Very Good, Mr. Brooks, Very Good

Wed, 11 Jun 2008 11:48:53 +0000

When I speak to non-economists about economics, I often tell them that norms are often more powerful than incentives. David Brooks has a must-read column in The New York Times today that strikes this note very well with regard to saving:

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

Do the data back him up? Let's look at the data on the personal saving rate out of disposable income:

Graphs for the government's budget deficit and the nation's trade deficit would also show a widening beginning around the same time during the 1980s.

Brooks goes on to implicate a number of institutions in his column, but he leaves out one that I think is important--your neighbors. If the people with whom you interact are willing to leverage themselves to the hilt to buy things--housing, durable goods, whatever--then they bid up the prices of these things when you have to buy them as well, even if you are trying to behave more prudently.

A recent study by the McKinsey Global Institute suggests another factor: the decline in the saving peak, which is in fact gone from the Boomer generation. Here's the key slide (#4) from the presentation:

The McKinsey study goes on to suggest that the Boomers will likely compensate for this decline in a saving peak by working longer. Seems about right to me.