Do Seniors Need Saving?
The big economic argument today is not just about tax cuts or free trade or minimum wages. It's about the risks created by going gray and going global at the same time -- and about how much individuals can cope unaided. Can we expect citizens to weather the challenge from India and China without some new form of government help, especially when the baby bust is threatening to shred traditional welfare programs?
This question is probably the best indicator of whether you belong on the left or the right, at least in terms of economics. It is the litmus test for our graying, globalizing era, much as tax cuts and deregulation were the litmus tests a quarter of a century ago.
There's no doubt that, at the moment, individuals aren't coping well with risk. Globalization has boosted income volatility and job insecurity. Workers are being forced to shoulder more of the risks in saving for a pension and more of the costs of their own illnesses. Personal bankruptcy filings have risen. Yet rather than responding to this increased risk in a rational way -- by putting money aside -- households have chosen to save less. Between 1950 and 1981, the personal saving rate fluctuated between 6.6 and 9.5 percent of income. Since then it has fallen steadily and now stands at about zero.
John Maynard Keynes famously wrote about the "paradox of thrift," explaining how excessive saving can drive an economy into depression. But today we face a paradox of non-thrift: Crazy Americans saved back in 1950, when male life expectancy was 66 years and China was walled off by Mao, but they don't save now even though life expectancy is 75 and China is a fierce competitor.
Why has saving collapsed just when the reasons to save have gotten stronger? This is where the left-right divide gets interesting. The left believes that individuals aren't preparing for a risky world because they can't. Therefore, government should devise new safety nets for the new age: wage insurance, national health insurance, government 401(k) accounts and so on. The right thinks that individuals potentially could cope with modern risks without being nannied by the government.
Some left-wing arguments seem unconvincing. People don't have enough money to save? For nearly all American households, inflation-adjusted incomes have gone up since the 1960s and 1970s, so saving ought to be easier than it used to be.
Equally, Americans can't save because they are enslaved by the consumer culture? Leftish social critics have advanced variants on this case since the late 1950s, when books such as Vance Packard's "The Hidden Persuaders" and John Kenneth Galbraith's "The Affluent Society" argued that the advertising industry was manufacturing synthetic wants to fuel the juggernaut of profits. But people managed to save back in the 1950s, so they could also save today. Indeed, the hidden persuaders are surely less insidious now than they were then: People have gotten better at zoning out their messages.
The right, for its part, advances its own unconvincing arguments. One is that stock prices and house prices have boomed, so individuals can look after themselves even without putting aside additional money. This overlooks the fact that half of households don't own stocks, and you can't sell your kitchen to pay medical bills.
But the main right-wing argument is intriguing, albeit speculative. It's that the dearth of personal saving reflects temporary forces. As Brink Lindsey of the Cato Institute puts it, Americans are learning to live with new stresses and freedoms, and their first response has been to save worrisomely little. But in time they may regain balance, rendering new-left safety nets unnecessary.
Consider the relatively new freedom to borrow, for example. Credit card loans, auto loans, home equity loans, mortgage refinancing: These sources of debt allow Americans to consume when and how they want, in a way unimaginable in the high-saving 1950s and still not fully possible in today's high-saving Germany. These novel borrowing opportunities are partially responsible for the collapse in American saving. But, like inexperienced drivers growing accustomed to the roads, Americans may eventually learn to handle high-powered financial tools while still saving prudently.
Or take the changed attitudes toward work and leisure. The high-risk, high-reward economy encourages people to put everything into their jobs, with the result that they have little energy left over for chores that might save money. To keep up with their work, two-career couples buy cooked meals, send the laundry out, bribe the kids with toys rather than attention. Perhaps in time the pendulum may swing back. The spend-hard-in-order-to-work-hard family may give way to thriftier behavior.
We can't know whether saving will rebound or whether Americans will prove forever unwilling to save rationally. But we do know that new-left social programs will weaken incentives to look after oneself: Their premise will be self-fulfilling. Once we go down that road, we will be signing up for an economy with much higher tax rates than in the past, never mind the unsustainable lows to which the Bush administration has pushed them. New-left social safety nets may ultimately make sense, but their advocates must always answer the question: Are we really sure that Americans, enviably affluent by all historical standards, cannot cope with the uncertainties of modern life unaided?