When I speak to non-economists about economics, I often tell them that norms are often more powerful than incentives. David Brooks has a must-read column in The New York Times today that strikes this note very well with regard to saving:
Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.
Do the data back him up? Let's look at the data on the personal saving rate out of disposable income:
Graphs for the government's budget deficit and the nation's trade deficit would also show a widening beginning around the same time during the 1980s.
Brooks goes on to implicate a number of institutions in his column, but he leaves out one that I think is important--your neighbors. If the people with whom you interact are willing to leverage themselves to the hilt to buy things--housing, durable goods, whatever--then they bid up the prices of these things when you have to buy them as well, even if you are trying to behave more prudently.
A recent study by the McKinsey Global Institute suggests another factor: the decline in the saving peak, which is in fact gone from the Boomer generation. Here's the key slide (#4) from the presentation:
The McKinsey study goes on to suggest that the Boomers will likely compensate for this decline in a saving peak by working longer. Seems about right to me.
Bookmark/Search this post with:
Savings
The failure of the personal savings rate to account for capital gains makes it a totally specious statistic for purposes of comparison to the past.
Question: How much did your parents have in their 401k/IRA, as opposed to their passbook savings account, 30 years ago? Answer: zero.
There's something encouragingly Puritanical about fretting that we aren't frugal enough any more, but our nearly $60 trillion in household net worth puts paid to the argument.
conservative paradox
So state lotteries are a bad thing, but does the conservative Mr. Brooks support other less regressive, or dare we say more progressive ways for states to raise revenue? Is demagoguing all tax increases getting in the way of a reasonable tax policy at all levels of government.
Our credit industry freely takes advantage of our lack of sophistication and basic understanding of finance to their own benefit. Do we need new laws to regulate the industry, better financial literacy of something else?
We are frequently told in our country that we live in a consumer driven economy (as opposed to a producer-driven economy). The response is always to spend more, whether we are attacked by terrorists or a housing crisis. When is it OK to tell us to spend less?
Time to buy the neighbors goods at deflated prices!
"If the people with whom you interact are willing to leverage themselves to the hilt to buy things--housing, durable goods, whatever--then they bid up the prices of these things when you have to buy them as well, even if you are trying to behave more prudently."
Ahhh . . but here comes the lovely part. When the neighbors can no longer afford those expensive goods (and they're trying to raise cash to get through this month) they put those expensive goods out in their yards with sale tags attached. Who says you have to pay retail?
"Norms"?
Oh my. Another blow to rational choice theory.
Post new comment