Why aren't we saving?
In Canada, businesses are saving, and government is saving (though not quite as much recently, for which we can thank Jack Layton). But the net household saving rate just keeps falling. It started falling from a long-run average between 12 and 16% around 1993, tanked out completely sometime around the bursting of the tech bubble (this is in contrast to the American private saving rate that had been falling since the early 1980s, and now both rates are routinely negative. In a nutshell, the North American household sector is routinely spending more than it takes in as income.
The Globe and Mail had the latest yesterday:
Because Canadians have almost no savings, economic shocks could be exacerbated by a slowdown in consumer spending, the main driver of Canadian economic growth, [CIBC economist] Mr. Tal said.
His report comes after Statistics Canada said last month that the rate plummeted to minus 0.5 per cent in the second quarter. In the U.S., meantime, the personal savings rate stands at minus 0.6 per cent, the lowest level on record.
While the methodology of calculating the rate may be flawed because it doesn't include asset prices, it's been compiled in the same way for decades. Ten years ago it stood at 10 per cent, 20 years ago at 20 per cent — an indication of a significant downwards trend, he said. Moreover, all age groups have seen a steady drop in their savings rate, Mr. Tal said in the report.
He attributed the falling rate to a number of reasons, among them lower inflation expectations, an extended period of low interest rates, a slower pace of personal income growth and changing financial attitudes.
Incredibly, 40% of Canadian households have no liquid assets at all other than what's in their chequing accounts. Not only does this make us very vulnerable to a housing market crash (since so many people are building their next egg by paying down a mortgage), but it also means that, as a nation, we're really liquidity contrained; we can't free up resources to get us through economic hard times.
Why are households so spendthrift? Another report in today's Globe and Mail provides the basic answer: inequality combined with wealth:
Among findings cited in the [international Social Watch] study:
— Between 1997 and 2003 Canada's economy was the fastest-growing among G-8 countries, expanding 55 per cent in real terms. The Gross National Product has surpassed $1-trillion.
— Federal spending stands at 11 per cent of the economy, down from 16 per cent in 1993-94, well below historic averages [note: it's now back up to 12% according to the study. We can thank Jack Layton for that.]. Recent increases in spending have not offset deep cuts made in the mid '90s.
— Only 38 per cent of unemployed workers receive government benefits, down from 75 per cent in the early 1990s.
— More than $1.7-million households live on less than $20,000 a year, and most are precariously housed. They do not own their own homes and spend more than 30 per cent of their income on rent.
— Cuts to post-secondary education and deregulation of fees have doubled or tripled tuition costs.
— Despite repeated promises there is no national child care program.
Ms. Yalnizyan said Ottawa has focused overwhelmingly on economic growth, dramatically limiting its role and transferring money to provinces without accountability or conditions.
The Social Watch people, including the folks at the Canadian Centre for Policy Alternativesare a bunch of serious lefties. But while I doubt I'd love all their solutions, their points about the trade off between social spending (which mainly enhances equity) and tax cutting (which, even progressive ones like the recent increase in the personal deduction, mainly enhances growth) are well taken. Though it's not the focus in Social Watch report, this tradeoff also has big implications for saving.
There's not necessarily a direct causal relationship between poverty and saving. Rich people and rich nations do save more as a percentage of income, but poor societies have also always saved, and poor households within rich countries have historically saved. Neither is it the case that all the households who are undersaving are objectively "poor". Even that $20,000 a year figure the Social Watch authors cite for Canada isn't really indicative of the dire poverty encountered in the developing world, especially for households without children. When I was making $20,000 a year I was certainly saving. The problem is that when there's an enormous amount of wealth like there is in Canada and the US, people try to consume up to the social standard. Everyone wants their cell phone, their 250-channel cable package, their European vacation. And when those things are so easily in reach of the people living down the block, you come to think it's easily in your reach too. The banking industry, the credit card industry, the personal loan industry, are all out to confirm this belief; after all, the vast majority of non-savers are not serious credit risks. Defaulting on various types of consumer loan remains relatively rare.
The government encourages this too when it sends you your tax rebate every April. Even the tax advantages of Registered Retirement Savings Program accounts (which, before Bush cranked the IRA contribution limits, were more generous and universally accessible than similar programs in the US) are only available to those who are wealthy enough to write the investments off their taxes. And more often than not, that write-off then comes back to you in the form of a big, juicy, spendable cheque.
The fall in the household sector saving rates from around 15% to less than 0% is probably the biggest demographic-behavioural change we North Americans have experienced over the past 30 years, and Canada's recent racing to the bottom to catch the Americans suggests there's something in the structure of the liberal market-based economy that's provoking this change. There's lots of peripheral factors involved: financial market liberalization; the tech bubble bursting; the enduring strength of the housing market and low interest rates are all big ones. But I venture that the real driving force behind the fall in saving is the combined pressures of rapid growth and high or increasing inequality. If we want to reverse the trend, that's what we need to look at.
