Are Americans Spendthrifts?

Are Americans in the habit of living beyond their means? Clearly the financial crash of 2008 exposed that a good many Americans were indeed living beyond their means. According to  Mohamed El-Erian from Pimco, since 1952, total  household debt grew 3.5 times faster than income. My interest in this subject was peaked when I saw this video at Grant Davies’ What We Think and Why blog. Please take time to listen to the discussion.

So, which of them is right? Are they both are right? For the most part, we are talking about the behavior of baby boomers and generation X.  I found this interesting because the parents of my generation and those of many baby boomers were adults during the Depression and WWII years. And, like me, their children heard the stories of how difficult live was during those years and we were taught the importance of saving and avoiding debt. I remember my mother, right up to the year she died, budgeting to the penny her income and she always bought savings bonds. There is a graph that I can’t embed that shows that Americans saved at very respectable rate until the ’80s. Savings rates had been in the 9% range for many years and then fell dramatically to around 3%. So, what changed? This article offers some thoughts on the subject:

The United States economy is built upon the assumption that people will spend money. Therefore, saving money is not really an applauded aspect of American culture. Sure, people are encouraged to generally save for retirement, but daily American life is definitely bent toward spending much more than saving. We are bombarded from the moment we wake up until we go to bed at night by marketing and advertisement campaigns that are all encouraging us to spend, spend, spend. Television, newspapers, magazines, radio, etc—each of these media outlets attacks us with these tantalizing offers. And the reality is that these marketing and advertising efforts work!

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The United States economy is built upon the assumption that people will spend money. Therefore, saving money is not really an applauded aspect of American culture. Sure, people are encouraged to generally save for retirement, but daily American life is definitely bent toward spending much more than saving. We are bombarded from the moment we wake up until we go to bed at night by marketing and advertisement campaigns that are all encouraging us to spend, spend, spend. Television, newspapers, magazines, radio, etc—each of these media outlets attacks us with these tantalizing offers. And the reality is that these marketing and advertising efforts work!

Prior to the 2008 Mortgage Crisis, personal savings rates in the United States had hit historic lows. Let’s break this down a bit further. First of all, the personal savings rate is calculated as follows: the government looks at how much a person makes, and then subtracts living expenses and taxes from that gross amount. Then, whatever is left over is considered disposable or discretionary money. Then, whatever a person saves in proportion to this disposable money is calculated as the personal savings rate. For example, if a person has $1,000 of disposable income at the end of the month, and they save $50, then they have a personal savings rate of 5%.

Then, the property market exploded and capital flew into the U.S. dollar in forex trading as investors sought safety. Suddenly, the general public realized that their property values were not immune to depreciation. This sudden shock caused a bit of a revolution in personal saving behavior. The crisis of 2008 and 2009 cut the retirement accounts of many Americans nearly in half in just a few months. Decades of savings and retirement planning was suddenly erased by 30-40% in just a matter of months. This systemic shock to financial markets served to change the mindset of many people. People started cutting back on spending and increasing their savings.

When people cut back on spending and increase savings, it basically ruins economic growth because the current economic model is based on consumer spending. By 2010, personal savings rates in the United States had jumped from all-time lows just a few years before to highs not seen since World War II. The question is, will this mindset of saving continue? One can argue that it is possible this trend will continue. Some people have taken the extra savings and used them to apply for a small business loan in order to pursue their dream of starting their own business.

Getting back to the video, I’m inclined to agree with Dan Mitchell that government programs and taxing policies are the bigger culprit. Our economy is a consumer driven without a doubt. But we don’t need our wage earners spending more of their income; what we need is more wage earners with disposable income to spend.

Well, that’s what I’m thinking. What are your thoughts?

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27 thoughts on “Are Americans Spendthrifts?

  1. Debt is a dangerous thing. Sure our quality of life has risen since the ’70s. But it’s a false rise. We are all maxing out credit cards. You are correct in that we are encouraged to spend spend spend and not save. This has to stop.

  2. I tend to think that savings is down for both reasons.

    This graph shows government spending as a percent of total GDP from 1791 to present:
    http://www.ritholtz.com/blog/2011/07/government-spending-as-a-percentage-of-gdp-2/

    You can see a loose relationship between personal savings and government spending. The FRED graph shows personal savings has decreased 75% since 1982 while government spending has risen by nearly 250% since WW II.

