Steady savings beneficial, economists say

We are a nation of consumers.

The goods and services bought and sold by individuals make up about two-thirds of all spending in the United States.

That means our collective habits have an impact beyond our pocketbooks.

"Consumers are king," said Raymond Owens, a senior economist with the Federal Reserve Bank of Richmond. "Usually as consumer spending goes, so goes the economy."

Oft-quoted and cited British economist John Maynard Keynes coined a theory known as the paradox of thrift. Its underpinnings have framed many economic policies.

"On a personal level, thrift is a good thing," said Walter Dehyle, who is director of tax and financial planning at Gelman, Rosenberg & Freedman in Bethesda, Md. "It's virtuous to be a saver. The paradox is if all individuals were thrifty and savers, that could damage the economy as a whole."

"If a recession starts to kick in, people stop spending and people get laid off."

In the 1950s through the early 1980s, consumers saved about 8 to 10 percent of their disposable income, or pay after taxes are deducted.

In the 1990s, the number began to drop. For much of the new century, Americans had saving rates of 3 percent or less. In late 2005, the rate went negative, according to the Bureau of Economic Analysis.

"We went on a binge, just a spending binge," said Deborah A. Hewitt, an economics and finance professor at The College of William & Mary's Mason School of Business.

The idea of spending continues.

President Barack Obama signed a $787 billion spending bill last week in hopes of stimulating the economy with tax credits, incentives and program funding. Part of the goal is to create jobs, which in turn will foster consumer spending.

Spending may not, however, be the way out for consumers.

"Here's the problem," Hewitt said. "In the long term, for an economy, too much spending means too little savings.

That begs the question:

What would happen if everyone saved more?

There are good and bad sides to saving.

If the saving was immediate and severe, the recession would deepen, Owens predicted.

"We see huge amounts of unemployment," Owens said. "We see production plummet and it's all driven by the plummeting consumption."

But steady savings in the long run would be beneficial.

If consumers saved more, they would be better able to weather economic downturns. Business owners also would be able to invest in new technology, which could increase efficiency and make companies more competitive, Hewitt said.

Consumers should rely on the government to do the big spending. And government spending should be long-term and durable, such as investment in infrastructure and repairing roads, he said.

"The government doesn't have to make logical financial decisions," Dehyle said.

What needs to happen for the economy to be healthy 10 years down the line?

"Once we get out of [the recession] we cannot expect to return to the old-time behavior," Hewitt said.

Consumers need to rein in their spending.

Businesses should invest in technology and workers.

Government spending must be reduced, as should federal debt so that future generations are not burdened.

"The idea that getting people to spend more money, money they don't have, that that will somehow save the economy, is preposterous," said Tad DeHaven, a budget analyst with the Cato Institute, a public-policy research foundation in Washington. "The correct course of action is to get people to start saving and to start investing."

No longer can rapid spending be supported when it comes to American spending or that of its government, some experts say.

"I don't believe in short-term government stimulus," DeHaven said. "What I would rather see is the government fostering long-term growth. We need more consumption based on savings, not consumption based on debt."

Contact Emily C. Dooley at (804) 649-6016 or .