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Home Publications Blogs Beat the Press You Don't Have to Save When Your House Does it For You

You Don't Have to Save When Your House Does it For You

Sunday, 18 December 2011 09:39

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.

Comments (4)Add Comment
written by skeptonomist, December 18, 2011 9:38
The decrease in saving began about 1980, long before the housing bubble. The stock-market bubble is a poor explanation for the decreased savings; as Dean says, most people do not own stock and there was no increase in saving with the collapse of the dot-com bubble (which occurred before the housing bubble started).

What is missing from most accounts is the increasing use of credit cards - the period of decreasing saving coincides with increased use of credit cards. Why did this type of credit become so prevalent? Deregulation for one thing. The rates on balances would have been illegal (usurious) in most places before the 80's. Credit cards have now largely replaced currency. It is not possible to increase one's debt by paying with currency.

It is just not reasonable to expect to account for changes in savings rate without considering the effects of increasing availability of credit through credit cards and other means. There may also be effects of changing consumption patterns such as increasing use of and reliance on rapidly obsolete electronic devices.

We are not likely to have another housing bubble soon, but the banking industry continues to make huge profits with credit cards. Maybe some thought should be given to whether having banks handle today's currency is the best way to do it.
A couple other thoughts
written by Holden Pattern, December 18, 2011 10:05
1) If savings relative to previous eras declined even before the bubbles (but I recall a stock bubble in the mid-1980's as well), maybe part of the reason is just as simple as "wages fell relative to living expenses". We've all seen the graphs of flatlined real wage growth.

2) "Your house will save for you" combined with Greenspan's cheap credit and flatlined wage growth was also a driver for the desperation for people to buy a house and willingness to take (retrospectively) huge risks.

When your income is flatlined, housing is the only leveraged investment that you can make, and housing is touted as going up permanently (and it sure looks like that as every house within increasingly long driving distances of your job keeps climbing out of your reach), you'll be desperate to get out of your rental and into a house -- there's no other way for you to save for retirement or for your kids.

Also too, public school segregation by income -- rentals in many places are concentrated in crappy school districts -- so you pay a mortgage instead of private school fees, which seems like a good deal right up until the bubble collapses.

And your reward for behaving precisely according to the incentives created for you by our government and financial industry when it goes south (and the rich are bailed out) is to be called a deadbeat and a liar and told you were irresponsible for trying to use one of the few avenues available to you to build up a nest egg and provide for your kids in a meaningful way.
written by PeonInChief, December 18, 2011 3:48
Uh, what percentage of the population had a few thousand--or even a few hundred--to put into a savings account?
Comment on the Politifact "lie of the year" debate "
written by Pat Donnelly, December 24, 2011 11:34
An important point not mentioned is that the Ryan plan relies on provisions of Obamacare to work; insurance companies cannot refuse or charge more for customers with pre-existing conditions and they cannot drop your insurance without just cause. Without these provisions many medicare age people would be denied or over charged insurance. The problem is the Republicans want to repeal Obamacare.
Thank you, Pat Donnelly

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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.