For decades Americans were hectored to increase our savings rate. Now President Bush and others say it’s our patriotic duty to go out and spend. Which is it?
Good question, but keep a distinction in mind. There is a difference between national savings and personal savings. National savings includes savings (or deficits, the opposite of savings) by the government. One reason you hear less hectoring about the need for more savings is that during the 1990s the government swung from huge deficits to (temporarily, it seems) surpluses. So national savings improved although personal savings did not.
So saving or spending: Which is good? The answer is that they both are. More spending, by individuals or corporations or the government, means more demand, more production, more jobs, more prosperity. More savings means more investment, more production, more jobs, more prosperity. The trouble is that a dollar can be saved or spent, but it can’t be both. So every dollar we spend is one less dollar we have saved and vice versa.
It’s a trade-off. But because spending is more fun than saving, and because the stimulus payoff from spending—by individuals or the government—is short term while the payoff from saving is longer term, politicians and citizens alike have a tendency to tilt the trade-off in favor of spending. A recession like the one we’re in now—especially when combined with an appetite-killing shock like 9/11—is generally considered the right moment for spending to take priority. The danger is that when the moment comes for saving to take priority again, we won’t be as quick to embrace it.
Explainer thanks Bob Cumby of GeorgetownUniversity and this General Accounting Office report. (You’ll need the free Adobe Acrobat software to read it.)
