View Full Version : Why Americans Can't Save Money - NY Times
http://www.nytimes.com/roomfordebate/2011/02/08/why-americans-cant-save-money?nl=todaysheadlines&emc=thab1
Several brief articles by various economists - interesting viewpoints.
1. Advertising
2. Immediate gratification
3. Keeping up with the Jones syndrome
4. Live for today
etc.
There are plenty of reasons, some the fault of the individual (several examples mentioned by sweetana fueled by the belief that tomorrow will be better than today), and some just a sign of the times (such as loss of health insurance due to unemployment or due to recission by a health insurer followed by a major illness). As the first article points out, the safety net of pensions and such which many americans enjoyed in times gone by has largely been taken away, except for for government union employees, and those are under serious attack as well. A lot of the blame for this can be placed squarely at the feet of the people who decided that globalization would be a good thing. It's proved to be great for global corporations as they seek the cheapest inputs for their products, including labor, which was probably their intention all along, but has sucked for the average American worker who is likely to continue to see their standard of living fall until the point a few years (maybe decades) from now when our standard of living is on par with the average around the world.
I think, though, that Daniel Gros also hits on a key problem. Current federal government policy strongly discourages savings by keeping interest rates artificially low in an attempt to increase borrowing. For every borrower (whether for a home or a business loan) that gets a cheap rate there's also a saver who also gets a cheap rate. Why save money at 1 or 2 or 3% interest when obviously basic expenses like food, gas, health insurance, tuition, are going up way faster. Better to spend the money now before it loses even more value.
Thanks Rosemary, that was really interesting.
What I found odd is that no one mentioned a really enormous elephant in the room: our entire financial structure functions by creating debt. That's how our economy grows. So when you scrape away the question, "why isn't America saving", the answer might really be: because it would be disasterous for The Economy. The whole house of cards depends on people spending and borrowing, and that is exactly what we're guided and pressured to do at every turn, whether it's a house or an education or a double latte with extra whipped cream.
I'm also surprised that there wasn't more mention of the idea that perhaps people aren't saving because many who haven't drowned entirely in debt are using their discretionary income to pay it off. Only one writer even seemed aware that people might be paying the piper as best they're able, even as their salaries stagnate (or disappear) and their expenses rise.
kib, I guess I wasn't blunt enough in my second paragraph (and the writer I mentioned also must not've been) because that was actually exactly the point I was getting at. After reading "The creature from Jeckyl Island" it's pretty clear to me that the whole problem is a result of our central bank, and that it was all intentional. Before the federal reserve came into existence people trusted that money wouldn't lose 95% in 100 years and really did just save it.
ApatheticNoMore
2-10-11, 3:21am
Why any individual doesn't save? I don't know. I haven't walked a mile in every single person out there's moccasins. I think a lot more people could save than do, so I'd be tempted to answer: Because They Don't Want To!
HOWEVER .... why don't they want to and what impacts this want?
1) The cost structure of American society is really high, and a lot of people's money is sucked into that. Put bluntly: things cost too much! Everything? No, some things like gas and food maybe should cost more. Junk from China is cheap. But houses cost too much and those huge mortgages serve mostly to enrich the banks. It used to be possible to buy a house on a single blue collar wage earners income. Now it takes two much higher incomes. You can say something like "this is just the free market", but excuse me while I laugh hysterically, because the government has spent absolutely massive sums in the last few years to prop up housing prices. The government is deliberately keeping housing expensive. Things like healthcare also cost too much when you have the most expensive healthcare system in the world. Education also, is way too costly (people's money gets sucked into paying back loans for years and years). Education could be done for a lot cheaper than it is. I don't for a second believe it HAS to be this way. So when you include all these biggies there is not a lot of discretionary income left for many people. Globally highly paid people must throw away their globally high wages on way too expensive necessities (our high wages don't buy as much as you'd think). But why don't people save what discretionary income they DO have?
