SINGAPORE (May 30, 2017)– At the end of the first quarter, according to the Federal Reserve Bank of New York, American consumer debt for the first time exceeded its previous peak (in dollars). That peak was in the 3rd quarter of 2008, just as the global financial crisis hit. Although car loans and student debt have been rising especially rapidly, housing debt remains more than 2/3 of the total ($8.6 trillion out of $12.7 trillion).
On December 3, 2014, I participated in a panel of Harvard University’s Bipartisan Program for Newly Elected Members of Congress. After establishing that the median US household has not shared in recent strong economic gains, I went on to consider policy remedies.
I offered the Congressmen eight policy recommendations. Some will sound popular, some very unpopular; some associated with “liberals”, some with “conservatives.” I would claim that they all have in common heavy support from economists, regardless of party – even the very unpopular ones.
“Is the recent Return to Saving temporary or permanent?” asks the National Journal .
The famous Paradox of Thrift holds now more than ever: what is good for the individual, and for the economy in the long run — high saving — is bad for the economy in the short run. During the current worst-post-30s recession we need a boost to demand. In the longer run we need more saving.
Americans could not have gotten the timing worse. During the three expansions of 1983-2007 the economy grew well, and by the end of the period the first baby boomers had reached their peak earning years. Yet households’ saving rates declined, falling almost to zero in 2005-07. Meanwhile, the government ran record deficits, reducing national saving even more (in the 1980s and 2000s; the late 1990s saw surpluses). It is ironic that the pro-capital orientation to the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 was largely sold as an incentive to increase saving and investment, and yet household saving fell sharply subsequent to both policy changes — to say nothing of national saving. The increase in the after-tax return to saving did not lead to a “return to saving.”