Why aren’t people saving the way their parents once did?
The first reason is a regime of easy consumer credit that has encouraged people to max out their credit cards. The second is the use of home equity as a speculative investment instead of a rock of security. Third, new “anti-thrift” institutions get people into a debt trap. And fourth is the idea that debt is no big deal and that saving for a rainy day is outmoded — Depression-era thinking.
Can — and should — the government do anything to restore a culture of thrift?
Yes, because this burden of heavy debt at every level is simply unsustainable.
What I call “antithrift” institutions prey on lower- and middle-income people. I’m thinking of things like payday lenders, pawnshop chains, and rent-to-own centers. These institutions tell people that there is such a thing as free cash and easy money, and that you can borrow with no downside. That just isn’t true. There should be more regulation of the antithrifts, such as usury caps on payday lenders.
In addition, the government should create more incentives to help lower-income Americans save. An interesting idea here is to expand the federal thrift savings plan, which is available to federal workers, to all Americans. Another is to give people a checkoff on their tax forms to use their refunds to buy U.S. savings bonds. We’ve forgotten savings bonds, but they have been a classic way to get a large group of small savers into investment mode. They’re still a good bargain, and a good idea.
Existing incentives to save — IRAs, 401(k)s, Roths, and so on — don't seem effective. Why would anything new work?
Now public consciousness has been raised. People are looking for ways to dig out of debt and to build a nest egg. But they need information and advice on how to do it.
The banking industry used to run campaigns to help people save and used to sponsor school savings programs. But many banks have stopped doing so. This is why it is important to have new information campaigns. Give people simple, plain-vanilla steps on how to go about saving.
You criticize state-sponsored lotteries as a form of gambling that prey on lower-income people. Should they be abolished?
Ideally, yes. But that isn’t likely. States are addicted to the lottery as a revenue source. But states could repurpose the lotteries. For example, they could devote a share of their revenue to a savings ticket that would give people prizes for saving money, as Britain has done successfully for the past fifty years.
Many economists are saying that higher savings rates could actually retard recovery. How do you respond to that?
Yes, the paradox of thrift. But I do not think that is an accurate view of what is happening, because the government is stepping in to be the spender of last resort. That’s the reason for the stimulus package — to boost the economy to compensate for slower consumer spending.
I also think you have to realize that people are doing what is rational. It is not as if consumers have a whole lot of choices; they cannot get credit and are overwhelmed with debt, so it’s entirely rational to pull back.
You talk about the value of public campaigns for encouraging saving. What should such campaigns say?
That it’s cool and smart to save. In principle, saving is fairly simple. First, you need to reduce your consumer debt and start to build a rainy-day fund to protect against unexpected expenses; a CD or an interest-bearing checking account is fine. It’s okay to start small; the important thing is to get into the habit.
The same thing goes for longer-term saving and investing. How to do this? Make a budget and include a regular entry for savings. If your employer offers direct deposit into a retirement account, or if your bank will automatically deduct a certain amount to go into a CD, take advantage of that. You can’t spend money you don’t see.
Research shows that people who save tend to be happier and less anxious. Sure, it’s fun to buy, but no fun at all to get the credit card bill.
How should children learn about money?
It depends on the child, but it should start from a young age. The idea is that you want your child to make a progression of steps up the learning curve. Encourage them to have a sense of their own resources, and to do small jobs to earn their own money. Introduce the idea of saving money early; for really small children, a piggy bank will do.
As they get older, go with them to open a savings account in a bank. Eventually, debit cards are a really good idea, because they are self-limiting; it’s important to remember to show them the statements and explain to them how they work.
As for credit cards, I don’t really see why high school students need one. College students sometimes do, but they don’t need three or four. They should see if there is a college credit union; these offer better rates and an opportunity to save, too. And they need to pay it off every billing cycle.
Kids today don’t know about cash except that it comes out of an ATM; their world is ATMs and plastic. Parents have a responsibility to educate them about the realities that underlie these services — the basics of earning and credit.
Any last thoughts?
Western Europe has generally proved better at maintaining a culture of thrift. I have a daughter who has lived in Paris for 20 years, and I have noticed that many Europeans are big fans of Benjamin Franklin and his principles of industry, frugality, and generosity.
So it’s interesting that in the U.S., when the tercentenary of Franklin’s birth was commemorated in 2006, the celebrations ignored his role as a popularizer of thrift in America. If the anniversary were this year, I bet that would have changed.
Read more on the economy and the new era of frugality:
The $787 Billion Stimulus: Is It Working?
Life in a Thrifty Future
