America’s Anti-Austerity Politics (Crippling)
America’s anti-austerity policies make saving as difficult as saving a piggy bank in a hurricane – especially for the young, old and disadvantaged. But don’t worry, we have some ways to weather the storm together.
The new un-American anti-austerity policy
America is the J. Wellington Wimpy of nations, eternally promising to pay its creditors on some mythical Tuesday in exchange for whatever it wants today. But here’s the catch: An economy driven solely by consumption is like a kid in a candy store: it can’t sustain itself without a severe stomachache. Overindulgence eventually consumes nations, just as hypocrisy and racism consumed Paula Deen’s career. History is littered with the ruins of empires that collapsed under the weight of their financial mismanagement.
Take ancient Rome for example. In the late fourth century, Rome was like a shopaholic maxing out his credit cards – overspending and overtaxing until the economy collapsed. The last straw? A massive decline in the workforce. Does this sound familiar? It should.
Then there is the Ottoman Empire, which was debt-free until 1850. But as the 19th century progressed, the Ottomans came to the conclusion that they could not meet their needs through taxes alone and began to flirt with the dangerous lure of debt. They issued bonds that European investors snapped up like hot cakes. Over time, the debt spiraled out of control, particularly after World War I, creating deficits greater than the Baldwin brothers’ collective problems. While the Ottoman Empire had more problems than a reality TV family, its poor debt management was a major factor in its ultimate downfall.
And let’s not forget the USSR. Despite its iron grip, the Soviet Union could not withstand an economy that operated like a laziness on sedatives. With low-wage workers and a government that poured over 35 percent of its GDP into the Cold War, the USSR officially declared its withdrawal on December 26, 1991. Even Russian oligarchs can’t help but think nostalgically of the good old days and forget that financial instability played a major role in the collapse of their empire.
This version retains the historical references and humor while making the narrative more exciting.
America: Modern Ancient Rome?
While these empires faced numerous problems that hastened their demise, they illustrate the weakening of a former superpower on the world stage, in part due to financial instability. America should pay attention.
In 2000, the U.S. national debt was $5.6 trillion. In 2008 it was $10 trillion. Today it stands at $35.22 trillion. Since the presidency of the Honorable Richard Nixon, the U.S. national debt-to-GDP ratio has increased virtually continuously and is now close to World War II levels.
While the public sector has demonstrated that it is as responsible with the country’s money as Bernie Madoff, the private sector is no better off. The 7th Annual Savings Survey, released last month, found that only 68 percent of Americans spend less than they earn and save the difference. In comparison, only 64 percent have emergency funds to help with unexpected expenses.
The Wall Street Journal also reported on a separate U.S. Department of Commerce survey showing that the personal savings rate was just 3.9 percent in December 2013. The average retirement savings rate is 6.4 percent, although most Americans believe it should be 10 percent.
Because it doesn’t rain pennies from heaven
Why doesn’t America save as Ben Franklin so wisely advised? Instead of following his frugal path, we have become loyal followers of John Maynard Keynes and adopted Keynesian policies that effectively hand out gold stars for spending and bond cards for saving. This consumer obsession has created a low-interest rate environment where saving is about as exciting as reading Gwyneth Paltrow’s guide to “conscious decoupling.”
Do you remember the last time you heard of a bank offering a killer interest rate? Probably in 2008, when you could get more than 2 percent in a savings account. Today, you’ll see that the best savings accounts offer interest rates between 0.75 and 0.95 percent. Parking $1,000 in one of these accounts will reward you with a whopping $9.50 per year – enough to treat yourself and a loved one to a latte and a half at Starbucks. With incentives like these, it’s no wonder that saving money has become just as attractive as a budget vacation at the local mall.
This low interest rate environment, intended to boost spending, is hitting younger savers and retirees the most. Children and young adults who are just starting to earn money need to put it somewhere, but often don’t qualify for checking and brokerage accounts because of small balances. In the past, they started their financial journey with a trusted savings account and eventually moved to checking accounts, then investments and IRAs. But today they’re missing out on the magic of compound interest, the financial fairy dust that can turn pennies into dollars over time.
Meanwhile, retirees and retirees approaching retirement who typically gravitate toward conservative investments like savings accounts, CDs and bonds are being pushed — or pushed — into riskier investments to keep up with inflation. Either that or they relegate their golden years to a steady diet of dinners at McDonald’s and nights out at the local YMCA. America’s love affair with low interest rates may keep the spending engine running, but it’s leaving our savers in the lurch wondering what happened to the good old days when saving was worth something.
Colleges are destroying their savings
Another shining example of America’s anti-savings agenda is the tax on college savings. As college tuition has skyrocketed faster than a Richard Branson spaceplane—reaching an average of over $39,400 per year for private colleges in 2023—our higher education system is increasingly sending a clear message: saving for college is for Idiots, and spending like there’s no tomorrow is the way to go.
Here’s how it works: Colleges use the federal government’s Free Application for Federal Student Aid (FAFSA) form to collect all the financial dirt on students and their parents. They use this information to calculate how much each student should pay in tuition. And here’s the kicker: All other things being equal, students who have saved diligently enough are often rewarded with a higher tuition bill, while students with no savings receive a discount. It’s like a reverse reward system – save more, pay more!
