Ronald T. Wilcox Ian Bradshaw

In his new book, Whatever Happened to Thrift?, Darden professor and former economist for the U.S. Securities and Exchange Commission Ronald T. Wilcox examines the causes and consequences of America’s aversion to saving. Wilcox’s book explains “why our savings have declined dramatically and what we can do now to rescue our future.”

Wilcox discussed the savings crisis in a May interview with BusinessWeek, excerpted below.

How do you think we ended up at this point, where American families are spending more than they make?

Americans have saved less than most developed nations for a long time, even pre-World War II. It’s not like we’ve ever been a nation of savers. There are famous examples of people who are prominent in American history—Thomas Jefferson being one—who were always in debt. We are a country of optimists. When you’re optimistic you tend not to save because you think tomorrow is going to be better than today.

Do you think the fact that people spend more than they have and don’t save is why we’re in trouble now?

I think that is true in the housing market, where people probably spent too much money on their houses. When the housing market is declining as it is right now, they don’t have additional savings to cushion their ability to go out and buy things that they would like or need. The lack of savings probably is exacerbating the current economic downturn. I think it will exacerbate it in the future. I don’t think it’s the primary cause, however.

What is the primary cause?

Overexuberant lending. I lay it at the feet both of individuals who borrowed too much money and overexuberant lenders.

Would it help our economy if more people saved?

Yes, it would. It would not help in the short term. The government is exhorting us to spend the tax rebates that are going out now. In the short term, the economy would be better off if people spent more money. But that is a short-term solution. In the long term, we would be better off if people had more money in savings, so when there are economic downturns, they could then tap into some of that savings to buy the things they need and want.

What advice do you have for people on saving money?

There are some ways to save money that are easier than others. One is to make a decision now that you are going to save more when you get your next raise. That’s a plan called the “Save More Tomorrow Plan” by Richard Thaler. You go to your human resources department and say: “At the time of my next raise, I want to allocate a certain percentage of that raise to my 401(k) plan.” The benefit is that you never see your paycheck go down, and it’s a lot easier in this kind of environment than going cold turkey and saving more today.

How grave is the situation that we’re facing when it comes to savings and the future of our own finances?

I don’t want to say we should become pessimists. But I think we should become realists. It is unlikely that wages and the money we earn in the U.S. are going to go up dramatically in the next couple of decades. That’s true at the aggregate level. On average, it’s true at the personal level as well. Individuals need to be realistic about how much more money they’re going to be making over time. You need a little bit of realistic pessimism about your future to adequately determine how much you need to save.