Spending Habits Put Future In Hock Paltry Savings Contribute To Nation’s Economic Woes; Few Willing To Change Lifestyle

SUNDAY, JUNE 4, 1995

Spend, spend, spend.

Here in the world’s consumer paradise, that’s one of the things Americans do best - and it’s a habit that could land us in hot water, if it hasn’t already done so.

With our gluttony for everything from camcorders to four-wheel-drive vehicles, Americans are the black sheep of the industrialized world when it comes to saving money.

For the nation, this failure to save carries a high price.

That’s because household savings helps to fuel the economy. It’s not just money stashed in bank accounts, but also purchases of stocks and bonds and mutual funds.

Such savings feed economic growth by making money available to businesses and governments to invest in such building blocks of economic prosperity as roads and airports, machinery and computer systems, research on new products, and education to produce smart, skilled workers.

But last year, American households saved, on average, only 4.1 percent of their after-tax incomes. Japanese citizens, meanwhile, stashed away 16 percent and Germans 11.4 percent.

Americans, for example, have loved to buy cars on time rather than saving up for them, and the growth of auto leasing takes pay-as-you-go to new heights.

To someone like 49-year-old Northeasterner Ray Blum, of Philadelphia, leasing makes all kinds of sense. Blum’s three-year lease on a Pontiac Grand Am costs him less per month than he would pay on a car loan. And the lease will expire before expensive parts start to wear out and need replacing.

Of course, when the lease runs out, Blum will probably lease another car, spending more than $200 a month he might otherwise save.

But that doesn’t faze him, because leasing allows him to live the ultimate American dream: He is driving a car he couldn’t afford to buy.

“Why should I buy something I don’t really want, when I can lease for less and drive something I really like?” he asks.

For now, for the nation’s Ray Blums, this lifestyle looks like a winner.

But our inability to “just say no” to spending has been offered, for example, as one reason the rest of the world has snubbed the dollar so rudely this year.

Although the dollar has risen slightly from historic lows reached this spring, it’s still well below where it began the year against the Japanese yen and the German mark.

But the weak dollar only reflects the more ominous problems that foreigners see lurking in the wings if we don’t get our spending habits under control.

Take our mounting debt load. We used to be the world’s bankers; everybody owed us money. In the last 25 years, we’ve become the world’s borrowers. We’re in hock around the globe for all those consumer goodies we can’t do without, and we rely on foreign purchases of U.S. government bonds to feed our habit of federal overspending.

Still, these debts would be manageable if we could count on strong economic growth to create the wealth we need to pay them off. But our free-spending ways make that iffy: The worst consequence of our passion for buying now and paying later is that it stunts economic growth. And that means our children and grandchildren are likely to have a harder time making ends meet than we do.

“We are eating our seed corn,” says Gary Robbins, an economist whose work underpins the tax theories of congressional Republicans. “The reason economists are predicting we will have only 2 or 2.5 percent growth in the long run is we aren’t accumulating enough capital. That’s why I’m concerned about savings.”

For some Americans, the less-flush future is already here. The failure of lower-wage earners to get ahead financially in the last 20 years is a direct consequence of the nation’s failure to save enough, many economists believe.

“One reason our economy is growing so slowly, and why real household incomes have not risen over the past 20 years, is that we have had a very low household saving rate,” says Mark Zandi of Regional Financial Associates in West Chester.

Since 1977, our household savings rate has been in the bottom third among the 19 industrial nations tracked by the Organization for Economic Cooperation and Development (OECD). In 1993, the most recent year reported by OECD, the U.S. savings rate of 4.1 percent was next to last, with only the Netherlands saving less.

What accounts for our profligate ways? Economic research has produced dead ends and contested results, but no answers that economists can agree on. Some theories include:

High U.S. taxes on interest, dividends and capital gains discourage people from saving. This is the core argument behind Republican proposals for lower taxes on capital gains. But many economists say studies of tax effects are flawed and prove, at most, that changing tax laws encourages people to shift their money around.

The United States is the world capital of easy credit. It may be that saving seems unnecessary in a country where unsolicited offers of loans and credit cards flood mailboxes and government subsidies make it possible to buy a house with as little as 5 percent down.

Some researchers think demographics play a role. Many baby boomers are still at the age when people buy houses, furniture, cars and college educations for their children. But as their child-raising years end and they approach retirement, they are likely to save more, the theory goes.

If our collective experience doesn’t encourage us to save, what might?

James Poterba of the Massachusetts Institute of Technology, who headed a study of savings rates in different countries, says America’s 401(k) retirement plans seem to have coaxed households to save more.

Such plans allow workers to save pretax income, deferring taxes on both the principal and the interest until they withdraw the money.

“A thing like that, which is funded by payroll deduction and sold by employer education programs in the workplace, has the potential to change savings rates,” he says.

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