This Is One Of The Most Stupid Things I’ve Seen

The premise of this article.

http://www.theatlantic.com/business/archive/2016/04/why-dont-americans-save-money/478929/

“Maybe the only way to make people richer in the long run is to take their money away from them.”

Look, since I was a kid, the currency has lost huge amounts of it’s value. Also in that time the government has only for a very short time lived within its means. There’s also the fact that for most of my life the economy has been under constant threat from the government in one way or another. So lets start the Fisk.

When personal-finance columnists explain America’s poor saving habits, they sometimes start with the aspects of the human mind that make it challenging to plan for the future. Behavioral psychology is a useful scapegoat for many foibles. But the decline in savings is recent, and the human brain hasn’t evolved since the Ford administration. The bottom 90 percent of households saved 10 percent of their income in the first Reagan administration. By 2006, their savings rate was nearly negative-10 percent.

So what changed.  It’s essentially the same people between 1980 and now.  Here’s a clue. When then environment changes behavior changes.  Saving became a losers game with near zero interest and inflation.

Other writers suggest that the country’s low saving rate is purely a matter of American exceptionalism. But it is also a myth that the U.S. is alone in its turn against saving in the last three decades. The personal savings rate has fallen in Canada, Germany, and Japan, as well.

Still, there is something about the U.S.: Nearly half of Americans would not be able to come up with $400 in savings in an emergency, according to a Federal Reserve study cited in The Atlantic‘s cover story this month. America’s poor and its middle class live on the razor’s edge of financial security through their working years and are uniquely ill-prepared for retirement. The United States finished 19th for three consecutive years in a global analysis of retirement security, behind Australia, New Zealand, Japan, South Korea, Canada, and 13 European countries.

Of course not being able to keep jobs because high taxes force them overseas make it harder to save money for retirement.  Also people like to keep eating. In order to have money people need to earn it first.

So, why don’t Americans save money? A complete answer should take into consideration three things:

(1) Since the phenomenon is new, its cause must be new.

Yes, so what’s changed the most?  The size and scope of government might give you a clue.

(2) Since the decline in savings among rich countries is global, its cause must be global.

Not necessarily, but if you see that the governments are all doing the same kind of financial manipulations you might see a relationship.

3) Since America’s poor and middle class are so especially ill-prepared for retirement, there must be something “special” about America.

It’s hard to tell. Different countries may be further or farther behind on some things.

So here we start with the theories from “experts.”

Theory 1: Americans stopped saving when their incomes stopped growing.

The heyday of American saving was also a heyday of American income growth. This makes a lot of sense: It’s easier to save money when there’s more money to save.

Between 1960 and 1973, income per capita grew at an annual rate of 3.2 percent. But in the following two decades, its growth rate fell by half to just 1.5 percent annually. Several other countries saw similar slowdowns by the late 1980s, as well.  Among almost all major industrial countries, “rates of both saving and income growth have been simultaneously declining,” the economists Barry Bosworth, Gary Burtless, and John Sabelhaus wrote in a 1991 Brookings paper. Middle-class saving fell as households spent more of their income to keep up with rising expenses, like housing and health care, and with their own expectations that earnings would eventually start growing.

But this theory isn’t complete. Real income did start growing in the U.S. in the 1990s. So, why did savings continue to plummet after that?

Nowhere here are the words “welfare state” mentioned.  I guess all this just happened. ON the other hand I lived through that time and I saw what went on.

Theory 2: The poor and middle class went into debt to buy houses.

The 1990s turned out to be a great decade in the U.S. for income growth. But the personal saving rate fell by more than five percentage points, the most of any decade in the last half century.

What happened in the 1990s? Mortgage debt happened.

The U.S. homeownership rate, which barely budged between 1985 and 1995, suddenly took off in the 1990s, peaking at an all-time high in the mid-2000s.

