Question

Read the Article from The Economist/Free Exchange, Saving: Too Thin a Cushion. The article is available as a PDF file under the Articles tab on the Blackboard menu. Then, post a response to the following questions: a) Why is the saving rate of individuals in the U.S. of concern? b) What factors might account for the observed trend in personal saving rates? c) Is government action warranted? d) If a change in government policies were to be made, what might be effective? Why?. Address these questions by drawing on the article as well as Mankiw's discussion of Saving, Investment, and the Financial System (Chapter 26) in the text; also reflect on any relevant Principles of Economics (Chapter 1). Please post your initial response to this forum and comment substantively on at least two other participants' entries by Sunday 1/6 11:59pm.

Answer 1

a) It is because savings are the one which gives one financial help/financial boost in his/her times of financial issues, job loss, unexpected need, medical emergency, etc. since if one does not have enough savings then he/she will face difficulties in his/her tough times of need of money and when they don't have other source of income.

Low rate of savings and savings rate near to zero creates issues in times of recession, it is because in order to get the economy out of recession, investment can't be increased by increase in consumers savings and consumption rather only option left is to apply the deficit budget financing and when government dis-saves and increase the expenditure out of its savings and by applying deficit financing of its projects in order to boost demand and production for getting economy out of recession.

b) Economic expansion, income stagnation, low income growth, desire of consumers to increase their living standards, low returns from low risk saving financial instruments are some reasons for observed low personal saving rates among people.

This trend is more visible after 1980's due to economic expansion made people less fearful of economic uncertainty and also due to low income growth, income stagnation, people wants to increase their living standards and so the do save less.

c) Yes when savings rates are near zero then government action is warranted to boost the economy via increase in public expenditure in big infrastructure projects in order to boost spending and production which will help the economy and people to earn more money and save some amount of that and invest in in both liquid funds and retirement funds in order to secure their future and immediate and unexpected needs during their hard times.

d) Change in government policies by increasing spending through dissaving and deficit financing and mandatory retirement savings in retirement funds/retirement policies will help for increasing personal savings of people for their retirement benefits as well as for increasing their liquid savings which will be done by increasing government spendings and tax cuts which will have effect for people to have more money in their hands and to contribute the same in their retirement funds as well as to deposit in savings account, CD's for fulfilling their liquid fund requirements.