Living beyond our means?

The UK and US governments face a conundrum. To achieve economic recovery, aggregate demand needs to expand. This means that one or more of consumption, government expenditure, exports and investment must rise. But the government is trying to reduce government expenditure in order to reduce the size of the public-sector deficit and debt; exports are being held back by the slow recovery, or even return to recession, in the eurozone and the USA; and investment is being dampened by business pessimism. This leaves consumer expenditure. For recovery, High Street spending needs to rise.

But herein lies the dilemma. For consumer spending to rise, people need to save less and/or borrow more. But UK and US saving rates are already much lower than in many other countries. You can see this by examining Table 23 in OECD Economic Outlook. Also, household debt is much higher in the UK and USA. This has been largely the result of the ready availability of credit through credit cards and other means. The government is keen to encourage people to save more and to reduce their reliance on debt – in other words, to start paying off their credit-card and other debt. That way, the government hopes, the economy will become ‘rebalanced’. But this rebalancing, in the short run at least, will dampen aggregate demand. And that will hardly help recovery!

In the following podcast, Sheldon Garon discusses his new book Beyond Our Means. He describes the decline of saving in the USA and UK and examines why other countries have had much higher saving rates.

‘He also seeks to explain why high interest rates didn’t encourage saving in the boom years and why current levels of relatively high inflation haven’t stopped savings rates shooting up again in Britain.’

Living beyond our means Guardian: the Business Podcast, Sheldon Garon talks to Tom Clark (2/11/11)

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