One plausible story is that many Americans gave up their saving habits in the stagflation ‘70s, and by the time real income growth took off in the 1990s, many of them used the credit boom to buy suburban houses, cars, and furniture. The saving rate of the bottom 90 turned negative in 1998, partly thanks to this huge rise in mortgage debt. The housing bust was painful for millions of people hit with foreclosures after the crash, and it was particularly painful for those who put most of their savings into buying houses.

No good deed goes unpunished. In this case it was low interest rates and The Community Reinvestment act.

Theory 3: U.S. policies make it easy to not save money.

In the last few decades, the U.S. private sector has moved from “defined benefit” retirement plans, where workers have a clear sense of how much money they’ll get when they retire, to “defined contribution” plans, where workers only know how much money they’re putting away each year. The 401(k) is an example of the latter.

But the 401(k) is leaky. For every $1 contributed to these plans, 40 cents flows out in the form of premature withdrawals. This is euphemistically called “flexibility,” but it in the long run it’s more like unfunding one’s retirement. Countries like Germany, Australia, Canada, and the U.K., which don’t allow for early withdrawals except in extreme circumstances, all perform better in measures like the retirement index.

When taken together, Theories 2 and 3 suggest that, compared to other countries, Americans don’t save money because the U.S. has made it easy to spend, easy to borrow, and easy to raid savings to spend and borrow more.

From my experience, people don’t draw from their 401k’s unless it’s a lifechanging event.   Unfortunately the US has had a lot of lifechanging policies.

Theory 4: The U.S. is uniquely susceptible to conspicuous consumption.

In 1994, just before the housing boom pushed middle-class savings to negative levels, the economist James M. Poterba published an international study of saving rates by age. Here are his findings of personal saving rates for people under 30 around the world:

Canada: 0
Germany 9.8
Italy 10.0
Japan: 17.9
U.K.: 5
United States: -2.2

What’s made America uniquely bad at saving? Perhaps America’s mix of wealth and diversity, the very staple of the American identity, is the culprit of its spending habits. In 2008, several researchers studied the stereotype that minorities spend more than whites on “visible goods”—like clothes, shoes, jewelry, watches, salons, health clubs, and car parts. They discovered that, even after controlling for income, minorities save less than whites and spend more on such conspicuous consumption goods. But the story wasn’t just about race. White people in poor U.S. states spent more of their income on visible goods than whites in higher income states.

One possible explanation is that people spend more to signal that they’re not poor, Megan McArdle suggested. “If you’re a member of an identifiable demographic with low average incomes (southern, racial minority, rural) you are likely to be treated as if you are poor,” which makes it harder to get both social respect and work, she wrote. In a perfectly homogenous country with all white people, there would be less reason for the poor to signal their wealth with expensive visual cues, since they already look just like the rich. But in a diverse country where some demographic groups are stereotyped as poor, lower-income people might be more likely to pay for clothes and cars that say “I’m not who you think I am.”

People need stuff. Unless they’re dead.

Theory 5: The pressure to keep up with richer neighbors has been greatly exacerbated by rising income inequality.

The average savings rate has been falling at the exact same time that income inequality has been rising. Two economists from the Chicago Booth School of Business, Marianne Bertrand and Adair Morse, found that the trends might be related. They called their theory “trickle-down consumption”:“Households exposed to more spending by the rich self-report more financial duress,” they concluded. They even discovered a positive relationship between the income of the state’s richest households and the number of personal bankruptcies in that state. (It wasn’t just about rising home prices: Their finding was strong even after controlling for that.)

Instead, they found that conspicuous wealth was, well, contagious. When people see others living the high life, they try to buy it for themselves, even when they can’t afford it. Middle-class households in rich states shifted their spending from “non-rich goods”—gas, utilities, food at home—to “rich goods,” like clothing, jewelry, furniture, manicures, and exercise classes. If not for this shift, the non-rich would have saved an additional $800 a year in the late 2000s.

So why did the entire bottom 90 percent of the country enter a decade of negative savings? The first two answers offer an economic explanation: The American middle class made up for decades of flat wages with debt. But the last two studies offer a cultural explanation. Minorities and poor whites have spent more to signal that they are not poor, while Americans in general have spent more to signal that they are just like the rich.

