From the time political philosopher John Locke described the right of any citizen to their own property, the value of personal savings became a central instinct in the minds of any raised in a democratic system. The United States is no different. Therefore, data from the U.S. Bureau of Economic Analysis showing a consistently high level of personal savings since the middle of 2008 ought to offer encouragement in the midst of economic trouble.
But what do these savings figures really mean? What significance do the numbers have in a recession? Why is it critical for Americans to save? Investigating a common-sense practice such as savings reveals some unexpected answers.
First, it is important to note that personal savings is not the same as total national savings. Due to government deficit spending, the total national savings rate actually declined over the period in which personal savings increased.
Next, the necessity of saving deserves attention. Low savings rates before the recession were an indicator, though not necessarily a direct cause, of the coming problem. Homebuyers, driven by a high demand for new and larger houses, took out risky mortgages provided to them by a blend of government and private agencies. Lacking proper credit history to take out home loans, the buyers soon languished in debt, then defaulted on their mortgages.
A greater consideration of savings by American consumers and homebuyers could have averted the explosion of risky loans that helped drive the housing bubble. Saving more now and ensuring sufficient personal means to pay off loans will prevent similar credit problems in the future.
Yet there is not a direct relationship between savings and economic health. The need for consumer spending is central in the United States economy. Anywhere from two-thirds to 70 percent of the national economy is attributable to consumer spending.
Furthermore, strong savings cannot exist in all economic sectors simultaneously. An economy in which all sectors save at a high rate becomes self-defeating, as no entity is interested in taking out loans from banks that savings funds themselves provide. Then the economy stalls without the proper flow of savings and loans.
In the recession, therefore, two conflicting forces exist on the consumer. On one hand is the need to save and not incur vulnerability to debt. On the other is the need to propel economic growth and investment. The savings rate now is perhaps even too high.
There is hope for this dilemma. The government should raise its savings rates as the private sector regains momentum, meaning renewed economic growth. Stronger economic growth will lead to greater consumer spending as buyers are less psychologically inclined to hoard their wealth. A healthy balance can result, truly upholding the long-run value of each citizen’s personal property.
Pearce Edwards is a sophomore political science major from Albuquerque, N.M.