be the availability of submarket interest-rate financing of automobiles and the marked easing of other consumer-credit terms such as down payment and amortization period. The same can be said about home-mortgage financing, with the wide use of adjustable rate mortgages with ``teaser'' low rates in the first year and other measures such as low down payments and long amortization periods to attract home buyers or users of home equity financing for other than purchasing of homes.
It is clear that there is a balance between consumer spending and personal saving which is consistent with healthy and sustainable growth of our economy. With the personal-saving rate falling into the 3 to 4 percent range, there is reason to be concerned that prospects for growth have worsened. It is imperative, therefore, that public policy measures be undertaken to restore a higher personal-saving rate.