We Need More Saving, Not More Spending

One of the major concerns in richer, aging societies is how will the older population be supported in its dotage. The assumption is made that people will live an ever longer number of years in retirement and that they will not have saved enough money for that retirement, so the younger generation will have to begrudgingly support them. The solution to this problem is really very straightforward, as I have pointed out before: (1) keep people in the labor force longer (so that the number of retirement years is consistent with increasing life expectancy at the older years); and (2) make sure everyone is saving for their retirement (so that they are not totally reliant on intergenerational transfers from younger people).

These ideas seem so simple, but the problem is that in the short term economists want people to spend money, while in the long term economists want people to save for their old age. It's very hard to have it both ways, and I was thinking about this as I read in today's New York Times that the drop in oil prices over the past few months has not produced the kind of boom in consumer spending that some economists were expecting.

While few outside of Texas and North Dakota are complaining about this huge savings that consumers have enjoyed since energy prices began falling last summer, economists have been stumped recently trying to figure out exactly what consumers are doing with the windfall. 

They have not gone on a shopping spree at the mall or online. Results at many retail chains have been mixed, and some stores that are middle-class fixtures, like Sears and J.C. Penney, continue to struggle. 

One hint at what consumers might be thinking came Monday, when new government data on the economy showed a healthy gain for wages and salaries in January, even as spending by consumers inched lower for the second month in a row. As a result, the savings rate ticked upward to 5.5 percent, the highest level in just over two years.

If this is really true, we can only say "thank goodness"! The future may look brighter than we thought. Let's see if we can keep this up.