2) Fed policy does figure in, but it's tough to tease out from the effect of the general culture. Interest rates are deliberately kept extremely low by massive FED intervention. Now all other things held constant (the ceteris paribus assumption) people will save less when interest rates are low and more when interest rates are high. This is just supply and demand restated. But don't the Japanese save EVEN THOUGH their interest rates have been kept low forever? Yes they do. So I am tempted to conclude that culture plays a stronger role than FED policy. But not so fast. What about the inflation mentioned by jp1? What are Japanese inflation rates like? Are they high or low? I don't know. Because if they are as high as ours and the Japanese still save then surely the cultural influence is not small. But if they are lower then it's Fed policy that is to blame all over again. Because yes inflation discourages saving (far more than low interest rates do I think). Why save if your money evaporates when you save it?
3) Sure things like advertising encourage people to spend. And advertising is given absolute free reign in our society. Now I'm not arguing it should be censored more or anything (although some have argued it is psychological manipulation and should be, I think doing so is as likely to backfire as anything). I'm just saying: looking at ALL the factors at play and not just advertising, perhaps this free reign is not just free but is also strategic. In other words: in a world where the currency is destroyed by the FED, advertising gives people a pretty picture of what is STILL ATTAINABLE with their money. It work synergistically with that world.
I think there are plenty of structural issues, starting with a huge and widening wage disparity; health care issues, corporate influence over public life, and on and on. I also believe the US government has a lot to do with it, and I'd like to share a little story that illustrates this part of the problem. During the week btwn Christmas and New Years, DH and I were out hiking when we ran into some Canadians. We happened to start a conversation which led to the subject of Christmas. The Canadians were surprised that the US govt was happily crowing about how much Americans spent this year, especially given the high unemployment rate and so forth. In contrast, they said the Canadian govt has a certain target based on the economic conditions, etc and actually chastises the Canadian public if they go too far over the amount the govt considers appropriate to spend on Christmas. Imagine! In all the time that the savings rate was near, at or even below (!) zero in the US in the last few years, I don't remember seeing much hand-wringing at all from any of the branches of govt, or even quasi-govt entities such as the Fed. The only thing I remember hearing about Christmas is smiles from the US govt if the spending was up from the prior year, and fretting if it was down. With this sort of encouragement to spend, no wonder Americans don't save. It's sort of amazing when they do, given all the outside influences.
It used to be possible to buy a house on a single blue collar wage earners income. Now it takes two much higher incomes.
In the 50's/60's when this was true, the average house size was under 900 square feet with 1 bathroom. Now the average house size is over 2500 square feet with 2.5 baths being a minimum. When I was little, our family had one car, and one black and white TV and of course no cable, computers, or electronics. Who does that today (outside people on these boards)? Closets were smaller, because wardrobes were smaller. Now "everyone" has a walk in closet (at least according to HGTV programs ;)). We went out to a "casual dining" restaurant maybe once a year as a family, now its routine for people to eat out several times per week.
While there are certainly structural issues, our expectations for what "middle class" life is have increased significantly.
ApatheticNoMore
2-10-11, 12:30pm
In the 50's/60's when this was true, the average house size was under 900 square feet with 1 bathroom.
But a lot of housing on the market *IS* actually houses built in 1920s, 1930, 1950's etc.. All the old cheaply constructed housing stock built for returning veterans now runs a pretty penny. It's the exact same houses (and yes I look at those houses and think: older buildings = hello, maintenance costs and headaches!). It's true people have sometimes added additional rooms etc. on to older houses. So some of that very old stock may be "improved".
Really there is no doubt at all in my mind that costs of the basics in life has gone up (especially those 3 things mentioned: houses, medical, education. Taxes also, although not as much so and less on the federal than on the more local levels). But I don't think it's 100% of the explanation, that's why I make the point: so just meeting living expenses takes a lot but why don't people save what discretionary income they still could save? (because while the basics take the BIG CHUNK of people's money, dribbling money away in SMALL chunks with the remainder IS ubiquitous). FED policy? American culture? I don't know ....