America’s unique form of widespread conspicuous consumption might emerge from its public policy. The U.S. is more stratified than its peer nations, particularly when it comes to health care and education. There is no public healthcare in America, except for the old and very poor. Meanwhile, public-college costs have increased in the last few decades as public-education spending has declined at the state level.

American middle-class households pay fewer taxes and save less money than those in many other rich countries. This initially seems paradoxical, since they have more post-tax money to save. But maybe these two facts are intertwined. Perhaps it’s precisely because American policy has embraced free markets over egalitarianism that many Americans spend more to signal their prosperity, to separate themselves from their peer groups, and to show that they are better than equal.

* * *

Actually when you look at combined burdens Americans pay more, not less.  Americans also have carry more expenses. And the government manipulation if healthcare and housing drove those costs through the roof and then the floor was torn our from underneath millions of people.

There is a tendency for some to say that Americans don’t save money because they simply can’t afford to. In many cases, this is true. The cost of healthy food and clothes for a family with several children is fixed. Housing is expensive. Medical emergencies can be financially punishing. The short-term burdens of poverty make it impossible to plan for more than a few months ahead. Two-thirds of workers are at a company that doesn’t offer a retirement plan. The U.S. is unique in its large number of single parents with children. This disproportionately affects the poor: A college graduate at 29 is 30 percent more likely to be married than a peer who never finished high school. That helps to explain why nearly 60 percent of first births in lower-middle-class households are now to unmarried women.

But the poor can save more money, and it’s not offensive to suggest so. It’s clear that millions of lower-income people can collectively devote tens of billions of dollars to an investment vehicle that holds the promise of future wealth. They already do: The lottery is a $70 billion government-financing initiative disproportionately funded by the poor. This is politically vile, but it is also an indication that low-income people see lotteries as a kind of savings vehicle. Rather than put $200 per year away in a low-risk, low-reward savings account, some put $200 into high-risk, high-reward lottery tickets.

State lotteries are yet another hidden regressive tax.  Along with high cigarette prices and inflated alcohol prices. The government does a lot of preying on the people who can’t help themselves.  It’s a very old habit.

Since I’ve had enough I’m going right to the end.

It sounds counterintuitive and nearly paradoxical, but maybe the only way to make Americans richer in the long run is to take more money away from them.

Does that make people richer?  You know I’ve spent a fair amount of time looking at these things and most of the time, taking people’s money away actually makes them poorer.  Of course poor, helpless and dependent on the state works out for what people like Derek want, there in the DC enclave where all the advice comes from “experts” with all too many studies and no clue about realities. For the rest of us it’s a horror story. Just like those countries that Derek thinks is peachy keen.

Advertisements

7 comments

  1. MadRocketSci · April 20, 2016

    These clowns need to make up their minds. All through my economics minor, the brain-dead Keynsians were decrying the bourgeoisie’s greedy ‘hoarding’ of savings. They chanted inanities about how money that isn’t being spent isn’t worth anything (errr … store of value guys?). They completely forgot how the banks they manipulate even work, and that no, savings actually are invested anyway (where do they think the interest came from?!). (And if there is nowhere smart to invest those savings, then the economy teeters over the edge of malinvestment bubbles.)

    So now the Marie Antoinette types want to know why I don’t have a pile of cash ‘hoarded’ for them to raid? Let’s see … 1. I do. But I’m an unusual case in many ways. (I’m allergic to debt, and risk averse.) 2. I don’t have much of an income, so it isn’t much. 3. Even though I’m living large for a graduate student, I’m probably below ‘poverty level’ in terms of income … and so is everyone else. My generation is #$%^ed that way. No one is going to have the income to live what, one generation ago, was a normal life on 2.5 temp jobs in the “service economy”.