    When government sucks up 25% of GDP that leaves less for personal savings.

    The housing bubble collapse, however, is the most painful evidence yet that people spend beyond their means. Otherwise, there would not have not been a house bubble collapse in the first place.

    Fascinating in the FRED graph is the huge spike in personal savings growth in the Great Recession of 2008. People save instead of spend during hard times.

  3. Government programs give people a false sense of security. “If we don’t have enough money saved to send Sally to college, she can always get a government-backed student loan,” “If I lose my job, I’ll just apply for food stamps and other government assistance,” etc.
    BUT, Americans are very consumeristic (is that a world?) Some people seem to never grow up past 15 when it comes to spending for things they want vs. saving for things they need.
    Interesting topic, COF.

  4. I think they’re both correct. One is simply giving the some of the reasons for the other one saying people are irresponsible. I believe it’s all part and parcel of the dumbing down of America. Keep people ignorant and indebted.

    Do people live beyond their means? You bet they do. Young couples in their twenties buying houses they can’t afford, driving 40K dollar SUV’s, and, as the one guy said, drinking Starbucks coffee every day.

    1. I buy my coffee in 5-gallon drums at Dollar General for about $6. Tastes just as good as the national brands, esp. if you spring for WalMart’s generic brand of flavored creamers!

  5. When we were planning our move and selling our house, my husband asked around for advice and we were shocked and horrified that among all his co-workers, we actually had a better handle on our finances than older folks around us.

    After you pay the mortgage, insurance, food, etc., there’s not a lot left to save. We try to put some back every week for emergencies. I’ve got relatives that have cars they really can’t afford, but they justify it by the fact that they “can make the payment”. That’s all they look at when making financial decisions, making the payment. Not ever having a payment doesn’t ever occur to them. We never have a car payment. My cars look crappy, but they get me up and down the road. We don’t use credit cards. We don’t go on vacation, and wouldn’t think about depleting savings for frivolity. I budget $100 a child for Christmas, $150 for birthdays -recently upped that since they’re getting older. I never buy clothes, I just wait until someone gives me some used ones. I went into the Starbucks in my college bookstore to get coffee, the cheapest, but seeing the price, I said no thank you and got a cup at the convenience store around the corner for 40 cents.

  6. Saving is important, and I should have tried harder and saved more. Hindsight it great, but you cannot make up what you never saved. Arithmetic is a difficult thing to outsmart.

    As things go, I am at the mercy of the markets. Taking 40% equity hits in 2000 and 2008 is pretty tough to overcome.

  7. With the highest rates in the world, no wonder no one has a buck. Companies cannot compete anymore in the usa

  8. Even in these bad economic times, people can still live comfortably, albeit not as richly as they did previous to the meltdown. It just takes doing without wants and focusing on needs.

  9. Republican Mother is admirable…I wish more families budgeted like that..
    Living comfortably doesn’t have to mean going to expensive restaurants and wearing designer clothes; it can be having pizza with friends. We need to get back to that…and quick. But, our kids are killing for designer tennis shoes, so we’ve also got a lot of debriefing to do!

  10. I can’t agree more with everything Dan Mitchell said and all the comments. However, I wonder if the premise is a bit misleading. The host of the program said that Americans have very little “in the bank”, but money “in the bank” does not equal savings because we have 401K accounts and investments such as houses and cars that can, in theory at least, be turned into money.
    I know plenty of people who don’t save at all, but they usually have trust funds.

    1. 401Ks are excellent ways to save, hiwever, too few people have access to them. Also, they and house equity and value in a car are not that liquid. So, most people need to accumulate liquid saving that they can tap into in an emergency.

  11. Mr. AOW and I avoided debt like the plague — and saved and saved and saved. We put some of our savings into the stock market, most into savings instruments at the bank.

    We didn’t even contract a mortgage. We sacrificed by living in the old family homestead, and we still live in that homestead — minimal bathroom facilities and lack of central A/C notwithstanding. We do actually love this old house, which is particularly suited to the family antiques I inherited over the years and generations. But the lack of central A/C during this heat wave is problematic; window units are running 24/7, and still the temperature on the first floor is over 82 degrees. I haven’t check the temperature on the second story, but the thermometer there must be approaching 120 degrees!

    Now, when we need passive income the most in our senior years, interest on saving accounts is in the toilet!

    My point: many different factors have encouraged people to go into debt and/or to make risky investments.

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