Saving more slows economic recovery

Lots of people saving in a piggy bank


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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Ah, but what gets made these days that people really need to buy? You can't find an older car that does everything a new car does? You can't find an old computer that handles everything your household needs from a computer? And so on.

Maybe new items could be made more efficient than older, cheaper items. The savings in energy could be worth the cost of buying something new, rather than saving money on buying something old.

Then, we'd need the biggest purchaser of these items, to buy these items. Then we could save on energy costs, we would be more efficient, and gee, that biggest purchaser would be the government--hey,wait, haven't we heard this plan from somewhere already?

So John Dimsdale tells us our rate of savings is at near record levels for recent history. He says that is bad in the long run. I say, we are individualy proping up the banking sector, and if that is a bad thing, why is the government doing it to the tune of $750 trillion and counting?

There's no paradox to thrift. When you save your money the bank doesn't burn that money, it lends it out to successful businesses and that, in turn, stimulates the economy and creates jobs.

But here's the catch, many of these good businesses are corporations -- and many of them small -- yet the U.S. has the second highest corporate income tax rate in the world. Under this heavy tax burden, these good corporations aren't borrowing and growing (i.e., hiring).

Cut the corporate income tax rate sharply and we'll see many of these companies propsper, grow and hire.

One of the reasons people are saving more and especially getting rid of any credit card debt they have is because of the way they are being treated by credit card companies. Customers in good standing have had credit limits reduced, interest rates increased and accounts closed.

I would have appreciated Mr. Dimsdale going further in his piece regarding the "paradox of thrift." I know that the economy is based on consumption. But I don't understand why that makes sense. What is the philosophy, or what is the underlying structure, that makes it make sense to base an economy on consumption? Or what could be done so that "saving" could be good for the economy?

Also, K. Risdal should break up regular daily dialogue with other languages. "We'll get to that, cuando hacemos los numberos."

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