Recently in the news was a story about the drop in the savings rate in the U.S. over the last fifteen years. In 1982, in the midst of one of the worst depressions since WWII, personal savings was 9.1 percent of income. It dropped to 2.1 percent by 1997, and fell to 0.2 percent for the month of June, 1998. Compare our savings with Japan, where savings rates are typically around 20 percent of incomes and it is easy to see why Japan has experienced huge rates of growth since the end of WWII.

Without personal savings, investment spending, spending on the tools of business, can only be financed by some combination of government savings (taxes minus government spending), foreign investors (imports minus exports), or inflationary increases in the money supply by the Federal Reserve. While there have been increases in government savings since 1993, in other words, a drop in the deficit, it is quite unlikely that the deficit will turn into a real surplus, as every politician in Washington, D.C. has his own plan for reducing any surplus with spending plans or tax cuts.

It is no accident that the savings rate was far higher in the depression of the early 1980s than during our current boom. People save primarily to finance their retirements, to build nest eggs. During retirement people draw down their nest eggs. With more and more of our population retired, the savings rate will fall. Also, with the huge run up in the Dow, even with recent market corrections, and with a greater proportion of our nest eggs in the stock market, our nest eggs have grown substantially, and so we see less of a reason to add on to nest eggs.

With a dwindling domestic source of funds for investing in our productive capabilities, we would have to have more investment in the U.S. by foreigners, or face a downturn in the economy and return to large rates of unemployment. The only problem is that the Japanese, once the one of the largest foreign investors in the U.S. are in no shape to invest in the U.S. They have their own domestic concerns.

Raising the rate at which we save and invest would help the country. Our income tax system double taxes savings, once when money is earned the first time and again on the interest that savings earns. One way to improve our savings rate would be to alter the tax code so that savings are not taxed, but consumption spending is. I’m not holding my breath, however.

Of course, a slowdown in investment spending would spell a drop in incomes and a dip in economic growth. Investment spending is largely spending on capital, the tools of production or productive capability. If our workforce grows and our capital base does not, each worker has less machinery to work with and productivity falls. If we produce less, we have less to consume.

Savings is not only key for the health of our national economy, but also key for a business in building a competitive advantage. Savings, in the form of a cash reserve, or better still, an invested fund, can finance certain types of business capital when that capital is cheaper to buy such as during downturns in the industry.

Consider this idea of a colleague of mine, Dr. Chris Cox, Assistant Professor of Marketing at Nicholls. When sales begin to fall, one of the first places a business cuts its spending is in advertising. Of course, advertising creates consumer awareness about a firm’s products and consumers forget, they can become less aware if not reminded of a firm’s products. During an industry-wide drop in sales, those who cut their advertising presence lose market share to those who do not. Regaining such lost ground becomes especially difficult as industry sales increase and competitors are all advertising at once. Then, with all competitors speaking at once, it is hard for potential buyers to tell one voice from another, and messages become garbled.

Putting funds aside to finance advertising during a downturn can really add to one’s competitive advantage.