Savings for a rainy day -- and US growth
It would be unfortunate if the American people were to forgo salting away as much additional savings dollars as possible during this period of economic recovery - even if such savings added up to but a few dollars here or there.
A vigorous national savings rate, after all, means more than just a dry economic statistic. Out of the nation's savings pool come funds to finance new housing and plant construction, hire workers, and ensure the nation's continuing economic prosperity.
Are Americans in fact turning their backs on savings? Some economists suggest that
may be the case, citing US government figures which show that the savings rate dipped to 5.8 percent last year. Since the savings rate in recent years has been running at about 6 percent, a 5.8 percent rate would seem particularly low during a period of recession, when people often boost savings. Indeed, during the first quarter of this year, the savings rate fell to 4 percent, the lowest rate in 33 years.
What's going on here? Does the downturn in savings - if that is the case - portend serious capital shortages for the United States in the weeks and months ahead? And why are savings so low, considering that the Reagan administration's sweeping three-year personal tax cut plan was based on the assumption that Americans would boost, not lower, savings?
As many economists point out, there are currently more than ample savings funds to finance business and housing loans. And the recent low savings rate by itself need not spell long-range dangers. Many Americans were forced to tap rainy day accounts during the recession, in part because wage increases either slowed or, for many workers, failed to come. Some workers even had to take pay or benefit cuts, making it all the more necessary to skim their bank accounts. Moreover, given the actual sequence of two recessions back-to-back - a brief one in 1980 and the longer 17-month recession in 1981 and 1982 - there was pent-up consumer demand. Consumer spending during the second quarter of this year shot up by 9.2 percent.
Now that Americans have gone out and purchased many of the items they have needed - but have been reluctant to buy because of concerns about the economy - it is likely that savings will once again grow. The administration, of course, would be wise to keep a wary eye on the savings rate so that the nation does not face a severe credit crunch down the road. Steps that could be taken to encourage additional savings range from further liberalizing of rules for Individual Retirement Accounts, to consideration of a consumption tax - taxing persons on income spent rather than taxing earnings from savings accounts.
For the moment, such actions would not seem needed. There are now countless opportunities for gain on savings dollars, from the stock market to high interest rates on money market accounts. As more and more Americans feel better about the economy and have more disposable income to play with the likelihood is strong that the savings rate will once again climb.