The Globe and Mail had the latest yesterday:
Because Canadians have almost no savings, economic shocks could be exacerbated by a slowdown in consumer spending, the main driver of Canadian economic growth, [CIBC economist] Mr. Tal said.
His report comes after Statistics Canada said last month that the rate plummeted to minus 0.5 per cent in the second quarter. In the U.S., meantime, the personal savings rate stands at minus 0.6 per cent, the lowest level on record.
While the methodology of calculating the rate may be flawed because it doesn't include asset prices, it's been compiled in the same way for decades. Ten years ago it stood at 10 per cent, 20 years ago at 20 per cent — an indication of a significant downwards trend, he said. Moreover, all age groups have seen a steady drop in their savings rate, Mr. Tal said in the report.
He attributed the falling rate to a number of reasons, among them lower inflation expectations, an extended period of low interest rates, a slower pace of personal income growth and changing financial attitudes.
Incredibly, 40% of Canadian households have no liquid assets at all other than what's in their chequing accounts. Not only does this make us very vulnerable to a housing market crash (since so many people are building their next egg by paying down a mortgage), but it also means that, as a nation, we're really liquidity contrained; we can't free up resources to get us through economic hard times.
Why are households so spendthrift? Another report in today's Globe and Mail provides the basic answer: inequality combined with wealth:
Among findings cited in the [international Social Watch] study:
— Between 1997 and 2003 Canada's economy was the fastest-growing among G-8 countries, expanding 55 per cent in real terms. The Gross National Product has surpassed $1-trillion.
— Federal spending stands at 11 per cent of the economy, down from 16 per cent in 1993-94, well below historic averages [note: it's now back up to 12% according to the study. We can thank Jack Layton for that.]. Recent increases in spending have not offset deep cuts made in the mid '90s.
— Only 38 per cent of unemployed workers receive government benefits, down from 75 per cent in the early 1990s.
— More than $1.7-million households live on less than $20,000 a year, and most are precariously housed. They do not own their own homes and spend more than 30 per cent of their income on rent.
— Cuts to post-secondary education and deregulation of fees have doubled or tripled tuition costs.
— Despite repeated promises there is no national child care program.
Ms. Yalnizyan said Ottawa has focused overwhelmingly on economic growth, dramatically limiting its role and transferring money to provinces without accountability or conditions.
The Social Watch people, including the folks at the Canadian Centre for Policy Alternativesare a bunch of serious lefties. But while I doubt I'd love all their solutions, their points about the trade off between social spending (which mainly enhances equity) and tax cutting (which, even progressive ones like the recent increase in the personal deduction, mainly enhances growth) are well taken. Though it's not the focus in Social Watch report, this tradeoff also has big implications for saving.
There's not necessarily a direct causal relationship between poverty and saving. Rich people and rich nations do save more as a percentage of income, but poor societies have also always saved, and poor households within rich countries have historically saved. Neither is it the case that all the households who are undersaving are objectively "poor". Even that $20,000 a year figure the Social Watch authors cite for Canada isn't really indicative of the dire poverty encountered in the developing world, especially for households without children. When I was making $20,000 a year I was certainly saving. The problem is that when there's an enormous amount of wealth like there is in Canada and the US, people try to consume up to the social standard. Everyone wants their cell phone, their 250-channel cable package, their European vacation. And when those things are so easily in reach of the people living down the block, you come to think it's easily in your reach too. The banking industry, the credit card industry, the personal loan industry, are all out to confirm this belief; after all, the vast majority of non-savers are not serious credit risks. Defaulting on various types of consumer loan remains relatively rare.
The government encourages this too when it sends you your tax rebate every April. Even the tax advantages of Registered Retirement Savings Program accounts (which, before Bush cranked the IRA contribution limits, were more generous and universally accessible than similar programs in the US) are only available to those who are wealthy enough to write the investments off their taxes. And more often than not, that write-off then comes back to you in the form of a big, juicy, spendable cheque.
The fall in the household sector saving rates from around 15% to less than 0% is probably the biggest demographic-behavioural change we North Americans have experienced over the past 30 years, and Canada's recent racing to the bottom to catch the Americans suggests there's something in the structure of the liberal market-based economy that's provoking this change. There's lots of peripheral factors involved: financial market liberalization; the tech bubble bursting; the enduring strength of the housing market and low interest rates are all big ones. But I venture that the real driving force behind the fall in saving is the combined pressures of rapid growth and high or increasing inequality. If we want to reverse the trend, that's what we need to look at.
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