<p><strong><a name="ts"></a>Romesh Vaitilingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is actually with a historian, Professor Sheldon Garon from Princeton University who has written a book called <em>Beyond Our Means: Why America Spends While the World Saves</em>. When we met in London in November 2011, I began by asking him to explain the basic story of his book.</p>
<p><strong>Sheldon Garon</strong>: The story is that the United States after 1945 diverged from really what was happening in the rest of the advanced economies of the world. They were all digging out from World War II, whether it was Japan or most European countries, they were all in savings and austerity modes with massive national savings campaigns.</p>
<p>The United States diverged from that, partly because it won the war, it suffered no war damage, it controlled a huge share of the world's production, very prosperous. It certainly didn't having to continue the sort of saving and austerity campaigns that we saw elsewhere. So that was one thing.</p>
<p>Beyond that, after 1945, new political ideas and economic ideas, including Keynesianism, but Keynesianism with an American inflection, led policymakers in both political parties, led the labor unions as well as businessmen, led to a broad consensus on the part of influential Americans that consumption would be the new driver of economic growth. And of course not only consumption, but the credit that was needed to finance consumption.</p>
<p>So consumer credit had already been quite advanced in America before World War II in the 1920s. But in the 1950s, what we call &quot;installment purchases&quot; thrived in America. Also, home mortgages. The buying of homes, and you can consider that also as sort of a consumption, but home ownership was promoted more in the United States at an earlier point that in most countries.</p>
<p>Federal Government policies have really started promoting home ownership as early as the 1930s, at the height of the Great Depression - the New Deal. The U.S. government promoted home ownership in many ways, including federal guarantees of private banks making loans and making 25 to 30 year fixed mortgage loans, which made them very affordable to home owners. And this too, although it started in the 1930s, really boomed after World War II.</p>
<p>So we had a long term, early post war development that didn't necessarily stop people from saving, but it certainly diminished the rate of saving. Not necessarily a bad thing. People borrowed freely to buy things, and they borrowed freely to purchase their homes. And there evolved in the U.S., a certain sort of, you could call it a savings behavior, but it's quite different from the rest of the world. It was a saving through housing.</p>
<p>That you took your surplus assets, and you tended to put them into your house, into your home mortgage, and saw your house, usually in that period, gradually appreciate. Those were kind of long term developments. Then 1980 marks a sort of a turning point. Before that, this credit, this consumption, this home buying seemed to be quite sustainable. People paid back their debts.</p>
<p>After 1980, because of a number of changes, you get the extraordinary availability of credit, both housing and consumer credit. It starts around 1980 with the deregulation of the credit card industry. Before that, credit card companies were really held back from charging much on the balance that people owned on credit cards by various anti usury laws in individual states. It made it very difficult for credit card companies to make much money on their cards. After 1980, credit card companies, because of various deregulatory policies, were able to actually charge whatever the market would bear. So more and more, credit card became a mass commodity in America, but also, more and more, people got over their heads in debt.</p>
<p>Home equity loans, which really hadn't existed much. Second mortgages. And after 1986, as a result of the tax slab, home equity loans just proliferated. Banks found that they were a very easy way to make money. That they could convince people that there were just unbelievable amounts of cash that they could get simply by taking a loan against the increased value of their homes, their equity. Now, this particularly exploded after the early 1990s to 2005, when home prices skyrocketed and Americans simply wrote themselves checks on the basis of these home equity loans, figuring that they could pay it back when their housing prices went up.</p>
<p>We also have sub prime loans made to some of the poorest Americans who probably couldn't possibly pay them back, and these were extremely predatory. So all of this culminated in really millions and millions of American households being very over-indebted, and yet floating by, thinking that they could pay it back. In a sense, covered up growing income inequality and stagnation in real wages and salaries among most of the population, and then after 2005, housing prices began to decline, and then in 2008, everything simply explodes, and you have the crash, housing prices are now about 30% below what they used to be.</p>
<p>So the fact that people didn't save, and the fact that people thought that they could save through increasing housing prices led to this enormous crash, and just a terrible loss of household wealth among a huge portion of the American population.</p>
<p><strong>Romesh</strong>: Perhaps we can come back to talking about that post crisis world that the American public faces. The way you describe it, you're a historian, so you come at it from a rather different angle from economists, the whole host of different ideas, institutions, cultural developments coming together to precedence. Then again, you see in the book, a real contrast with many other societies, particularly Japan, other East Asian societies and European societies. What are the broad differences, if you like, between what has happened in America and what has happened in these countries?</p>
<p><strong>Sheldon</strong>: You can say two differences, historically. One is, in most of the other advanced economies, there are much longer histories of institutionally promoting small saving. That is, saving among ordinary people, not the big investors, but ordinary households. This goes back to the 19th century and setting up savings banks, and post office savings banks, and then war savings campaigns in the two world wars.</p>
