For the first time in many years, Americans are saving money. As families are threatened by loss of jobs, shrinking health coverage, and diminishing retirement savings, their natural inclination is to cut back consumption to avoid deeper debt, and have a little “rainy day” money.
In general, saving money is a good thing. But at times like these, it leads to further downward spirals in consumption, lay-offs, and business failures, because consumer spending (consumption) is the principal engine for economic growth.
But what if job losses and downsized 401(k)’s were cushioned by generous unemployment benefits, guaranteed health coverage, and a secure retirement? Insulated from the worst parts of the recession, workers and families could keep the economy moving by spending money at the local bakery, bicycle shop, bookstore.
Our neighbors in Canada, and across the Atlantic, are doing just that. In Finland, for example, decades of high taxation – which provide universal health care, affordable colleges, 60% of income during retirement, inexpensive child care, guaranteed family leave, etc. – mean families don’t have to save for those items. So now, they can encourage their citizens to spend money.
Here in America, instead of investing the gains of economic growth in broad benefits like health care, education, child care, retirement, and public transit, we’ve given the money over to narrow, private interests like capital markets, debt instruments and outsize executive salaries.
Since wages haven’t grown much in real terms for the past 30 years, workers have financed personal spending by borrowing against their home equity and expanding credit card debt. Now the bill has come due, and families can’t afford to help spend our way out of the recession.
There’s no doubt our economy needs immediate stimulus in order to slow the current economic decline and cushion the blowback for working families. The federal economic stimulus package is a good first step. But in the long run, we can’t get out of this economic hole until we ensure the benefits of prosperity are broadly shared, and invest public revenue for long-term public benefit.
The real foundation of economic growth, whether in an economic recession or expansion, is spending a greater percentage of national income on human needs and intellectual growth, and less on individual material consumption.