Don’t Blame Greenspan; It’s the Growing Savings Deficit, Stupid
What on earth is so worrying the Federal Reserve Board and its chairman, Alan Greenspan, that they keep raising interest rates, trying to slow a U.S. economy that is just getting healthy after years of recession--and threatening a California economy that is still in the convalescent ward?
Savings, in a word, or lack of same. The real, underlying concern of Greenspan and the Fed is that the U.S. savings rate has fallen back again after a brief rise.
Forget all the ballyhoo about baby boomers saving for retirement. Americans are saving only 4% of their disposable, after-tax incomes these days, and that’s as low as the savings rate has gone since the 1930s.
The truth is we’re spending more; consumer credit card debt is going up again.
And the federal budget deficit, having come down to less than $200 billion, has stopped falling and may turn up again as well--if for no other reason than rising interest rates ratchet up government borrowing costs. The deficit makes a difference because it soaks up half of what limited private savings there are.
In short, the specter of Americans living a rake’s progress, consuming today and putting nothing away for a chilling tomorrow, looms again.
And that has consequences. “The reason interest rates are going up may be no mystery at all,” says economist Barry Bosworth of the Brookings Institution in Washington. “We have a capital shortage.”
Bosworth is saying publicly what Greenspan and the other Fed governors worry about privately: that the gigantic U.S. economy, which has now reached $7 trillion in annual output of goods and services, doesn’t have sufficient resources to allow for rapid creation of more goods and services, jobs and incomes.
That is, if we tried to raise American living standards dramatically, we would quickly stretch our resources to the limit and develop bottlenecks that in turn would wastefully increase costs, resulting in higher inflation.
“If you want growth of 4% or more per annum, you have to accept inflation of 3.5% or more along with it,” says John Wilson, chief economist of BankAmerica Corp.
The alternatives for the Fed are to finance U.S. growth by borrowing overseas, as was done in the 1980s, or to throttle the economy back to a level of growth that can be sustained. Greenspan has chosen the throttle.
The Fed has lifted short-term interest rates three times since Feb. 4. and seems prepared to lift them again in May, apparently with the aim of slowing the economy to a growth pace of 2.5% a year.
That level of growth would not stretch our resources or accelerate inflation, but neither would it do much to reduce 6.5% unemployment or lift U.S. living standards dramatically.
But that’s why most Americans are mystified and frustrated. The economy went through a long, draining recession. Practically everybody’s job is insecure these days; raises are history, incomes aren’t rising.
And yet at the first signs of pep and drive in the economy, along comes a guy named Greenspan applying the brakes.
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What’s going on? Greenspan is facing facts: We aren’t as rich as we used to be. In other times, savings were greater. In the 1950s--and ‘60s and ‘70s--Americans saved 6.7% to 7.7% of their annual incomes in bank accounts and trust funds, mutual funds and insurance policies. And much of that money went to finance industry because the country didn’t have a big government deficit, and middle-class Americans didn’t have a lot of entitlements.
But since 1981, according to the Organization of Economic Cooperation and Development, “the United States has saved remarkably little of its national income.” In the 1980s, Americans saved 4.5% of their income on average, and now that has fallen to 4%.
Also, federal deficits have ballooned thanks to a river of benefits, from Medicare to student loans to welfare payments, that Washington sends through society.
Other countries save more. The average savings rate for 24 industrial countries, including all of Europe, is 9%; Japan’s savings rate, even in its current recession, is more than 15%.
Japan created the modern model for savings. After World War II, its government spurred industry to create jobs and then urged people to deposit tax-exempt savings in post office accounts, which the government then funneled to industry to create more jobs and so on.
Today, Japanese postal accounts are no longer tax-exempt as the government tries--however slowly--to shift to a consumer economy. Still, savings remain high in Japan because the population is growing older and both government and people feel the need to save for old age.
“Americans are also growing older,” notes economist Bosworth, “but curiously they are not saving more.”
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In the 1980s, the United States attracted foreign savings to its Treasury bonds, and it could do so again today. But that would push up the dollar’s exchange rate and undermine the hard-won competitiveness of U.S. companies.
Furthermore, foreign savings may not be there. Europe and Japan may use their savings to revive their own economies--or to invest in building new markets in developing countries.
The inescapable fact is that we need to change. The quickest way to restore national saving is to cut the budget deficit. The White House estimates the deficit will be $175 billion in the next fiscal year, but it could come in higher because rising interest rates mean the Treasury will have to pay more on its bills and bonds.
Also, private savings could be encouraged by tax exemptions, and the money could be funneled to support new industries and education so more U.S. workers could earn the growing incomes that led to higher savings in former times.
Saving more and making do with fewer entitlements won’t be easy for Americans. But it will be more useful than blaming Greenspan and the Fed for facing facts.
