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Makin' Money

Don’t forget to save

Chris Farrell Jan 10, 2011

Will consumers spend more now that their paychecks are bigger? It’s a good question pursued in this article now that average wages will get a $1,000 boost during the year.

The public policy goal is to stimulate spending. But I agree with this perspective from the article: Save instead.

Americans have ramped up their savings rate during the economic downturn to 5.3 percent, up from a negative rate during the headiest days of the of the boom years, as consumers worry about job security, home prices and stock market volatility. And though spending the extra money from the payroll tax cut may benefit the country, financial experts say the best strategy for individuals is to save as much of it as possible.

It’s much better for everyone that the gross domestic product (GDP) is expanding rather than contracting. Nevertheless, in recent years there has been growing appreciation of how GDP is an inadequate or incomplete measure of well-being.

For much of the past four decades, economists have puzzled over a paradox that cast doubt on GDP as the world’s main indicator of success.
People in richer countries didn’t appear to be any happier than people in poor countries. In research beginning in the 1970s, University of Pennsylvania economist Richard Easterlin found no evidence of a link between countries’ income–as measured by GDP per person–and peoples’ reported levels of happiness.
More recent research suggests GDP isn’t quite so bad. Using more data and different statistical techniques, three economists at the University of Pennsylvania’s Wharton School–Daniel Sacks, Betsey Stevenson and Justin Wolfers–found that a given percentage increase in GDP per person tends to coincide with a similar increase in reported well-being. The correlation held across different countries and over time.
Still, for measuring the success of policy, GDP is far from ideal.

David Brancaccio over at Economy 4.0 is a keen observer of alternative measures to GDP. For instance, this post by colleague Emilie Mutert looks at a green GDP calculation.

Speaking of green, electric cars are fascinating (or at least I find them intriguing). Still, I can’t in good financial conscience let go of my current car. It’s fuel efficient, paid for, and it still has miles to go. I’m also not an early adopter of high-tech gear. From flat screen TVs to smart phones I tend to wait until the cost comes down and the bugs are fewer. But I am following closely the personal economics of electric cars and hybrids closely. The cost curve should eventually plunge when electric cars are no longer a niche item but a mass consumer product.

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