A Nation of Savers?

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If the 1946 film classic It’s a Wonderful Life depicts the conservative, community-focused financial ethos of an earlier generation, today’s overriding fiscal virtues — spending through debt and self-expressive consumption — might be defined best by the get-rich-quick TV game show Who Wants to Be a Millionaire.

“Americans once had boundaries and standards of financial behavior imposed upon them by local banks and other community institutions. We don’t anymore, yet we need to re-instill in Americans the importance of thrift, of living more responsibly,” said Robert D. Manning, an economic sociologist and director of the Center for Consumer Financial Services at the Rochester Institute of Technology.

Manning, the author of the book Credit Card Nation: The Consequences of America’s Addiction to Credit and a star of the documentary In Debt We Trust, distinguishes the 2008 recession as uniquely “consumer-driven.” It is, he says, the gnawing consequence of subprime mortgages, ever-escalating credit card limits, a frenzy of home-equity loans, buy-now-pay-later offers and other easy-credit opportunities.

Never before has the U.S. economy been so dependent on consumer spending (about two-thirds of the gross domestic product) while so encumbered by debt. According to the Economic Policy Institute, total household debt obligations as a share of disposable income increased from 33.2 percent in 1949 to 102.2 percent in 2000 and then skyrocketed to 131.8 percent in 2005. More and more of us are borrowing to service our debt.

Not surprisingly, America’s savings rate is dead last among industrialized nations. Last year Americans spent more than they earned — the first negative savings rate since the Great Depression. (Essentially, the savings rate is the percentage of disposable income that is not spent. Existing investment holdings like stocks or a 401(k) do not factor in, but any new contributions to such accounts do.)

In speaking engagements during the recent boom years, Manning often likened the U.S. economy to an athlete on steroids: “For a while it looks great. But when the effects wear off — like now — it’s not a pretty sight.”

Embracing thrift and adopting temperance toward consumer credit (which may happen anyway and not always by choice) will not only improve long-term financial stability in the U.S. — healthy credit markets and buoyancy on Wall Street — but also increase our economic competitiveness. The dearth of homegrown capital, Manning and others note, prevents us from investing where our country most needs it: renewable energy, new technologies, education and other value-added sectors that will distinguish us in the global marketplace.

Can American consumers rediscover the virtue of thrift?

Ronald T. Wilcox sees a host of policy initiatives that could spawn a culture of savings. Wilcox, a professor of business administration at the University of Virginia’s Darden School of Business, a former economist with the Securities and Exchange Commission, the author of the recently published Whatever Happened to Thrift?: Why Americans Don’t Save and What to Do About It and a regular blogger on the subject, cites some low-hanging fruit: Renew efforts to market savings bonds; encourage community banks to tailor savings accounts to low-income residents; create programs that allow even the smallest companies to offer 401(k) plans to their workers.

“As simple as it sounds, we just need to make it easier for people to save,” he said.

Other proposals target so-called “anti-thrift” institutions such as state lotteries, payday lenders and check-cashing shops, which cater mostly to low-income workers, and replace them with credit unions and other consumer-friendly community lenders. (These and other proposals can be found in For a New Thrift: Confronting the Debt Culture, a recently released report from the Commission on Thrift.)

Wilcox also touts a more ambitious proposal — taxing consumption rather than income, compelling workers to think twice before opening their wallet.

A variety of plans have been floated, from scrapping the existing federal tax code in favor of a European-style value-added tax to hybrid models that preserve the code while allowing deductions for saved disposable income. Despite considerable attention in recent years and a bipartisan Senate initiative a decade ago, the plan rarely gains traction. The left tends to view a tax on consumption as regressive, a break for the wealthy, while the right worries it will stifle commerce by raising the price of goods and services.

Wilcox rejects those criticisms as reactionary, noting endorsements from economists and political leaders on both ends of the spectrum. While neither McCain nor Obama has championed a consumption tax, neither has rejected one outright.
Whether a value-added tax even would spur savings is an open question. Research by two academics at the University of Delaware suggests such a tax might spur a 10 percent increase in U.S. savings, but the authors stress the “might” aspect and call for more data broken down by age.

Nonetheless, the dark cloud of a deepening recession may reinvigorate the debate. The American aversion to thrift, Wilcox believes, is reflective of the unflagging spirit of optimism that, for better or worse, occupies our national character.

“Optimism is a ubiquitous American trait,” he writes, “the stuff of mythology and political language,” a product of the “rising hopefulness of paupers.” We borrow rather than save, Wilcox contends, because we know tomorrow will always be better, and it usually is. Indeed, throughout history U.S. savings rates have tended to increase only in times of grave danger or national uncertainty when optimism is momentarily shelved. Now might be one of those times, he says, cracking the door for increased thrift.

Manning agrees, proposing a massive grass-roots effort to remold our culture of debt into a culture of savings. His next project is a book and film about successful public campaigns in earlier eras to encourage thrift. He says much can be gleaned from those efforts, which typically rallied citizens around a common threat: the Depression, World War II, the battle against communism. The message was articulate and coordinated, spread by savings and loan officers visiting elementary schools to enroll new bank customers, by celebrities and local leaders extolling the virtues of war bonds or savings bonds and through public service ads.

Manning believes our own larger cause is in plain view — the meltdown of our financial sector and the lingering recession predicted — and argues that public officials must forcefully acknowledge the dire threats that loom. “Washington needs to spell out the truth, that we’re all going to need to make sacrifices in the way we live,” he said.

Thus far, nobody has stepped up to the mic. Public officials lob vituperative assaults on banks, credit card companies, corporate CEOs and lax regulators, yet few are prescribing the needed populist elixir: to stop living beyond our means and start saving for a rainy day.

“It is quite frightening,” said Benjamin Harris, an economist at the Brookings Institution who specializes in savings and tax policy. “All the conversation we’re hearing — the bailout, the credit markets — all of it centers around getting back to what we think of as normal — back to the way it used to be, rather than how things should be. I’m still waiting to hear the term ‘national sacrifice.’”

In fairness, regulators and elected officials are in a macroeconomic bind. Encourage parsimony, and consumer spending will decline, deepening the recession; do nothing, and we remain a nation of debtors, vulnerable and dependent on foreign capital.

“We get these mixed messages all the time,” Harris said. “The government gives us tax credits for saving, but then they send us a stimulus check and tell us to go out and spend it at the mall.”

Wilcox recognizes the challenge, noting the somewhat Faustian quality of an economic system that requires ever more consumer spending to fuel growth.

“When the economy is like it is now, the government wants us to spend, so you won’t hear much of a pro-thrift message coming out of Washington,” Wilcox said. “But eventually we need to hear it. In the long run, we are far better off, as a nation, with strong balance sheets at home.”

Will that happen? Lendol Calder, a cultural historian at Augustana College and author of Financing the American Dream: A Cultural History of Consumer Credit, is not convinced. He says history reveals a pattern of thrift when times are tough, but when the economy roars back to life, the mattress gets cleared out rather quickly.

“Americans have always had a debt wish,” he said. “It’s part of our character. The challenge isn’t finding ways to reinvigorate thrift; it’s finding a way to maintain it long after the doom and gloom is gone.”

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