<p>And a host of institutions set up largely by governments, usually central, sometimes local that promoted as a social goal, and as a political goal, that everybody be invested in savings account of various types and that they build up their nest eggs and that they not be a drain on society's resources, and it became a real social good. Now, in America, there certainly were pockets of very good saving, but we have a much weaker historical commitment to promoting small savings, except for the period right around World War II and right after World War II.</p>
<p>In the 19th century, very few savings banks, really, a ridiculously weak postal savings system that nobody can even remember from 1910 to 1966, and in general, that it has not been a major social goal, or political goal to promote small savings. So that's one major difference. That would tie together Japan and South Korea on one side, and European nations on the other, including Britain, again until about the 1980s.</p>
<p>The other difference is the availability of credit. There has been much more, one would say, cultural and political resistance to offering too much credit to people, both in Japan on one side, and most of the continental European countries on the other. To this day, in places like Germany, Italy, Belgium, people don't have what we would call an American-style credit card that is a revolving credit card that you can borrow against. Almost all of their credit cards are offered by the local bank, and they are tied to one's bank account so that you really can't go too far. And they're very strict if you do.</p>
<p>Continental Europeans, particularly central Europeans, have very strict procedures for people who become over indebted. You could call it a tough love approach. Americans have personal bankruptcy laws that are quite liberal, that offer people a fresh start. In places like Germany and Austria, when you get over indebted, first of all, it calls for a legal process, and really a social policy process. Social workers straighten you out, they plan your payments, and you are expected to pay back more or less everything over a long period of time. So this is also a disincentive to take too much credit. Not much credit is offered, and there are severe punishments for those who become over indebted. These are the big differences, I think.</p>
<p><strong>Romesh</strong>: So these feel like they're almost sort of deep parts of the foundations of these different nations. The American belief in freedom and not being controlled by anybody, not least by the government whereas perhaps in the European countries and in Europe, there's an openness to being more directed and encouraged to do things, to be nudged to do things perhaps.</p>
<p><strong>Sheldon</strong>: It does seem to come out that way, but then we always have to ask how these cultures get formed. One of the things you could say to refute that in the case of the US is that in this period around World War II, early post war period, the US government had no problem promoting small saving among people.</p>
<p>Workers were expected to have regular deductions to buy US savings bonds. School children had US Treasury programs in World War II, in the post war period in the fifties. There were school savings programs in many cities in the 1950s. So it's not that we are totally opposed to government intervention, but that our society, like most societies, has evolved and as it has evolved, cultures have been reshaped.</p>
<p>Certainly the culture we have today in the US has long term formation, early post war period, but it's really the 1980s and 1990s and early 2000s that contribute to the &quot;radical notion,&quot; as you say, of freedom and government not really doing anything to protect consumers and savers from this market.</p>
<p><strong>Romesh</strong>: Can we talk a little about what the real motivations are for savings? I mean, it's &ldquo;precautionary savings&rdquo; economist talk about. Saving for a rainy day, kids are encouraged to save up to buy what they want. People in the workplace are encouraged to save for their retirement. Can you talk a little bit about those kind of motivations and how they fit into these different stories in different countries?</p>
<p><strong>Sheldon</strong>: It's a great question because motivations not only vary by individual, but they vary by historical period and they certainly vary by country. The idea of saving for retirement is a relatively new idea because people didn't used to live so long. The saving that most people did in the 19th century would have been for fairly immediate needs. If you were an apprentice, it's to buy tools or to move up to the next step to own your own business. So it&rsquo;s a lot of saving for immediate investment in self employed small businesses.</p>
<p>Certainly saving for medical emergencies which happened all the time before national health insurance. In America, it still happens because we don't really have a national health insurance system. In America today, the surveys of lower income households show that very few people are motivated to save for retirement because that seems almost impossible. They are trying to save so they can cover car repairs so that they can commute long distances around big cities to get to where they need to go.</p>
<p>Economists in America have often come up with things like the &quot;Life Cycle Thesis,&quot; Modigliani and Friedman and others. All that is predicated that they somehow know that people are only saving for retirement. Well, that's not true. That may be one thing people save for, but that's not the only thing. You brought up saving up to buy things. It's a phrase that's actually become quaint in America. Again when you look at Germans and you ask them, &quot;Why do you save?&quot; They say, &quot;I want to save up because I want to buy something.&quot;</p>
