July 03, 2002
The Two Decade-Long Fall in America's Private Savings Rate

Of all the remarkable things to happen in the U.S. economy over the past two decades, the fall in the private savings rate must rank among the top ten. Net private savings in the United States--the sum of household savings on the one hand and business retained earnings on the other--used to fluctuate between nine and twelve percent of gross domestic product [NDP]. Then in the mid-1980s, during the Reagan years, private savings began to fall. This was a mystery: after all, the government was running substantial deficits, and there were theoretical reasons to believe that individuals might save more to offset the risk--nay, the certainty--that higher levels of government debt would one way or another increase their taxes in the future. Some argued that the private savings rate was fallen because the 1980s stock market boom had made people wealthier, and they wanted to spend some of that wealth. But the crash in inflation-adjusted stock market values in the 1970s had not led people to save more to offset their reduced stock-market wealth. It remained a puzzle. And the puzzle gathered strength in the 1990s. By the peak of the late-1990s boom, the private savings rate was only three...

Posted by DeLong at 12:57 PM