Tuesday, April 29, 2008


Does Jesus save? Should he?

[It’s not what you think.]

According to a report on NPR yesterday morning, we’re not saving money the way we used to do:

In 1982, Americans saved more than 11 percent of their disposable income. The personal savings rate dropped to just 0.4 percent last year. An economist blames easy credit — and how we think about money.

That’s one huge drop in 25 years!

Economist Tim Harford says that it’s because lenders are more willing to lend, and that we basically have an infinite capacity to spend. And it’s clear that he’s right for some people — we can see that by looking at how many people have filed personal bankruptcy in recent years and how many people are in severe credit-card debt that they can't get out of, and by considering the mortgage crisis.

On the latter: mortgage lenders clearly did unethical things, and convinced people to get loans they couldn’t afford — knowing that they (the lenders) would be protected when the borrowers defaulted (the lender would just take the property). But what about the other side of it? Couldn’t the borrowers see that they were getting themselves into loans they couldn’t afford?

ABC News recently profiled a couple in Florida who got a $300,000 loan despite having an income of only $30,000 or so. Now, they didn’t seem particularly stupid — and I think most of the people who found themselves in this pickle aren’t — but it doesn’t take advanced mathematics to figure out that you can’t afford that kind of loan with that kind of income. Wouldn’t you stop and say, “Yo, hey... Why are they giving me that loan? And how’m I going to pay for it?”

Of course, the lenders made things complicated by screwing with the interest rates, but the basic point is still there: the borrowers accepted the loans at least partly because, as Mr Harford says, we’re inclined to borrow if we’re allowed to, even if we know it isn’t a good idea. It’s the same reason people get into credit-card trouble and get involved with loan sharks.

So how does this translate into the tanking of the savings rate? Well, simply that if we’re inclined to borrow as much as lenders will lend, and if lenders will lend enough we’ll spend all our money paying back the loans.

And I’m not really buying that.

To some extent, sure, the increase in housing prices has made people get higher mortgages, so that’ll reduce the rate of saving. And even for people who’re in a house, the increase in the value of the house gives a burst of equity that can be borrowed against (in what we used to call “second mortgages”, which now go by the much more pleasant-sounding “home equity loans”).

It still seems to me that not all of it is accounted for... that those factors, along with higher prices in general, wouldn’t get us all the way down to 0.4%. But Mr Harford gives us another reason — a significant one — that he kind of downplays, later in the interview:

If the national savings rate bounced back up, would we be better off?

It depends, he says. “How much do you want to sacrifice your income now for income later when you’re richer?”

Harford says that as a college student, he worked and saved money, but sacrificed his own enjoyment in the process. “I made completely the wrong decision,” he says. “That was crazy.”

In other words, money has relative value to us that goes beyond the absolute value of the numbers, and that value changes with inflation, with our job and family status, with our needs and desires, and so on. A penny saved is not, Benjamin Franklin notwithstanding, a penny earned. Increased need and decreased availability will increase the relative value of money — that’s why we save for retirement, when we’ll have much less income along with higher health-care expenses. Adding to the family also increases the value of money, by increasing the need for it.

But inflation decreases the value of money, as does greater availability — say, during years when we readily get pay raises and promotions. In Mr Harford’s example of stashing money away as a student, we can see that effect. On the one hand, compounded interest is your friend, and the more so the earlier you can save. But on the other hand, saving money when it’s at a high relative value, when it’s likely that you’ll see a much lower relative value for that money later... isn’t the wisest path.

So where’s the balance point? I think it’s closer to the ten percent of the 1980s than to the half-percent now. We’re collectively saving so little now that we have no buffer, nothing to cover us if something goes wrong. And, yes, I know a number of people who have enough income to have stashed away a savings, but haven’t.

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