To make matters worse, students without savings are often pressured into borrowing through the government-subsidized student loan program. The average student loan debt for the Class of 2023 is over $37,000. It’s like saying, “Congratulations!” Don’t have any savings? Here, go into debt instead!’ The system effectively pushes students into the arms of lenders, making borrowing the only viable option to cover rising tuition costs.
While parents may think they are doing the right thing by saving for their children’s college education, in reality the system is designed to punish those who plan. Instead of being rewarded for their financial responsibility, they pay more and watch as their savings are effectively penalized. In America’s turbulent world of college funding, the best strategy might be to stuff your college fund under the mattress and hope for the best — or perhaps hope that your child becomes the next Richard Branson and forges his own path to the stars .
Anti-austerity – a cross-party initiative
The Democratic and Republican parties are as indistinguishable as the Olsen twins – if you look closely you might convince yourself there’s a difference, but good luck telling them apart in a lineup. Sure, they use different slogans to rally their base, but when it comes to their loyalties and politics, they’re practically copies. Democrats have long been branded as “liberal liberals” who proudly wave the Keynesian flag. But here’s the dirty little secret: Republicans haven’t been the party of supply-side economics since Ronald Reagan hung up his cowboy boots.
Take Republican President George W. Bush, for example. In 2001 and 2008, he handed out discount checks like candy on Halloween, famously encouraging Americans to “shop more” to stimulate the economy. These are not the words of a proponent of production-based economics – they come straight from the Keynesian consumption-first playbook. This fits right in with Newsweek’s startling suggestion that Americans should stop saving altogether. To their credit, Newsweek didn’t stop there – they also advised American companies to stop cutting corners. Bold move, Newsweek.
Then there is President Obama’s nomination of Janet Yellen to succeed Ben Bernanke as chair of the Federal Reserve. The only surprising thing about it was the acceptance of diversity by nominating a woman. But Yellen, like her predecessor, is committed to the easy-money policies that have stalled the recovery since the Great Recession. It’s like swapping one identical twin for another – the face changes, but the guidelines don’t.
As Jeremy Grantham, co-founder of wealth management firm GMO, recently pointed out in Fortune magazine, “Higher interest rates would have increased savers’ wealth.” Instead, they became collateral damage of Bernanke’s policies.” The idea behind low interest rates is to stimulate investment spending, right? Why is capital spending still sluggish at this stage of the cycle? Grantham notes that there is no evidence that quantitative easing has boosted capital spending.
And here’s an interesting tidbit to ponder: S&P 500 companies broke records and had over $1 trillion in cash by 2013, with no signs of slowing in 2014 or beyond. So as you work hard to get your next paycheck, remember that corporate America is hoarding cash like it’s going out of style. And that, my friends, is bipartisan fiscal policy – two parties, one strategy: keep the consumption train going and stick with savers.
Give Hayek lots of love
Our policymakers and business leaders have fully embraced Keynesian economics and transformed America into a full-fledged consumer economy. It’s as if we’ve traded in our work boots for shopping carts, and the service sector has been the economy’s golden child since the real estate market took a nosedive in 2008. We’re all about consuming, but when it comes to saving or investing? Well, that’s about as popular as a salad bar at a barbecue.
The thing is: no single economic theory always works for all economies. Positions like the presidency and Fed chair aren’t just fancy titles; There is a reason these are revolving doors: policies, including economic policies, need to be constantly tweaked and adjusted to adapt to the current economic climate. It’s like trying to make the perfect dish. You can’t always use the same recipe and expect it to work. Sometimes you need to add some spice or increase the heat.
But if interest rates remain at their lowest levels, we face a future in which capital spending, personal investments and savings become rarer than a unicorn at the rodeo. Why? Because if the expected return is low, people won’t bother saving or investing – it’s just not worth it. On the other hand, if interest rates rise, people will begin to recognize the opportunity cost of not saving or investing. When the returns look good, even the biggest spenders among us might be tempted to put away a few dollars.
It is high time for the Federal Open Market Committee (FOMC) to abandon its easy-money policy and give interest rates a boost. Politicians in Washington, DC must roll up their sleeves and implement pro-growth economic policies that boost production and curb our consumer frenzy. And while they’re at it, they might try to practice a bit of fiscal austerity with the state’s coffers. In the meantime, American companies should stop hoarding cash as if it were the last roll of toilet paper in a pandemic and instead invest in capital spending, research and development. Oh, and selling jobs to the world’s lowest bidders? This has to stop. It’s time to bring the jobs home and put American innovation back at the forefront.
These are our recommendations to breathe new life into the US economy. But let’s be honest: With the nomination of Janet Yellen as Fed Chair, we are likely to see more of the same economic and government policies we have seen since 2001. Just because Albert Einstein defined insanity as doing the same thing over and over again and expecting different results doesn’t mean we’ve learned to avoid it. We are more committed to this definition than to any meaningful change.
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