Just last week, in his remarks to the Council on Competitiveness, Treasury Secretary Lawrence Summers bemoaned the appalling savings habits of American consumers. In a report two days later, the International Monetary Fund pointed at the same problem.
The "personal savings rate" of U.S. consumers -- what's left over from our take-home pay after our car-trips to the mall or cyber-journeys to Amazon.com -- has been declining for years and on paper appears truly abysmal. But that figure is misleading, since it doesn't count the hefty bull-market gains that savers have earned on money stashed in stocks, bonds and mutual funds via their 401(k) plans or other investment accounts. So, is the "official" rate of savings really something to worry about?
It could be.
In fact, many economists fear that the continued failure to save now could turn us into indentured servants to investors abroad -- those who saved well and thus had a big war chest when U.S. high-tech companies in need of money for growth came calling. That's an over-simplification, but it's not too far from the truth: By continuing down this path, foreign investors will own big chunks of our corporate stock, will see fat dividend payments go into their pockets and could amass real leverage with both Washington and Corporate America.
"Anytime you get into debt, you lose control of your destiny," says Maureen F. Allyn, chief economist for Scudder Kemper Inc. in New York City.
We are a nation of spendthrifts and must change our habits, some economists say. We have the worst savings record of just about any country in the industrialized world. A country is no different than a household: If you spend more than you bring in, you have to borrow to make up the difference. This "difference" is known as the current account deficit, a kind of broad measure of the trade deficit that last year ballooned to a record $339 billion.
"Eighty percent of our trade deficit comes from over-consumption," says Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis. "We like to blame trade barriers and [unfair trade], but 80 percent of it" is because we spend too much.
We weren't always this bad. During the early 1980s, our personal savings rate neared 11 percent several times, according to the American Savings Education Council (ASEC). In 1994, that rate dropped below 7 percent for the first time. Last year it was 2.4 percent, a record low.
There are signs of improvement. For one thing, the federal government and many state governments are running budget surpluses, and many companies have parlayed their profits into piles of cash, which means the overall U.S. savings rate is respectable, though not great.
And among consumers, the tremendous stock market gains of the past decade brightened the personal balance sheets of many households, boosting the value of the bit of money they had saved. Increasingly, working Americans are taking their company retirement plans seriously, knowing that -- with a needed Social Security overhaul in political gridlock -- they need to take control of their own retirement destiny.
"The good news is: More Americans are saving. The question is: Are they saving enough? We're not confident that they are," says Don M. Blandin, ASEC president.
Not only are consumers saving too little, they're employing a dangerous strategy, says Wells Fargo's Sohn. More and more, American savers are beginning to count on regular, predictable, stock market gains as part of their income. Instead of saving money out of their paychecks, U.S. consumers are letting the market do their saving for them, reasoning that even a small investment now will one day blossom into a large amount of money.
In turn, that's made it possible for consumers to spend more from their pay -- while giving them the confidence to do so. This confidence is clearly why the U.S. economy grew at a gangbusters 7.3 percent annualized rate in the 1999 fourth quarter. Spending increased 6.9 percent, the fastest clip in a decade, while income grew only 5.9 percent.
But, as underscored by the big sell-off in the Nasdaq composite index the past couple of weeks, the market is not predictable: Consumers can't count on predictable gains. Nor can they, with certainty, even view the current balance in their brokerage accounts as permanent wealth, Sohn says.
This spend-to-the-end mentality can't continue if the United States is to remain the world's most competitive economy, economists say. U.S. companies are the leaders in Internet technology, but that industry has an incredible appetite for cash. If there isn't a big pool of domestic savings to draw from, these firms will have to go -- hat in hand -- to foreign investors who have money to spare in exchange for a piece of the action. If these firms make it big, a chunk of the riches will travel abroad. This doesn't have to happen too many times before the country's standard of living declines.
"We are not saving enough to fund the investment opportunities the nation has," says Scudder Kemper's Allyn. "We're kind of consuming our future income before we have it in our hands. ... down the road, we could run into trouble."