Lord, Make Us Thrifty, but Not Yet

Following up on my earlier post on the fall in American consumer spending: The flip side of the declining spending numbers is that the personal savings rate increased in January. Households had a saving rate of 5.8 percent (measured as the share of disposable income not spent), up from 5.4 percent in December.

Isn’t that a good thing, you might ask? Don’t we want Americans to start budgeting more responsibly?

In the long term, yes: it would benefit the economy to be less dependent on consumer spending and more reliant on exports. That requires a higher saving rate, at least to the levels seen before the credit bubble.

But as  St. Augustine of Hippo might say, Lord, make us thrifty, but not yet. In other words, we want Americans to start saving more in the future — that is, sometime after the economy has fully recovered. In the near term, though, businesses need consumer spending, not saving, to help them grow and eventually hire.

And this was the exact calculus behind the temporary payroll tax cut: to get consumers to pick up the pace of spending in the near-term only.

One month’s worth of data does not a bulletproof verdict make, but the policy does not look promising.