The pandemic has been a gold mine of data and theoretical tests for economists – sort of a let’s-poke-it-with-a-stick-and-see-what-happens concept. The disruption of almost all economic activity here and around the globe provided all kinds of revelations that would not have been clear before.
One surprising result was a spike in savings rates. Here in the U.S. last April, we collectively saved a record 30% of our income. Saving money is a good thing, as all our parents repeatedly told us, but despite those admonitions, America has not been a land of savers, averaging around 7% to 8% over the last several years. Comparing to other countries, we just don’t tuck much money away.
The starkest contrast is with the Chinese who historically have saved nearly half their income. While saving is a personal virtue, when people save instead of spend, other people don’t get income. It’s a Tragedy of the Commons-type problem. What is good for individuals may not be good for the whole population.
This is one of China’s biggest problems in reducing their dependence on exporting – without the Chinese becoming more energetic spenders, exporting becomes a crucial market. The latest data show Chinese consumer spending at about 55% of GDP. In comparison, in the U.S. consumers provide about 70%.
Looking back, it is obvious when you’re not going out, most face-to-face retailing slows drastically. Even the pickup in online retail couldn’t overcome this spending collapse. We’re feverishly studying why. Being cooped up, fear of the future, and especially the end of going out to eat or travel undoubtedly contributed. There are probably other factors. At any rate, the American public has stashed away unprecedented amounts of wealth. The savings rate has dropped back to lower levels but the money the government poured into the economy – like the PPP program – didn’t all get spent. It undoubtedly prevented a severe recession.
Meanwhile Americans have accumulated about $2.7T in what are called excess savings. And we’re not alone. There is about $5.5T globally in similar holdings. This is new territory for economies and we’re not sure what this stash means for the future. Next week, I’ll explore what many economists think will happen to these savings and why, perversely enough, it may be a big headache for some time.
