Americans are saving more of their paychecks than at any time since February 1995, a shift toward thrift that could prolong the recession but strengthen the financial health of U.S. households and the overall economy if it lasts.
Even as income grew, personal saving as a percentage of after-tax income rose to 5.7% in April, the Commerce Department said Monday, up from 4.5% in March and well above the zero savings rate reported a year earlier.
The turnaround reflects Americans' deep concerns over the weak job market, declining home values and volatility in the stock market. The saving rate also was boosted by the government's stimulus package, which extended unemployment benefits in many states, and gave most Americans an extra few dollars in their weekly paycheck.
Personal income rose a seasonally adjusted 0.5% in April from March. After-tax income increased $121.8 billion, or 1.1%, due to reduced taxes and increased government benefits for unemployment and other programs. Government stimulus efforts added about $44 billion to American households' after-tax income in April, and households overall increased their saving by $131.5 billion Personal consumption declined 0.1%.
Americans' thrift puts the Obama administration in a quandary. On the one hand, it is preaching the need for Americans to live within their means and exercise more fiscal responsibility. But on the other, to get the economy back on firm footing, Americans need to return to spending, from large-ticket items such as cars to smaller impulse buys like perfume and chocolate.
This is a reminder of the stupidity of what is euphemistically called the "stimulus." The concept of "Ricardian equivalence," in economics, is the idea that it makes no difference whether government spending is financed by taxes or deficits, because people will just anticipate future taxes and save in order to pay for them. Strict Ricardian equivalence surely does not hold, but people probably do save more when they're afraid of future tax hikes. The government and the people are working at cross-purposes: people are trying to secure their futures, while the government is making people's futures less secure by drowning us in debt.