The Consumption Binge Is a Myth
It is widely believed that one of the fundamental problems of the U.S. economy has been a "spending binge' ' by American consumers. Proponents cite as proof the behavior of certain selected indicators, such as the high percentage of national income devoted to consumption expenditures and the corresponding decline in the official personal saving rate in 1985-1988. This low saving rate is often blamed for many of the nation's economic ills, ranging from declining international competitiveness to slow productivity growth to stagnant real wages. In response to the supposed "saving shortfall" in the private sector, it is argued that the country needs to adopt more consumption taxes (e.g., excise taxes or a value added tax) or saving incentives (e.g., tax breaks for capital gains or Individual Retirement Accounts). Of course, it is true by definition that a country with a current account (trade) deficit must be spending in excess of its income. But no causal inferences can be drawn