1916, with the introduction of the federal income tax. The interest deduction at that time applied mostly to business loans because few people had home mortgages, but AFAIK it’s always been applicable to mortgage interest.
Yeah, but health insurance coverage has been getting less widespread among Americans and significantly more expensive, so that doesn’t sound likely to be a significant factor in the reduction in savings.
But again, your timing seems way off here. Legislated unemployment insurance dates back at least to the 1940’s. And I don’t see why other “safety net” programs would produce the decline we’ve seen in savings rates since just the mid-1980’s, when such programs were arguably more generous than they are now.
Nope, the average duration of joblessness for the unemployed has actually been increasing in recent decades, even though the unemployment rate has declined.
Which changes are you thinking of? The most recent bankruptcy law change (pdf) that seems to have been criticized as too generous to individual debtors was the Bankruptcy Reform Act of 1978. The article comments that “subsequent amendments have tilted the scales back in favor of creditors”, namely the Bankruptcy Amendments of 1984 and Bankruptcy Reform Act of 1994. In 2005, of course, a major overhaul of bankruptcy legislation was passed, but it too tends to make individual bankruptcy harder, not easier.
The other factors suggested by you and Maeglin, such as low interest rates, easy credit, rising prices, stagnant real wages, etc., seem more plausible as explanations for our vanishing savings. But I’m not sure they all add up to what I’d call a rational trend in decisions about saving.
I don’t want to jump on this boring old merry-go-round again, but here “rational” should not have any normative value. Substitute “goal-directed, utility-maximizing, and nonrandom” for rational and it will be easier to swallow.
Okay, but the problem is that I can’t identify a self-consistent “goal” or “utility” that this trend of diminishing savings is directed toward. I grant you that “rational” behavior in this case doesn’t have to correspond to “behavior that I think is wise”. But what “rational” strategy does it correspond to?
In this case, I think that the strategy is a monotonically increasing function of type.
Suppose you have a group of people. All of them are different in only one respect. their discount rate. For person i, a bird in the hand is worth two in the bush. For person j, a bird in the hand is worth three, etc. Everyone in the set of individuals can be indexed by how much cash next week would equal X amount of cash today.
I know you can work out the rest. The more cash it takes next week to equal cash today, the more likely you are going to spend it today rather than wait. As future gains appear smaller and smaller, more kinds of people are inclined to spend now rather than wait it out.
I believe there are two forces in play that affect this calculation. US prosperity is still running reasonably high, so most people are not expecting catastrophe tomorrow. At the same time, the flawed fundamentals of the world economy do not induce people to save in the United States. So while things are still good and the return to saving stinks, why not spend? Put saving off when the returns are higher. When people get a large return to a cheap new car or a next gen Playstation and they value present consumption over future consumption by some critical amount, they will spend rather than save. As the utility on the present consumption increases and the likelihood of high future consumption decreases, we should expect to see incrementally more people switching from saving to spending.
I really do hope you found this helpful. I am usually not the kind of person who says that anything is easier to communicate mathematically, but in this case, it really is.
Considering that health care is one of the, if not the, major causes of bankruptcy, I’d suspect that health care is one of the, if not the, major depletors of savings. It certainly has been for me. I am in debt because of health care.
Plus it is almost guaranteed that these couples taught their offspring the same bad habits. As much as I prefer for parents to take responsibility for educating their children in subjects outside of the school curriculum, this is not one of those cases. Some parents simply are not wise enough. Household economics needs to be taught in junior high and high schools. Arm people with knowledge prior to when they go out and finance their first car or first house. Students entering the workforce should understand the power of early retirement planning and the value of the extra compounding one gets when one starts to save for retirement at age 22 instead of 30. They should learn the dangers and pitfalls of credit cards, which seem like plastic magic Mommy and Daddy pull out of their pocket that gets them things. Certainly, some parents are smart enough to pass on advanced knowledge of these subjects, but that doesn’t help the people Lissa cited.
As someone who was around back then, let me remind you that while interest rates were high, inflation was still higher. (And not everyone could get into investments with the high interest rates.) In times of high inflation, purchasing becomes more rational than savings.
While unemployment did spike, most people were still in the mindset of having one or very few employers. So that’s not it.
Single earner families with a given income are more efficient than dual earner families with the same income. There is less expenditure on meals, child care, clothing, transportation. This could explain some of it also.
BTW, those of you who think that people make rational economic decisions should read up on behavioral economics. (Warning - pdf).
