What Higher Savings Means for the Economy

Host: For years we Americans have been defined by our urge to spend. We maxed out our credit cards, drained our homes of equity, lined our roads can mega-malls. The American consumer was the engine for economies all around the world. Well, what a difference a little economic crisis makes. Consumer spending fell more than three-and-a-half percent in the last year, the equivalent of two weeks pay. That's the first drop since 1991. Debt declined for the first time since 1953, and savings rose from less than zero in 2006 to an annual rate of about 3.6% in December. Well, that must be good news, right? Thrift, good. Being buried in debt, bad. Well, look around. Retailers from Sharper Image to Foot Locker to Wicks Furniture are closing down stores by the hundreds. GM is on the verge of bankruptcy. The government passed an $800 billion stimulus law to try to get us to please, please spend again. In economics, this is known as the paradox of thrift. Saving is good for household, bad for the economy overall. But the economy will just have to cope. The stimulus package may supply a temporary jolt, but all the president's men can't put the American spend thrift back together. We're too spooked by what's happened, and even if we wanted to reassume our spending spree, banks are too spooked to lend us the money. Higher savings will hurt in the short run, but the economy needs it. Savings help finance business investment and fund long term obligations like social security. Used productively, they turn into a higher standard of living, and sucking it up and saving certainly beats handing over our economic destiny to the Chinese. Back in 1994 Americans saved more than 8% of their income. That was the year when the incentive to spend in the form of easy credit began to out weight the incentives to save. Well, the balance has tilted back again. Not now, but ultimately. That will be a very good thing.

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