Should We Care About the Decline in Savings?

Jeremy Rifkin is concerned about the decline in the U.S. savings rate that began in the middle of the 1990s. From saving 8% of income eight years ago, Americans are now saving less than .2% of their income. To Rifkin this can mean only one thing — record economic growth is being bought on credit and is bound to crash and burn (he compares our current situation to that just prior to the Great Depression).

Rifkin’s on the wrong track (as usual). While he’s correct that the number of bankruptcies in the United States has increased from 1994-1999, he forgets to mention that a) it’s ridiculously easy to declare bankruptcy in the United States, and b) part of that acceleration is driven by people afraid that Congress is going to change the law to make it more difficult to declare bankruptcy, as they almost did earlier in the year.

Second, Rifkin ignores capital gains. If you include capital gains in savings, the period of 1995-1998 actually saw the most savings for any four year period in American history. A study by the Brooking’s Institute that factored in capital gains put the saving rate at 15.8 percent. This doesn’t take a rocket scientist or even a biotech critic to figure out — if you’re getting 8 percent return from your bank and 15 percent from your mutual fund, you shift the money from the bank to the mutual fund.

As for consumer credit, it is hard to reconcile Rifkin’s claim that American middle class families are squandering their future on credit when according to the Federal Reserve the median net worth of families rose by almost 18 percent from 1995-1998 (besides which it always amazes me when Leftist complain that the middle class and even the poor often have access to the sort of credit devices that in the past would have been available only to the wealthy).

If Rifkin and others want to ensure middle class families save more the solutions are pretty obvious — change tax incentives which discourage savings by doing things like increasing the amount of money that can be put into an IRA or similar plan (the U.S. House of Representatives recently passed a bill to just do that, but the Clinton administration opposes it and so it will likely die).

Source:

Another Wolf At Our Door. Jeremy Rifkin, The Guardian of London, October 24, 2000.

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