The Thrift Paradox: U.S. Savers May Be Happier, but the Economy Suffers

Fed’s Bernanke considers the economics of happiness as Harris Private Bank finds that thrifty Americans hamper growth

Economic research shows that money doesn't buy happiness, says the Fed's Bernanke. (Photo: AP) Economic research shows that money doesn't buy happiness, says the Fed's Bernanke. (Photo: AP)

Consumer spending—or more precisely, the lack of it—continues to hamper the U.S. economy as Americans reconsider what it takes to make them happy.

This thrift paradox has become increasingly apparent as Americans, after their earlier decades of spending and indebtedness, have gotten into the habit of saving their money to the detriment of national growth, according to a recent report from Harris Private Bank.

At the same time, the “economics of happiness” suggests that the relationship of income and wealth to well-being is more complex than economic policymakers have traditionally assumed it to be, Federal Reserve Chairman Ben Bernanke noted Monday in a speech before the International Association for Research in Income and Wealth in Cambridge, Mass.

Exclusive attention to aggregate numbers, without considering factors such as people’s sense of belonging to a community and the level of optimism about their future, paints an incomplete picture of what many individuals experience, Bernanke said.

In short, it looks like post-recession Americans have truly learned that money doesn’t buy happiness.

“An interesting finding in the literature is that the overwhelming majority of people in the United States and in many other countries report being very happy or pretty happy on a daily basis, a finding that researchers link to people's intrinsic abilities to adapt and find satisfaction in their lives even in very difficult circumstances,” Bernanke said.

At the same time, however, the Fed chairman did acknowledge that many Americans are struggling and not too happy about their finances.

"Even though some key aggregate metrics—including consumer spending, disposable income, household net worth and debt service payments—have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions,” he said.

Income in the United States rose 0.5% in June while consumer spending stagnated, signaling that many Americans are using earnings to increase their savings and pay down household debt, says Harris Private Bank, part of BMO Financial Group. Indeed, the U.S. savings rate is at its highest level in a year, at 4.4%.

Those numbers point to a “paradox of thrift,” which could have a negative impact on economic growth, according to Jack Ablin, chief investment officer of Harris Private Bank.

“Americans have taken to saving more and reducing their debt load, and this may be causing a paradox of thrift in the U.S. economy,” Ablin said in a statement. “This paradox states that, while pinching pennies works on the individual level, it has a disastrous impact on the economy if everyone does so at the same time. If we all save more money, then aggregate demand will fall and will, in turn, lower total savings in the population, because of the decrease in consumption and economic growth.”

The report suggests that the trend toward saving and debt reduction will continue. And that means downward pressure on domestic growth for the rest of 2012, Ablin said.

Read War of Borrowers Against Savers at AdvisorOne.

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