Where Has all the Saving Gone? A. Carilli

by Anthony M. Carilli S ocial commentators from both ends of the political spectrum have long bemoaned the low rate of saving in the United States. They fear that the lowest rate of saving in the industrial ized world portends economic disaster.The level of saving is one factor that determines the level of interest rates: the lower the rate of saving,the high er the interest rate. The interest rate is the price of obtaining funds for investment. So, high interest rates yield lower levels of investment. Thus a rela tively low rate of saving yields a relatively low rate of investment. The low level of investment makes it difficult for American enterprise to compete in the world market, because it will be unable to afford the adoption of new technologies. Some blame the low rate of saving on American materialism. Some say that Americans do not have a moral commitment to saving. Still others blame the shortsighted selfishness of the market econo my for the paucity of saving. The solution, the social commentators argue, is to change the psy chology of the American consumers.

These criticisms and their requisite solutions missentirely the true reason for the low rate of sav ing in the United States. Americans are rational decision makers. They weigh costs against benefits to decide upon how much to consume and how much to save. The decision to save is an economic decision. Most consumers place a higher value on near-term consumption than on consumption in the distant future. To get people to give up the bird Dr. Carilli is an assistant professor of economics at Hampden-Sydney College in Virginia and adjunct schol ar to the Beacon Hill Institute for Public Policy Research at Suffolk University in Boston, Massachusetts. in the hand for the two in the bush, interest must be paid. The higher the interest rate the more likeiy an individual is to put consumption off; that is, the' higher the interest rate the more likely it is that the individual will save. Although consumers save for a variety of reasons-to provide for retire ment, to leave legacies for their children, to pro vide for random emergencies-the decision to save is based on economic incentives.

In a free market, consumers purchase various bundles of goods according to the relative prices of those goods. The saving choice is one of choosing relative amounts of present and future consump tion. The price of present consumption in terms of future consumption is the interest rate. Thus, con sumers substitute future for present consumption as the interest rate rises (i.e., as the price of present consumption rises, ceterisparibus).So increases in interest rates will tend to bring about increases in saving. PunishingThrift Given that consumers are rational, why is the U.S. saving rate consistently as low as it is? U.S. economic policy toward saving is the answer. Poli cies over the last 50 years not only have not encouraged but have actually discouraged saving. The question is then: why discourage saving? The answer lies in the economic policies based upon the economic theories of John Maynard Keynes.