Americans’ low personal saving rate—it currently stands at 4.7%—may seem like cause for worry. The good news, however, is that Americans can count on their corporations to do a lot of savings for them.
Big business is a major force in American life as it is in few other countries, and one of the virtues (and drawbacks) of this arrangement is that it lets Americans spend like crazy: Consumer spending rose by 1.1% last month, the biggest monthly rise in almost two years. The result is a recession-resilient economy—in relative terms at least—and higher levels of consumption, and thus higher living standards.
At the household level, Americans have long been poor savers. The U.S. personal saving rate has mostly declined since the mid-1970s, albeit with a bump upwards for the Great Recession starting in 2008. From a high of more than 17% in the mid-1970s, it fell to below 10% in the early 1990s, and mostly below 5% for the aughts. After the crash of 2008, households had to tighten their belts and for a while the savings rate bounced above 10%, but by 2011 old spending habits re-emerged and the rate fell back toward 5%. Expecting more consumer spending and a lower savings rate, following the pandemic-induced savings bump, has always been the right bet.
Are such low savings rates unsustainable for an advanced economy? Not in view of America’s business saving. Looking at the U.S. Federal Reserve’s series on undistributed business profits, it starts to rise significantly in the 1970s, and takes off around 2000 (with a dip for the financial crisis), and currently stands a bit above $1.2 trillion. There are other ways to measure business savings rates, but generally they show a significant upward move over the last few decades.
On net, gross U.S. savings rates are hovering between 17% and 18% of GDP. Again, there are different ways to measure the relevant variables. But under any plausible approach the U.S. is not having to survive on saving only a few percent of personal income.
This is related to those stories about some of the most successful U.S. corporations sitting on billions of dollars. Maybe you view that as wasteful or extravagant. But a more helpful response might be: “Better them than me!”
Data on personal savings typically neglect pension plans and realized capitals gain on financial assets and homes. In that sense the personal saving rate also is higher than is typically measured. Yet here, too, much of the credit goes to business. If equities are high in value in the aggregate, that is a tribute to corporate productivity more than to brilliant investing.
Unfortunately, the robustness of U.S. business is also a mixed blessing. High business saving makes it easier for governments to run up debt without real interest rates going through the ceiling. You can think of this as another way that business subsidizes consumption—through government spending and transfer programs, and financed through debt rather than higher taxes.
Another issue is that this asymmetric distribution of the savings burden can lead to wealth distribution problems over time. In the U.S. it is relatively easy to take out lots of debt, and the American retail-advertising complex encourages this. The commercial pressures to save just aren’t nearly as strong. The country thus ends up with too many people whose wealth does not compound over time, limiting their upward mobility. They will find it harder to buy homes or start businesses.
Businesses, owners and holders of equity, however, have the potential for higher pecuniary returns over time, as do those who save through their homes.
In Europe, household rates of saving typically are higher—the EU’s gross savings rate, which is useful but not equivalent to the U.S. personal saving rate, was 26.4% in September—and the role and scope of business is typically more limited. So it can be easier for lower earners to rise in the income distribution, simply by being thrifty.
In the meantime, Americans can take comfort that their personal consumption expenditures put them well above most citizens of Western Europe. And while they are celebrating, they should not only realize that this is a mixed bargain, but also thank the businesses that made it possible.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include The Complacent Class: The Self-Defeating Quest for the American Dream.
This article was provided by Bloomberg News.