Tax cuts from the stimulus package and increases in Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it. Although personal spending increased slightly last month, the saving rate climbed to its highest level in 15 years as consumers tried to build a buffer against the threat of job losses and more economic hardships. The personal saving rate, which dipped below zero during the housing boom as Americans tapped home equity loans and other easy lines of credit, rose to 6.9 percent in May, the Commerce Department reported. That was its highest point since December 1993.
Pro-growth types often hail a rise in savings as means for generating more investment – but that assumes we are at full employment. Healy knows we are not:
As personal savings return to more normal levels, the increase prompts what economists call the “paradox of thrift.” Although saving money helps individuals repair their finances and pay debts, a sharp rise in overall personal saving can actually deepen a recession and hurt the people who are saving more. As people save money, fewer dollars circulate through shopping malls, Main Street businesses, and large employers and subsequently back to workers through their paychecks. This thrift pulls the economy lower.
Well said – but wasn’t those tax cuts that President Obama included in the stimulus package on the hope of getting bipartisan support supposed to give a boost to consumption demand? It seems that they neither got the Republicans to support his fiscal stimulus nor was a very good bang for the buck form of stimulus.