Adam Davidson had an amusing piece on the consumption of various items (e.g. lipstick, nail polish and men's underwear) that can be taken as reflecting consumers' sentiment. At one point he comments on the high levels of consumption of the last two decades and implied low levels of savings:

"During the fast growth of the late 1990s and mid-2000s, and the dark times that followed, people have been choosing to spend more and save less than ever before. Paradoxically, this happened just as pensions have been disappearing and life spans have been increasing. It suggests that Americans are so caught up in every short-term enthusiasm or agony that they haven’t thought enough about long-term fiscal health."

While this is true in the sense that most workers are ill-prepared for retirement due to their lack of saving, it is important to recognize that their consumption was driven in large part by the wealth created by first the stock bubble in the 90s and then the housing bubble in the last decade. People saw stock prices soar at double digit rates in the second half of the 90s. They were led to believe by experts (i.e. the people quoted in places like the NYT and Washington Post) that stock prices would continue to remain high. If the wealth created by this bubble had been real, then many of the people who were not saving during this period would have been just fine.

The same applied, albeit even more so, to the run-up in house prices in the last decade. Housing is much more widely held than stock. When people saw their house prices rise by 10-20 percent a year, they saw little point in putting a few thousand dollars into a retirement account. The increase in house prices gave many homeowners far more additional wealth during the bubble years than they could have hoped to accrue by putting aside a portion of their income.

While it was predictable that this bubble would also burst, most homeowners were far more likely to hear the voice of someone like Federal Reserve Board Chairman Alan Greenspan, insisting that there was no bubble, then one of the few economists who were raising the alarm. Given the information that they had at the time, it was perfectly reasonable for people to think that they did not need to save for their retirement.

Leave your comments

Post comment as a guest

  • No comments found

GuideStar Exchange Gold charity navigator LERA cfc IFPTE

contact us

1611 Connecticut Ave., NW
Suite 400
Washington, DC 20009
(202) 293-5380

let's talk about it

Follow us on Twitter Like us on Facebook Follow us on Tumbler Connect with us on Linkedin Watch us on YouTube Google+ feed rss feed