I can also conversely ask what is it that allows me to save when so many others seem to struggle so much with the issue:
Haha, I mostly answer:
1) No kids
2) No debt (unless you want to count what I might run up monthly on a credit card)
3) I rent. This is a biggie
4) Satisfactory income. I don't like to use national averages for CA since I think they're pretty distorted here, but my income while not super high here, does allow me to live decently
But houses cost too much and those huge mortgages serve mostly to enrich the banks.
How much *should* houses cost?
I've been involved in building affordable houses for a dozen years now, with some local land trusts. On the order of 100 homes. The homeowner only pays for the house itself, from the foundation up. The land, driveways, and other site infrastructure are owned by the trust, and use leased to the homeowner for a few dollars a year. So the homeowner's cost is purely bricks, mortar, and labor, and not impacted by increasing land costs.
Costs for the homes we have been building have skyrocketed over the past 12 years. There aren't any profit-seeking middlemen or bankers forcing it. The increase are due to increased construction labor costs, increased materials costs, and a huge cost associated with increased governmental regulation and requirements.
As to why older homes also rise in price - it's a boring supply and demand issue. If the cost to build a new home has increased massively, if there is sufficient demand for housing, this pulls the price of already-constructed homes upwards too. Econ 101/102. View the older homes as a replacement good, as consumers move away from new construction, they increase e demand for existing homes, and with a limited-and-decreasing supply of such homes, prices are bound to go up.
ApatheticNoMore
2-10-11, 6:08pm
I dont' really have a dollar figure, something more in line with local median household incomes probably. Massive intervention is at work to keep housing prices what they are at present. Deliberately extremely low interest rates to push people to buy, people living in houses for years without paying their mortgages (banks don't want to foreclose because it would mean marking the houses to market on their balance sheets) - of course this situation props up the market, large government subsidies to buying houses (the state of CA is completely broke and yet until recently we were cutting checks for thousands of dollars each to homebuyers), etc..
I'm noticing more and more abandoned houses and lots. I mean ok it's not exactly a ghost town yet, and yes maybe someday all those vacant houses will be torn down to build shiny new condos or something (as many of them are beyond repair at this point IMO), I can see that happening if we ever get a serious recovery.
I dont' really have a dollar figure, something more in line with local median household incomes probably.
The median income here is about $25k for single-earner household. Assuming you have zero debt, and can put 20% down, and go for a 5%, 30 year fixed loan, you can purchase a ~$90,000 home.
Many areas where people want to live have median housing prices far above what the median income can afford, it's a national problem. You can find $10,000 homes in emptying towns in the flyover states though. Apparently nobody wants to live there.
Let's be generous, and allocate $10,000 for a lot, $10,000 for water, sewer, power, stormwater hookups, $5000 for permits, $5000 for site prep/driveway (and these back-of-the-envelope figures are super-low in many areas, here they'd add up to $150,000 or more, leaving you living in a tent). That leaves you $60,000 to build the home. How much house can you build for $60,000? Say you somehow manage to pull of $100 per square foot, that's a 600 square foot home.
As to why older homes also rise in price - it's a boring supply and demand issue. If the cost to build a new home has increased massively, if there is sufficient demand for housing, this pulls the price of already-constructed homes upwards too. Econ 101/102. View the older homes as a replacement good, as consumers move away from new construction, they increase e demand for existing homes, and with a limited-and-decreasing supply of such homes, prices are bound to go up. I think there's another angle to it as well, also a supply and demand issue. Fiddling around with the idea of a move, I've been looking at the online housing market. In one area we're contemplating, it seems like 90% of the new-ish houses in our price range are unattractive to me (craptastic - way too fussy with too many expensive-to-maintain useless details like many-multiple rooflines and fireplaces rather than woodstoves) and at least twice as large as what we want - in the 3000+ sq. range. Perhaps I'm not the only one who would actually pay More for a simple house that was easy to heat, clean and maintain ... with a usable porch.
Perhaps I'm not the only one who would actually pay More for a simple house that was easy to heat, clean and maintain ... with a usable porch.
Indeed so.
