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Home Publications Blogs Beat the Press Consumers Continue to Spend Rather Than Save

Consumers Continue to Spend Rather Than Save

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Tuesday, 01 March 2011 04:32

The Washington Post told readers that "consumers are sitting on their pocketbooks," in reference to the 5.8 percent savings rate reported for January. In fact, this savings rate is well below the average for the 50s, 60s, 70s, and 80s. The wealth effect from the stock bubble in the 90s and the housing bubble in the 00s depressed saving rates in these decades.

 

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With the housing bubble now finishing its deflation we should expect the saving rate to rise back to its historical level. The alternative would imply that workers will have much less money for their retirement relative to their income in their working years.

Comments (5)Add Comment
More Savings is Just More Socialism and Recession
written by izzatzo, March 01, 2011 6:21
With the housing bubble now finishing its deflation we should expect the saving rate to rise back to its historical level. The alternative would imply that workers will have much less money for their retirement relative to their income in their working years.


Exactly. This is why the younger generation in the USA is so willing to forfeit their current earnings over to the older generation in the form of high taxes, because there's so much available they can fund socialist subsidies and still save enough for their own retirement at the same time.

Only a socialist like Baker would encourage more savings through the paradox of thrift to undermine higher consumption demand in a deep recession.

Stupid liberals.
We should always define save in this context
written by Floccina, March 01, 2011 8:34
When I buy a stock that is that sending or saving in this context? When a company buys capital equipment that lasts multiple years is that sending or saving in this context?
...
written by skeptonomist, March 01, 2011 8:34
The savings rate, which I have been showing for some time:

http://www.skeptometrics.org/Savings.png

has been going down since around 1980, so its decline can't be explained entirely by the stock market and housing bubbles. What did drastically decline before the stock-market bubble got going is wages:

http://www.skeptometrics.org/WeeklyWages/WeeklyWages.htm

If you make less money and expenses do not decline (in real terms) you will be able to save less. I don't have a simple pat explanation for the trends in savings rate, but wage and salary levels must be at least as important as the stock-market wealth effect, since most people don't have significant visible wealth in the stock market. Real wages have held up in the current recession, but there seems to be no prospect of them returning to 1973 levels (with respect to GDP), so the recent increase may be temporary. Many people must be postponing major purchases during the recession.

My savings rate diagram above, going back to 1930, shows that savings rate did decline drastically (to negative) during the Great Depression, when wages did decline. It went up very high during WW II, when wages were also high.
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written by skeptonomist, March 01, 2011 1:31
To answer Floccina's question, the savings quantity shown is the difference between disposable personal income (DPI) and personal consumption expenditures (PCE) as given by the Fed:

http://research.stlouisfed.org/fred2/categories/110

or from directly from the BEA (www.bea.gov). The expenditures do not include stocks, etc. although they do include commissions thereon and other financial services.

Personal income has increased steadily through the recession, but expenditures dropped drastically starting in late 2008 - this is why the savings rate jumped up at that time. I think this drop is more readily explained as a result of panic about the financial crisis and deepening recession than as a result of people suddenly seeing the light about the necessity for saving for retirement, and thus the savings rate is more likely to go back down than up if recovery continues. Equity losses from the puncture of the housing bubble showed up well before late 2008.
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written by urban legend, March 01, 2011 3:56
Isn't it funny how closely the decrease in savings tracks with the decline of unions, stagnation of wages, and explosion in the costs of health care, higher education and housing?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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