At a time when we should be saving more, we are saving less. Writing for Vox, Timothy B Lee charts the long-term decline in thrift:
“A generation ago, the savings rate was between 7 and 10 percent. Two generations ago, Americans saved 10 to 13 percent of their income.”
As described in the ConservativeHome manifesto, the UK situation is broadly similar to that of the US.
Lee argues that young workers need to be “putting away about 15 percent” of their income – with higher proportions for older workers with some catching up to do:
“When presented with these facts, many people react not with alarm but with outrage. Americans don’t save enough because by and large they seem to believe it’s not possible to save that much money.”
This may be true for those at the bottom of the spectrum, but it’s demonstrably not the case for everyone else:
“…unless you’re at the very bottom of the economic ladder, it’s easy to find examples of people living more frugally than you. A household that made 2012’s median income, $51,017, could save 20 percent of their income if they lived like a family at the 40th income percentile, $39,765. Similarly, a household whose income was at the 60th percentile, $64,582 could save more than 20 percent of their income if they lived like a family making the median income…
“Cutting expenses is a painful process. But the fact that millions of people do it proves that it’s possible.”
This is bracing advice – and Mr Lee doesn’t let up:
“Obviously, everyone needs a place to live, so you’re not going to be able to eliminate housing costs altogether. But there are a lot of things you can do to reduce them. You can get a smaller apartment or get a roommate. You could move further out in the suburbs where you can get more housing for less money. And if your personal circumstances allow it, it’s worth considering moving in with parents to save money.”
In Britain, at least, this is exactly what’s been happening. And on other major expenses, such as motoring, there’s further evidence that the young are cutting out costs.
However, one has to point out a massive contradiction in the conventional economic wisdom. On the one hand, the bean-counters say that the long-term sustainability of our personal and public finances depends on people saving more; but on the other, with the spectre of deflation haunting Europe, they also want us to spend more.
There’s only one way in which this circle can be squared and that’s if ordinary people are paid more. The long years of wage stagnation must come to an end.
Appropriate tax cuts, such as the raising of the income tax threshold, will help. So too, will measures to hold down living costs, especially those determined by property prices. But, above all, we need a return to healthy, non-inflationary wage growth.
Among other things, this requires a systematic review of government policy. For each item of relevant expenditure, we need ask whether it incentivises employer investment in a highly-skilled, well-rewarded workforce or whether it effectively subsidises a low-wage economy.
This isn’t about telling employers how to run their businesses, but merely recognising that, consciously or otherwise, the modern state has an unavoidable impact on private investment decisions.
It’s time to make this impact work for growth in the short-term and solvency in the long-term.