Commentary: What Bush Vs. Gore Means For Empty Piggy Banks

Turn the calendar back two years, to September, 1998, when the government announced that the personal savings rate was negative for the first time in the postwar era. As savings continued to plunge, pundits such as Lester C. Thurow decried America's spendthrift habits while economic forecasters warned that consumers' spending binge could not continue. But the pessimists and their gloomy conclusions were left hanging after the government did a major revision of the data in October, 1999. The savings rate was revised upward by more than three percentage points, wiping out the excursion of savings into negative territory.

Now, the savings rate has again entered the red zone--but this time there's no revision on the horizon to bail it out. On Aug. 28, the Bureau of Economic Analysis announced that the personal savings rate had fallen to -0.2%, again hitting a new postwar low. This latest plunge is much more significant economically as a sign of financial stress than the first one was. What's more, it's likely to play a key role in the Presidential campaign.

OUT OF POCKETS. Looking back, it's clear that the decline in the personal savings rate from 1995 to 1998, which caused so much consternation at the time, was driven entirely by higher taxes, both income and payroll. As more and more Americans moved into higher tax brackets and paid taxes on capital gains from the rising stock market, the average tax rate rose, from 17% of personal income in 1995 to close to 19% in 1998.

Indeed, calculations by BUSINESS WEEK show that if the average tax rate had stayed constant during those four years, the personal savings rate would have risen. In essence, money was being transferred from your pocket into Uncle's Sam's as higher taxes and lower private savings were used to fund a paydown of the budget deficit.

In contrast, the latest savings-rate drop into the red is mainly driven by the willingness of Americans to spend in excess of their current incomes. Americans are now borrowing against their homes and selling stock shares to finance today's spending. Over the past two years, the increase in consumption has exceeded the gain in disposable income by some $216 billion. Even if the average tax rate had stayed constant, the savings rate would have tumbled.

The economic conclusion of the negative savings rate, 2000 edition, is clear: Americans have become dependent on high stock-market and property values to fund both current consumption and future retirement. As long as wealth stays high, there shouldn't be any problem. But a decline in the stock market or a fall in home prices would force cutbacks in spending and likely increase the need to boost savings in order to prepare for the future.

Commentary: What Bush vs. Gore Means for Empty Piggy Banks

The political implications are striking as well. Underneath the rhetoric, much of the difference between the economic programs of Presidential candidates George Bush and Al Gore hinges on how to deal with the problem of a low savings rate. The Bush proposal specifically cites increased household savings as one of the major gains expected from big tax cuts, as lower marginal rates give people more incentive to save. In contrast, Gore's proposal to pay down government debt would increase national savings. That's supposed to boost economic growth, lift household incomes--and not incidentally, eventually make it easier for Americans to save for college and retirement.

It's possible to find economists on either side of the argument. But ultimately, the choice will be made by voters, even if few will cast their ballots based on which candidate will best bolster savings down the road. Whether they realize it or not, however, that is one more important choice voters will make in November.

Before it's here, it's on the Bloomberg Terminal.