<p>Americans think that's very strange today. &quot;Why do you need to save up to buy things? You use your credit card or you take a home equity loan.&quot; So we do have some rather striking differences in motivations, but one of the puzzles is why Americans don't save more given that life is relatively uncertain and insecure for them compared to European welfare states.</p>
<p><strong>Romesh</strong>: Exactly. Think of it perhaps the other way around. If there's a big social safety net, you're less likely to save perhaps.</p>
<p><strong>Sheldon</strong>: The American economists have told us for decades that anybody getting a generous national pension or getting social benefits in a welfare state has an absolute disincentive to save, and yet we see it's exactly the opposite. We see Germans, and French, and Belgians and Austrians with elaborate social benefits and they're saving 10%, 11%, 12% and Americans who have very few of these things, other than a national pensions system, are saving very little.</p>
<p><strong>Romesh</strong>: Presumably you would want to see more savings of the kind that goes on in Europe and Asia going on in the US. Are there particular savings schemes from history or other countries now that you particularly like or think that would be really worth encouraging the development of in the United States?</p>
<p><strong>Sheldon</strong>: I do. One is we clearly need to return to accessible saving institutions for the small savers. We have no problem with the affluent. They are able to save. They don't need encouragement to save. They have access to institutions, so that's not the problem. The problem has been historically in the last 200 years - How do you get lower income and middle income people access to saving institutionss that might take relatively small deposits from you on a regular basis? But small deposits might have relatively high transaction costs. How do you accomplish that social good of getting people into savings accounts in banks? In America, we've done a terrible job in that. We really don't have small saver institutions anymore. It's almost all commercial banks. They have been singularly unfriendly to small accounts. They cite low profits and high transaction costs. They're actually starting to assess fees, major fees, on the poorest of their savers which drives lower income people away from the banks.</p>
<p>We need a government policy that one way or another either mandates, or gives certain tax advantages to banks, or one way or another nudges banks into doing the right thing and accepting small savers accounts, whether it's subsidized by the state or not. We need comprehensive school savings programs, or &ldquo;financial education&rdquo; would be a more modern term. This was a big story in the 19th and early 20th century all around the world. Less so in America, but very comprehensive in other places.</p>
<p>Clearly it's not that we have to tell children to &quot;save, save, save,&quot; but we have to educate them about the array of financial products out there, from credit to saving to investment. We have to educate Americans at the earliest stage about what risk is. So many Americans went into the stock market and put their retirement savings in without really a very clear sense of what the risks were, the downside. Clearly people have to better educated.</p>
<p>And then the other thing is on the more negative side, we need to regulate the consumer finance industry much better than we have. It's been virtually unregulated until recently. We now have some new legislation. We now have a new agency, called the Consumer Financial Protection Bureau, that came out of a reregulation law over the last couple of years. The problem is the Republican Party is trying to sabotage it at every turn and at this point, a director has not even been appointed of this new bureau because the director has to be confirmed through the US Senate and the Republicans are blocking anything because they and the financial industry are very opposed to any efforts to reregulate consumer finance industry. Then that would be things like credit cards, and home equity loans and things like that where clearly the financial industry needs to provide more information to the consumers. They need to tell them about the risks and they need to stop being quite so predatory.</p>
<p><strong>Romesh</strong>: Final question, Sheldon. The crisis, the collapse of sub prime and the suffering that's gone on for so many Americans in the wake of it, it feels like the culmination of your story that started back in the post-war years. What do you see now as the prospects going forward in terms of potential changes in the whole culture, perhaps moving from a society that's just founded on credit and debt back to a society where savings is more important?</p>
<p><strong>Sheldon</strong>: That's a difficult question. I don't think that it's happened yet. It's odd that it hasn't happened yet because we're now about three years into the economic crisis. Whether it's technically a recession or not, clearly the stagnation is there and we haven't seen appreciable changes. Now we have seen a rise in the personal savings rate which had been almost zero, then at one point it went almost up to 6% and now is trending down and it's maybe 4.5% or 5%.</p>
<p>It's OK, but the problem is it's an aggregate rate and it's mainly because households at the more affluent level, which have the capacity and margin to save, have been stocking away a lot of money because they're scared because they realize stock market and housing prices aren't going to boost their household wealth anymore, so they've gone back to saving.</p>
<p>The problem is that most people at the lower and middle income levels, the household surveys we have show that there hasn't been an appreciable rise in saving, partly because they are in desperate shape. Unemployment, medical emergencies, a few million home foreclosures since 2008, the sorts of combinations that don't lead people to save more because it's actually taking away their wealth.</p>
<p>So how we're going to get out of it, I'm not sure. There are certainly these policies that I've outlined. They could be extremely helpful, but they all face a great deal of resistance.</p>
<p><strong>Romesh</strong>: Sheldon Garon, thank you very much.<br />
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