November 24, 2011
Why We Spend, Why They Save
By SHELDON GARON
CHRISTMAS is nearly upon us. Americans, once again, are told that it’s our civic duty to shop. The economy demands increased consumer spending. And it’s true. The problem is that millions of lower- and middle-income households have lost their capacity to spend. They lack savings and are mired in debt. Although it would be helpful if affluent households spent more, we shouldn’t be calling upon a struggling majority to do so. In the long run, the health of the economy depends on the financial stability of our households.
What might we learn from societies that promote a more balanced approach to saving and spending? Few Americans appreciate that the prosperous economies of western and northern Europe are among the world’s greatest savers. Over the past three decades, Germany, France, Austria and Belgium have maintained household saving rates between 10 and 13 percent, and rates in Sweden recently soared to 13 percent. By contrast, saving rates in the United States dropped to nearly zero by 2005; they rose above 5 percent after the 2008 crisis but have recently fallen below 4 percent.
Unlike the United States, the thrifty societies of Europe have long histories of encouraging the broad populace to save. During the 19th century, European reformers and governments became preoccupied with creating prudent citizens. Civic groups founded hundreds of savings banks that enabled the masses to save by accepting small deposits. Central governments established accessible postal savings banks, whereby small savers could bank at any post office. To inculcate thrifty habits in the young, governments also instituted school savings banks. During the two world wars, citizens everywhere were bombarded with messages to save. Savings campaigns continued long after 1945 in Europe and Japan to finance reconstruction.
All this fostered cultures of saving that endure today in many advanced economies. The French government attracts millions of lower-income and young savers with its Livret A account available at savings banks, postal savings banks and all other banks. This small savers’ account is tax free, requires only a tiny minimum balance, and commonly pays above-market interest rates. In German cities, one cannot turn the corner without coming upon one of the immensely popular savings banks, called Sparkassen. Legally charged with encouraging the “savings mentality,” these banks offer no-fee accounts for the young and sponsor financial education in the schools.
Supported by public opinion, policy makers in European countries have also restrained the expansion of consumer and housing credit, lest citizens become “overindebted.” Home equity loans are rare in Germany, and Belgians, Italians and Germans are rarely offered an American-style credit card that allows the user to carry an unpaid balance.
How did America arrive at its widely divergent approach to saving and consumption? Seldom over the past two centuries has the federal government promoted saving; it left matters to the states or the market. In the 19th century, savings banks and building and loan associations did thrive in the Northeastern and Midwestern states; where they existed, working people saved at high rates. However, the vast majority of Americans in the Southern and Western states lacked access to any savings institution as late as 1910. Most Americans became regular savers only after the federal government decisively intervened to institute the Federal Deposit Insurance Corporation in 1934 and mass-market United States savings bonds in World War II.
The United States emerged from the war with unparalleled prosperity and hardly needed further savings campaigns. Instead politicians, businessmen and labor leaders all promoted consumption as the new driver of economic growth. Rather than democratize saving, the American system rapidly democratized credit. An array of federal housing and tax policies enabled Americans to borrow to buy homes and products as no other people could.
But from the 1980s, financial deregulation and new tax legislation spurred the growth of credit cards, home equity loans, subprime mortgages and predatory lending. Soaring home prices emboldened the financial industry to make housing and consumer loans that many Americans could no longer repay. Still, Americans wondered, why save when it is so easy to borrow? Only after housing prices collapsed in 2008 did they discover that wealth on paper is not the same as money in the bank.
As we seek to restore a balance between saving and consumption, what aspects of other nations’ experiences might we adapt to our circumstances? The new Consumer Financial Protection Bureau, while politically besieged, possesses broad powers to curb predatory lending. The bureau might also promote the creation of financial education programs in every school. Congress should consider ending costly tax incentives for wealthier savers and homebuyers while creating new incentives to encourage low- and middle-income people to save. Finally, federal intervention is needed to stop the banks from fleecing and driving away their poorest customers. If the banks cannot be encouraged to offer low-fee accounts for young and lower-income customers, the government might consider creating postal savings accounts for small savers.
To improve the balance sheets of America’s households, we must approach saving in a more forthright manner — not an easy thing to do when again and again we hear that individual prudence acts to impair the economy.