Why Americans Don't Save: "Credit has become America's welfare policy."

Unlike people from other countries, Americans aren't big savers - that much we know. But why exactly?

Sheldon Garon, professor of history and East Asian studies at Princeton University explains in his new book, Beyond Our Means: Why America Spends While the World Saves. In short, "credit has become America's welfare policy."

... in the 1980s, Americans stopped being good savers - at first slowly and then very rapidly in the 1990s, particularly as housing and consumer credit became available to Americans in amounts unlike anything seen in the rest of the First World.

First, the credit card industry was deregulated as the result of a 1978 Supreme Court decision. Now able to impose any interest rate they pleased on unpaid balances, credit card firms aggressively expanded their customer base beyond the affluent to target middle and lower income households. By the 1990s, most Americans held not one but several credit cards, and more than half of those cardholders carried unpaid balances.
Second, home equity loans—which had heretofore scarcely existed—exploded. This occurred after the 1986 tax reform made home equity loans one of the few types of credit in which interest remained tax-deductible.

From the 1990s to 2005, homeowners borrowed more and more against their equity as home prices skyrocketed. Americans essentially stopped saving. Why save when you could borrow so easily?

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