    Like

  2. MadRocketSci · April 20, 2016

    PS: The whole Keynsian program of punishing savings (through inflation, through banks not paying out interest, through negative interest, through inventory taxation preventing the “hoarding” of commodity goods) always made me furious. Savings are how we cushion personal economic shocks. If you are in trouble and have savings, you’re fine. If you get into trouble and don’t have savings, even minor cash-flow hiccups turn into life-ruining disasters. Savings are insurance against everything not working perfectly in life. They are necessary.

    Now these guys have gotten the nightmare world that they’ve always wanted: Businesses without inventory jerking along from supply problem to supply problem (the whole “Just in time” paradigm). Businesses without cash saved that have to make payments late, that end up threatened by foreclosure. Late payments that cause the same pain and instability for everyone down the line in a massive chain reaction of starved instability. People and their families not being able to count on any security: Either the security of their own thoroughly stolen surplus, or security from a sane business environment, or even security from insurance priced beyond their reach.

    And it’s our fault. Because of our loose moral habits and low intelligence. Yeah …

    Good people suck.

    Like

    • Wayne Blackburn · April 20, 2016

      The very first time I heard about “Just in time” supply, I thought the notion was insane. This was before I knew about inventory taxes. Now, it at least makes sense, from a tax point of view, but it really sucks to be a person who does his shopping late in the evening, when all of today’s deliveries have been picked over.

      Like

      • jccarlton · April 20, 2016

        Smart production planning is all about buffering and planning where you put the buffers. that little drill co, IRS decision did more harm than people realize.

        Like

  3. jccarlton · April 20, 2016

    People save when the y believe that there’s a future. What does that say about the country? Getting while the getting’s good is not a good sign, but people like Derek here just want to punish people even more.

    Like

  4. Pingback: The Nanny State Writ Blobacious | The Arts Mechanical
  5. MarkM · April 21, 2016

    1. The middle and lower class’s ability to borrow money has clearly increased over time. It used to be that it was difficult to get a credit card, a subprime mortgage, a home equity line or a payday loan. That is clearly not the case today – although, post-crash, the pendulum has somewhat swung the other way for a period of time and that group found their credit squeezed – but frankly, they still have more credit capacity than they did. In other words, the potential opportunity cost of having insufficient funds when needed went down – the bank overdraft fee/bounced check fee could be avoided with a payday loan. In part, these funds are available because the real interest rate on those loans are comparable to what used to get prosecuted as “loan sharking” rates back in the day. Indeed, anything over a 6%-8%/year interest rate was considered usury if you go back into the 1800s. As recently as 1968, the usury laws set by each state were still (with very few exceptions) in the 6%-12% per annum rate. At that rate, lending to the middle class and poor would be a risky proposition without an appropriate payoff.

    2. For better or worse, our modern economy has run on credit — and not having credit can be debilitating in the US (unable to rent a car at a reasonable rate, unable to reserve a hotel room without a significant cash deposit, unable to get a credit card, unable to rent certain apartments, etc.) We’ve hosted a variety of French teachers who teach at my daughter’s school. It is truly amazing how much of a handicap not having a credit history can be if you’ve not experienced it.

    3. 401Ks do have a significant advantage over pensions in a couple of ways: (a) they are mobile and follow the employee, (b) they typically have a much shorter vesting period and are not dependent on your final year of pay, (c) the employer pays them as it goes — so the bankruptcy of the employer will not typically impact the 401Ks (unless a significant percentage of that 401K was invested in company stock, of course). This actually happened in my family. My father was an attorney at a law firm which promised him a pension. After the law firm failed, the pension was taken over by the Pension Benefit Guaranty Corp (PBGC) which had and has a maximum cap on payouts under a failed pension. The annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan has increased to $60,136 for 2015, up from $59,318 for 2014. The increase is not retroactive, however; payments to retirees whose plans terminated before 2015 will not change. So, if you were unlucky enough to have your plan terminated back in 1990 for example, your benefit even today is capped at $2,164.77/month or just under $26K/year. 401Ks can even be used to structure the acquisition of a business … but that’s beyond the scope of this article. I will concede that they do transfer the investment risk from the employer to the individual employee.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s