What is wrong with this picture?
This is a political ad that has aired repeatedly in the past few weeks in the Washington, DC area. It’s an ad for a candidate for U.S. Representative from one of the Virginia suburban districts.
That’s the candidate and her father.
Have you figured out what’s wrong?
Sure, this is a campaign ad. You’re supposed to respond to the images emotionally. You aren’t supposed to think about what they are actually saying. But instead of just basking in the warm glow of that aw-shucks fiscal conservatism, try actually reading the words.
Crudely put, savings + spending = income. Which means that the candidate is endorsing the notion of spending less than 50% of one’s income. As a matter of logic, that’s the only way that you can save more than you spend.
Let me walk through the implications of that, one step at a time.
Microeconomics: Not feasible for the middle class.
Source: Federal Reserve Bank of St. Louis (FRED) system.
OK, let’s just take that at face value. The printed advice above boils down to “you should save at least half of your income”.
First, to be clear, for the U.S. as a whole, that’s never happened and never will. Above you can see more than a half-century of the U.S. personal savings rate. It has typically ranged from 5% to 15%, with a secular trend toward less savings. In recent years, 5% would be roughly normal.
But that doesn’t tell the full story. Almost all that savings is done by the well-to-do. The top 10% and top 1% of earners. Here’s a graph — of unknown quality — of savings rates by wealth.
Source: financialsamurai.com
That looks about right to me.
For the vast majority of Americans, the idea of saving half your income is absurd. It’ll never happen, for the simple reason that you need to pay the bills.
Even more absurdly, this same candidate has made much of how middle-class families must struggle to make ends meet. So the message here is that the middle class is struggling, but it should be saving more than half of its current income.
So, look, if you make tons of money, sure, you can look down on the great unwashed masses and their pitiful savings rates. I’ve had years where my little business was so successful that I did, literally, save more than I spent. But I can also recall the single-digit checking account balances of my youth. So if people with modest incomes don’t save much money — and they never have — I find it hard to fault them. Personally, I’ve always been extremely financially conservative. But I don’t think that somebody with two minimum-wage jobs should be expected to save half their income.
Macroeconomics: Economic suicide.
It goes without saying that if, in some imaginary world, Americans suddenly decided to save half their income, the economy would immediately tank. We’d have the next Great Depression.
Oh, wait, didn’t that just happen? The top graph below is personal savings, which appears to have hit nearly 35% recently. The bottom graph is the unemployment rate, which hit 15%. That was, in fact, the highest unemployment rate since the Great Depression. Which we just had, during the pandemic.
Source: Federal Reserve Bank of St. Louis FRED system. I should note that this is a bit of a cheat, on the savings side, because individuals largely saved their first round or two of COVID-19 payments. (Which is why they needed additional rounds of stimulus, get it?) That artificially gooses the observed savings rate, but only by a bit. Basically, from the standpoint of economics, people were pretty much panicking, as they had during the Great Depression. And as everyone individually reduced spending, the macroeconomic results were inevitable.
My first point being that if Americans were suddenly to follow that folksy bit of economic wisdom, that would guarantee that we’d have the next great depression.
So, why didn’t we slide into an economic depression?
The answer is the COVID-19 spending bill that Trump signed. Followed by the two COVID-19 spending bills that Biden signed. All of which force-fed money to U.S. corporations and citizens, to counteract the collapse of demand that occurred during the pandemic.
Which was matched by similar programs undertaken by all of the industrialized nations. This wasn’t a U.S. idea. This is what everybody with any sense did.
Anyway, all that money is now coming out of people’s savings, and going into spending. That’s my interpretation of why the U.S. personal savings rate is now just about 3%, which is low compared to recent history. It’s also why the unemployment rate is about 3.5%, also low by recent history. And, to some significant extent, why prices are up.
It may seem like the Federal government spent a lot of money to keep the COVID economic crisis from snowballing. We did, in fact, run the largest deficit (as % of GDP) since WWII.
But the point is, that was almost undoubtedly cheaper than having the next Great Depression. Which is what the entire industrialized world was facing. Which is why everybody threw money at their economies. They didn’t do it because they were stupid. They did it because it was smart. It was cheaper than the alternative.
Are we living with the consequences now? Yep, sure are. Are people going to squabble about how much was spent, try to use it to political advantage? Yep, sure are. Will folks forget why the money got spent in the first place? No doubt.
Will this candidate ever get called to task for suggesting that middle-class people ought to save more than half of their income? Nah, I bet nobody even noticed what that ad implied. Will anyone ever point out that uniform adoption of that policy is collective economic suicide? For sure not.
That’s just the way the world works. Please feel free to say anything, no matter how stupid, as long is riles up the right people. And never, ever apply logical analysis to anything that is said.
Don’t worry, be happy.
