Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.

Tax Cuts and Savings Rates

James Skillen


January 15, 2001

With all the concern about a possible economic recession and the urgent need for tax cuts and lower interest rates, one question is being overlooked: Is, or is not, the rate of private savings a crucial factor in securing American economic stability?

A recent study by Wynne Godley at the Jerome Levy Economics Institute of Bard College (see Robert J. Samuelson, "Time for a Tax Cut," Washington Post, 1/9/01) makes clear that the past decade's economic boom was propelled by a "buying binge" in which both consumers and businesses spent beyond their means and went deep into debt, as Samuelson summarizes it. In 2000, household debt hit 100 percent of personal disposable income, up from 82 percent in 1990.

Yet the apparent need for a quick tax cut is to make it possible for Americans to keep more of what they earn so they can maintain their spending. Otherwise, if people cut back on spending in order to manage their debts, or even to increase savings, then the country is in danger of a serious and perhaps even prolonged recession.

The main debates now taking place in Congress and the media, as George W. Bush prepares to take office, revolve around the timing, amount, and targets of the "needed" tax cuts. No one seems to be questioning the pattern of ever increasing consumption based on ever increasing indebtedness that is becoming ever more deeply entrenched as the foundation of our economy.

Is this any way to build economic security? Can this pattern ever lay the groundwork for reforming Social Security and addressing the pockets of poverty that remain in the United States even after a decade of unprecedented growth?

The problem is this: Our chief national aim seems to be to avoid recession, or put positively, to keep economic growth going with as low a rate of inflation as possible. This way, everyone, including the elderly on fixed incomes, benefit. But do they? Do we? What does it take to keep economic growth going? Almost every dimension of national economic policy presumes that spending and more spending is what it takes. Consumption must be encouraged. What about savings? Not if savings interferes with spending. Spend now, save later. Borrow now so you can keep on spending.

But what happens when fuel costs jump unexpectedly or when the hoped for multiplication of high-tech miracles turns out to be a false hope or a longer-range hope? What can consumers do to keep making their debt payments while losing their jobs or getting hit with higher heating costs? Those who are most indebted can't do anything, because they have either no savings or insufficient savings. They are completely dependent on "the system" to make it possible for them to keep on spending.

But if consumption-oriented incentives are not sufficient, then bankruptcy may be the only option, an option that more and more individuals and companies have been taking. Which means that the department stores, credit card companies, and banks that hold all the debt must take measures to increase their income to cover more defaults. Those measures require taking even more of a bite out of debt-oriented consumers.

Wouldn't it be wiser for the policy makers to encourage more private savings so that when difficult times come and the economy slows, people can manage their affairs more responsibly? One day when the American economy can no longer depend on its huge indebtedness to foreign investors and savers, would it not be wise if Americans had learned the habit of saving as well as they had learned the habit of spending beyond their means?

Who in this new Congress and new administration will argue for a savings policy?

—James W. Skillen, Executive Director
   Center for Public Justice


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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”