Real Income and the Savings Rate

Second verse, same as the first—with some differences. I made an initial posting on personal income and on the savings rate yesterday, noting the increase of the one, the decline of the other, and suggesting that this statistic is worth tracking in detail quarter by quarter as we proceed.

Today I’d like to follow this up by using real dollars for disposable income—thus dollars with the same purchasing power in 1959 as in 2009—and in all of the years in between. Using real rather than current dollars, what we see is that in this half-century (actually 51 years, from 1959 to 2009) real purchasing power per capita has increased from $10,803 in 1959 to $32,519 in 2009; it has more than tripled! In the middle year of this series, in 1984, real disposable income was at $21,105 per capita. The data are the following graphic:

And yet—although real income has substantially increased, not just in numbers but in genuine purchasing power—the savings rate has declined. At the beginning of this period it stood at 7.5 percent of disposable income; in the last year at 4.3. More telling are data for three periods shown  in the following table:
      

Period	Average Real Income ($)	Average Savings Rate (%)
First 25 years (59-83)	15,449	9.1
Last 25 years (85-09)	26,980	4.8
Last 5 years (05-09)	32,254	2.5

Now ordinary logic might suggest that as real income increases, the savings rate would increase; with basic needs satisfied, more would be available to put away for that rainy day, that business cycle downturn, that inevitable unforeseen problem—illness, layoff, whatever. What we see instead is the exact reverse of that pattern. As real income grows, savings decline. How to explain that?

My own explanation is that it is cultural and rooted in human fallibility. Societies decline as a consequence of this combination of weaknesses. A false confidence arises in the population when things are going well. We habituate ourselves too easily to anything that repeats—and too easily forget the bad times—unless they really, really hurt us. And the rest is the tendency to indulge ourselves, all else being equal—a tendency that is exploited by all those intent on selling us what they offer for sale.

Progressive notions are based on the curious idea of enlightened self-interest—thus the magic of the market. The trouble is that self-interest is just that. It’s not enlightened. And repetition deludes us. We’re also too easily flattered. As always in collective human affairs, problems may be traced back to big ideas. Enlightened self-interest is one of these inadequate big ideas. If our policies were based on another big idea, original sin, which is much more descriptive of that which we see, things might begin to look quite different.

Part of the problem, of course, is that the few who competently resist this inertial tide are nonetheless inextricably woven into the social whole, and when the whole declines they suffer the collective consequences right alongside the thoughtless who just go with the flow.

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