Saving more slows economic recovery

Lots of people saving in a piggy bank

TEXT OF STORY

KAI RYSSDAL: Americans earned more and spent more in January. So said the government this morning. Don't get ahead of things, though. The increases fall firmly in the category of statistical blip. More promising was this: That on average we saved 5 percent of our disposable income in January. That's the highest savings rate in 14 years. And it'll be great if we can keep it up over the economic long run.

But our Washington bureau Chief John Dimsdale reports that socking money away is a lousy way to give an economy a consumer kick-start.


JOHN DIMSDALE: Corrie Flaker works for the Columbia, Mo., city government. She's been saving more money for the past several months. And she's gotten herself out of debt. One way is by having a friend cut her hair.

CORRIE FLAKER: And also help my friend out by trading with her -- like making her dinner or giving her a massage or something.

Americans are building up their savings to try to cushion the impact of the recession. Economists say the change in spending behavior is likely to stick. But if everyone follows Corrie Flaker's frugal example, it will be that much more difficult to reverse the economy's decline.

Economist Jack Albertine calls it the paradox of thrift.

JACK ALBERTINE: Over the long term it's important for the savings rate in America to go up. But in the short term, it's a paradox. It will have the effect of reducing demand for goods and services in the economy. That will lower economic growth. That will make the recession worse. It is a spiral downward.

Economists say lower taxes on smaller stock market gains and a cost of living hike in Social Security benefits bumped up income and spending in January. Some forecasters say the boost in incomes will eventually take the edge off the decline in retail sales and rising unemployment.

In the meantime, though, consumers who save don't bode well for the government's $800 billion stimulus package. Lower withholding from paychecks this spring, along with tax breaks and job-creating infrastructure projects are designed to get cash flowing into the economy -- and not into savings accounts.

In Washington, I'm John Dimsdale for Marketplace

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

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