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June 10, 2009

Why didn't we save?

It's well known that until recently American households were among the least thrifty in the whole world, in some years saving absolutely nothing out of their paychecks. Now, recently the saving rate has moved into positive territory at 4 percent. Just what's caused the change?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, we typically as Americans save about 10 percent of our take-home pay. That started to change in 1985, when we started to see the savings rate go down, and it actually bottomed out at about zero a couple of years ago. Now it's back up to around 4 or 4 ½ percent. I think the same factors that caused the savings rate to go down are now causing it to go up. That is, for example, asset values. Research has found that when the stock market goes up and the value of homes goes up, people save less out of their paychecks. That should make sense, because, really, the stock market and the housing market are doing the saving for people. There's also some research that suggests that the rising returns to education - the higher pay that you get when you go to college - has actually put downward pressure on the savings rate because people are, in essence, investing in their future, investing in what we call human capital, and therefore, they don't have to invest as much financially. So if we look at what's happened recently, clearly asset prices have gone down, both the stock market and the housing market. So that's causing people to save more. And actually, the returns to education, although not going down, have not been going up like they used to, and we think that has also caused people to think a little differently about their future and say, 'Well, I need to put more in the bank rather than relying on my brain to do me well in the future.' So it's going to be very interesting to see if this trend toward a higher saving rate continues down the road. I think it will because I think there have been some fundamental changes to our economy."

Posted by Dave at June 10, 2009 08:00 AM