One of the reasons that Italy has so far weathered the PIIGS crisis better than some of its peers in the sty has been a high (12 percent or so) private savings ratio and relatively low levels of private indebtedness. Not only is that a good thing in and of itself (yes, I’m half Scottish), but it also means that more of the country’s high (above 100 percent of GDP) level of public debt can be financed domestically. This leaves Italy less vulnerable to the fears of international investors. Under the circumstances, that’s just as well.
That’s less and less the case for the U.S., making the news that Americans are reverting to their pre-recession spending patterns worthy of one cheer at best.
Blogging over at the New York Times, Tyler Cowen takes a look at why Americans don’t save. The whole piece is well worth reading, but, in brief, he (correctly) highlights the stagnation in median household income over the past decade, the relatively easy availability of credit, a terrible job market, and, intriguingly, an over-reliance on human capital. What does he mean by the last of these?
Some Americans tend to carry a lot of their “savings” in the form of human capital, namely education and earnings ability based on hard work and creativity. This is most likely to apply at the upper tiers of the income distribution, but those same individuals account for a lot of the earned income. It gives the country as a whole a lower savings rate because there is a sense that “you can always earn some more.
Interesting. But there is also this vital point:
[T]he American tax system does not encourage savings. Most economists believe that savings and investment income should face a zero rate of taxation and that taxes should be concentrated on consumption. Most West European nations come closer to that ideal than we do, and they have higher rates of saving for the most part.
“Most economists” are right, and it’s worth noting that the taxman’s assault on savers is only going to get worse. To take just a few examples, the financing of Obamacare will include additional levies on investment income while the eventual ending of the Bush tax cuts will also hit savers, who will, of course, take a further knock (if inflation rises) by the continuing (and disgraceful) failure to index capital gains. Meanwhile, the possible means-testing of Medicare and Social Security can only operate (as Mrs. Thatcher realized in the course of similar debates in the UK in the 1980s) as an additional disincentive to save.
There are no easy answers to America’s deficit problem, particularly so long as median income remains low and unemployment stays high. Nevertheless a shift in federal tax from income (which would not, alas, involve the scrapping of income tax, but ought to mean its flattening and simplification) to consumption remains overdue, essential, and, yes, conservative.