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Too Little Savings?: The Cure May Be Worse Than the Disease
| Article
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18330 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
10 / 1990 |
6,186 Words |
| Author
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Dan Mitchell and Andrew F. Quinlan
Dan Mitchell is currently John M. Olin senior fellow in
political economy at the Heritage Foundation, a Washington-
based nonprofit public policy organization. Prior to working
with Heritage, he worked as an economist for Sen. Robert
Packwood (R-Oregon), the ranking Republican on the Senate
Finance Committee Andrew F. Quinlan is a free-lance writer
based in Washington, D.C., who specializes in economic issues. |
Economic policymakers and political commentators are almost unanimous in proclaiming a savings crisis in America. According to conventional wisdom, America's savings rate is at a record low level, depriving our economy of the funds needed to generate future economic growth. These “experts” maintain that the trade deficit, high interest rates, and a sluggish economy are just a few of the consequences of our consumption-oriented society.
Numerous policy proposals have been advanced to address the supposed savings crisis. Some politicians believe that raising people's taxes will encourage them to save more. Others, including President Bush, think the answer is to reduce the current tax system’s bias against saving. Many economists feel that other factors unrelated to the tax code depress savings and have suggested policy changes to address those areas.
The savings controversy is often needlessly confused because of a failure to understand that there are two separate concepts of savings. The savings rate is what economists call a flow, representing the portion of income that is not consumed in a specific period of time. Savings, on the other hand, is properly measured as a stock, the total level of savings that exists at any given time.
Politicians often fail to grasp the difference between the savings rate and total savings. For instance, reducing the federal budget deficit will not - as politicians constantly maintain - increase our savings rate. Indeed, it will not even increase total savings. Instead, if done properly, a lower budget deficit will increase the amount of savings that will be available for private sector investment.
Another reason why the distinction between savings rate and total savings is important is that the savings rate can be temporarily low, as it was in this country in 1987, yet because of total savings increases, borrowers will have adequate access to capital. Annual measures of the savings rate also often fail to capture increases in net worth. If changes in net worth were included, the statistical savings data would be a more reliable indicator of the stock of private savings.
Is There a Savings Crisis?
Debating what changes in the tax code or other policies would have the greatest impact on savings, however, avoids the question of whether there truly is a savings crisis in America. What defines a
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