And have you ever looked at the construction quality of some of the newer homes that are going up? Not the fancy counters and cabinets, but the quality of the framing, walls, and other "hidden" bones and organs. Many of these homes sure don't look like they are built for long-term maintainability and durability. What a waste.
ApatheticNoMore
2-10-11, 9:44pm
By the way, since we're on monetary policy, what do you think of this:
http://money.cnn.com/2011/02/10/markets/dollar/index.htm?source=cnn_bin&hpt=Sbin
Not to get too new world order-y :0!, and not to claim I'm a global trade expert, but I'm not so sure it takes one to see that this portends nothing good for U.S. citizens. I mean they deliberately want to reduce demand for U.S. treasuries from foreign governments etc..
In the 50's/60's when this was true, the average house size was under 900 square feet with 1 bathroom. Now the average house size is over 2500 square feet with 2.5 baths being a minimum. When I was little, our family had one car, and one black and white TV and of course no cable, computers, or electronics. Who does that today (outside people on these boards)? Closets were smaller, because wardrobes were smaller. Now "everyone" has a walk in closet (at least according to HGTV programs ;)). We went out to a "casual dining" restaurant maybe once a year as a family, now its routine for people to eat out several times per week.
While there are certainly structural issues, our expectations for what "middle class" life is have increased significantly.
This is all true, but certainly one could've made a similar argument in the 50s: Families today live in luxurious houses with things like indoor plumbing, telephones, a TV, central heat, automatic washing machines and almost every family has a car in their driveway. The middle class 50 years ago at the turn of the century didn't have many, or any, of these things. Our expectations for what "middle class" life is have increased significantly.
The reason our expectations change is because the economy grows to accommodate these things as normal. And the prices of many of these things keep falling, making them affordable to the masses. That one black and white tv that families had back in the old days undoubtedly cost MUCH more than what a family today would spend on a modest-sized flat-screen tv today, at least in inflation-adjusted dollars.
I have no idea if this site is a worthwhile source, http://www.thepeoplehistory.com/ but they put the price of a b/w tv in the 50s at $179. In today's dollars that's almost $1500. For that price I could buy just about the biggest flat screen tv out there today.
Interesting discussion! I just wanted to add one practice that Americans seem loathe to do, which is to share houses inter-generationally, and then pass down those same homes through the family line. It may be crowded and not allow much privacy, but multi-generational extended families can save huge amounts on childcare, elder care, maintenance and mortgage payments. I've seen a lot of this practice in southern European and Middle Eastern countries, and it does allow for some accumulation of wealth...or at least the chance of it. America is so into young people leaving home to establish their independence, and then collectively we seem very willing to move, move, and move again for the next job and/or the next housing status upgrade, that those benefits are completely lost.
You may find this hard to believe. We live in a county in California that is the play ground for SF Bay Area people. We live above the snowline. There are 1900 lots in our subdivision about 1500 have been built on. The lots range in size from 1/4 to 1 acre. My guess is 90% of the 1500 lots are weekend or vacation homes. The price of these homes range from $300,000 to about $800,000. We are spending the month of February in a golf community in the Mother Lode. There are 4 of these communities in our county. About 60% of the homes in these golf communities are weekend or vacation homes. The value of these homes range from $400,000 to over a million dollars. I am talking thousands of homes. Anyone touring my county would be saying what recession Americans are quit wealthy and the lack of savings is just not true.
I guess my county may be proof of the disparity of wealth in our country.
Our responses all show that our perceptions are based on where we live or lived. We live in the midwest where affordability is available. And yet, Habitat for Humanity has over 20 repossessions to renovate and sell this year. Even committed people who can get into well built and affordable houses have financial issues.
Herbgeek, were you my brother? That was our life in Alaska in the 50s. One car that mom got once every two weeks for a grocery shopping trip, 900 sq foot home with one bathroom and an unfinished basement for 6 people, one restaurant meal a year or so, one vacation about every 7 years or so, clothes for school and one bicycle. However, the whole outside, school and library to occupy us and enough.
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