Rebate Checks and Economic Stimulants -- Breaking the Spending Habit

Imagine giving a drug addict more drugs, a drunk another drink, or a smoker another cigarette. Well, that’s exactly what Congress and the President seem eager to do with our nation’s addiction to spending: give us quick and easy cash. That fix will feel good (Wow, nice iPhone!), boost our confidence and, the plan goes, stimulate our slumping economy.

That addiction is about to get another hit as the long-awaited rebate checks arrive in a few weeks. The widely held view, of course, is that more spending will boost our confidence and, thus, the economy. But a cloud will hang over our high because we know that more spending further postpones the inevitable, and makes even harder what we know we must do to restore our nation’s long-term health: We must start saving again.

Who needed to save when the booming housing and stock markets, combined with increasingly easy cash for homes and consumer goods, made us feel like there was a never ending supply of money? But then we burned through literally trillions of dollars of home equity, home values plummeted, credit markets collapsed, and now we’re dangerously dependent on Chinese investors and Sovereign Wealth Funds to keep us afloat.

The party’s over, and we’ve woken up with a terrible hangover and far more addicted to spending than we think – and we’ve got the debt to prove it. We’re spending an average of 14.5 percent of our annual income simply servicing debt – a 30 percent increase from 15 years ago. That’s money going down the drain – not being used to get to work, for child care, or to pay the heating bill – doing nothing for our economy. Mortgage debt and consumer debt have both doubled in just the last six years, according to Daniel Alpert of Westwood Capital. And David Rosenberg of Merrill Lynch finds that that there’s $6.5 trillion of private-sector debt the economy cannot absorb.

So, should we be surprised that one in seven families is dealing with a debt collector, that foreclosures are at Depression Era levels, and that more kids today see their parents file for bankruptcy than divorce? Seems like it’s time to get sober, come clean, and get our economic lives back in order.

And it’s time for Congress to add some savings incentives to their stimulus efforts. Yes, we know: Savings is the anti-stimulus. Fine. Stimulate the economy now, and let the savings incentives kick-in a year from now.

But don’t leave savings out: Show us that you, Congress, understand that the nation needs a large pool of savings for investment, and that families need savings to weather emergencies, pay for college and training, start a business, make a down payment on a home (the zero-down-payment days are gone), and build a nest-egg for retirement.

But won’t it be hard for Americans to start saving again? Yes, reducing our spending in order to save will be painful, but we’ve learned that the process of saving actually can and should be painless.

For starters, preaching about financial education or forming yet another financial literacy commission – as President Bush has just done – ain’t going to do the trick. Savings behavior, like most behaviors, can’t be changed by telling people what they should do; indeed, 80 percent of Americans already know they should be saving, according to the Consumer Federation of America. Instead, savings has to be on auto-pilot, something we actually don’t think much about.

How many Members of Congress wake up every day and say, How much should I save today? Very few. But they’re accumulating enormous amounts of savings because in their first week of work someone in HR signed them up for the Thrift Savings Plan – a structured savings plan that automatically deducts savings from their paycheck, matches it, and invests it. One – if any – decision was made to save, and they’ve got a million bucks waiting for them at retirement. It’s really that simple.

So, first, Congress needs to do for the American people what it’s doing for itself: get every American, ideally at birth, into an automatic savings plan. Several bi-partisan bills now in Congress embody this idea. Second, Congress should target savings plans and incentives to those with the greatest need to save and most likely to generate new savings: lower- and middle-income households. Finally, Congress needs to crack down on predatory lenders and abusive credit-card providers, who share the blame for our consumption-crazed, debt-fueled economy.

Americans are resilient. Eventually our hangover will recede, our economy will pick back up, and – if only by necessity – we’ll start saving again. Hopefully we’ll succeed and see a culture of savings replace our culture of debt. For goodness knows that when the next boom-followed-by-bust comes, as it surely will, we won’t get swept up again, addicted to spending and crippling debt again, and get caught with our pants down and our pockets empty when the lights go on.