savings

Novel Idea: Maybe It Isn't OUR Job to Revive the Economy

Mark Huelsman — Mon, 16 Feb 2009 20:43:00 -0500

"The role of consumers has had considerable attention in the press because the economy desperately needs additional spending right now. But it is not - and should not be - the responsibility of middle-income families to provide that spending."

Robert Frank made a good point this weekend.

Possibly the most frustrating part of the economic recovery debate has been the willingness of many policymakers and thinkers to lay the responsibility of recovery at the feet of the American consumer. Luckily, economists (like Mr. Frank) and think-tank types (like our own Alejandra Lopez-Fernandini and Rourke O'Brien) have been presenting the argument in recent weeks that, quite likely, we should give families signals to save and perks when they do. From last Thursday's USA Today:

Yet those Americans who choose prudence should not be made to feel unpatriotic -- as if they are destroying the economy of their country -- because they fail to spend recklessly. It's time we move beyond this economic belief that places the health of the U.S. macroeconomy squarely on the willingness of individual households to spend, spend, spend.

It's an uphill battle. Unfortunately, Mr. Frank seems to oversell and overcomplicate the "paradox of thrift" a bit -- making it a central caveat to his argument when there are both benefits to saving (like giving banks the confidence to lend again) and straightforward ways around the negative macroeconomic aspects (like Mr. Frank's plea to let government increase spending to not only make up the "loss" of families reigniting the concept of thrift, but to spend enough to jumpstart the economy).

Regardless, it's a refreshing and all-too-rare argument these days. We can all agree that it is in our long-term interest to promote saving and responsibility; it shouldn't be the exact opposite in the short-term.

A One-Stop Shop for Savings PSAs

Mark Huelsman — Thu, 12 Feb 2009 16:08:00 -0500

Looking for a friendly, animated reminder that, in the age of stimulus, it's not too bad an idea to save? Luckily, the good people at Choose to Save have consolidated their adventures of Savingsman public service announcements into a single Youtube Channel. Enjoy.

Conditional Cash Transfers: Generating Buzz, But Let's Think Outside the Box

Leila Seradj — Wed, 11 Feb 2009 15:56:00 -0500

At yesterday's launch of the World Bank Policy Research Report, Conditional Cash Transfers: Reducing Present and Future Poverty, New York Times contributing writer Tina Rosenberg recounted her article pitch to her editors at the Times. Asking her why she was so intent on going to Mexico to cover Oportunidades, the conditional cash transfer program that started it all, she answered: Because it's a social policy program that actually works.

From Latin America, to Africa, to even the United States, conditional cash transfer (CCT) programs are sprouting everywhere and garnering an increasing amount of attention. As the packed auditorium demonstrated yesterday, the buzz has long since reached Washington. And as Justin Lin, Chief Economist for Development Economics, noted, the World Bank will be extending CCT projects to six additional countries this year.

In the scramble of eager participants that shot their hands up breathlessly to seize their chance to ask their multi-part queries to the pre-eminent experts on CCTs, I didn't have the chance to ask the question in the back of my mind: How can CCTs be used to incentivize and change savings and asset-building behavior?

CCT programs aren't a magic bullet, the panelists reiterated. Santiago Levy-- the brainchild behind Oportunidades-- emphasized that CCT programs don't work everywhere, and certainly, they must function within a larger network of social safety net programs provided by the government.

But I wonder how much more powerful they could be if they were used as instruments to help the poor increase savings and build assets, and served as a gateway into formal financial inclusion of the unbanked.

Rosenberg mentioned that, in the course of her time researching the impact of Oportunidades in several villages in Mexico for her New York Times Magazine article, that many women invested parts of their transfer in small businesses. These businesses were sustainable, and added to family income.

If that's the case, then certainly there's room to explore the role of CCT programs to help the poor save, accumulate assets, and increase financial inclusion.

In the U.S. and Latin America, pilot projects and formal government programs are beginning to test these waters. Proyecto Capital in Peru is working to connect, combine, and adjust CCT policies with those that encourage savings, asset building, financial inclusion, and access to financial and entrepreneurial "know-how" for the poor. New York City's Opportunity NYC program links payments to bank accounts so as to encourage savings and reduce services associated with high transaction costs. And evidence from Latin America demonstrates that households participating in CCT programs increase their savings rates and investment in productive assets. Participants of Paraguay's Tekporã program saved 20% more due to their participation in the program; evidence from Mexico likewise affirms that families invested 12% of transfers in income-generating activities, and saved more when payments were made through banks.

So on the day of the launch of this seminal study, it seems timely to start thinking about CCTs in more innovative ways that increases financial inclusion, and helps people save and build assets. This is only the beginning of the conversation-- the Global Assets Project is beginning to ask these questions, and will release a report exploring the potential between CCTs and savings in the coming weeks. In the meanwhile, let's hope that the lively discussion that was sparked at yesterday's event continues in ways that think about CCTs outside the proverbial box.

A Shout-out for Savings in a Primetime Press Conference

Mark Huelsman — Tue, 10 Feb 2009 14:43:00 -0500

In a primetime news conference designed mainly to promote and defend the pending economic recovery bill, I expected to hear a few curveballs from the media. What was fairly unexpected, however, was a chunk of time devoted to the delicate balance between consumer spending and savings in the context of economic recovery. But sure enough, near the halfway point of the broadcast, there was Chuck Todd of NBC News playing the role of inquisitive asset-builder. Here's the exchange (my emphasis added):

Chuck Todd, NBC News: Thank you, Mr. President. In your opening remarks, you talked about that, if your plan works the way you want it to work, it's going to increase consumer spending. But isn't consumer spending, or overspending, how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first before they start spending money into the economy?

President Obama: Well, first of all, I don't think it's accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies based on shaky assets and because of the enormous leverage, where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system.

That led to a contraction of credit, which, in turn, meant businesses couldn't make payroll or make inventories, which meant that everybody became uncertain about the future of the economy, so people started making decisions accordingly, reducing investment, initiating layoffs, which, in turn, made things worse.

Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined and this economy has been driven by consumer spending for a very long time. And that's not going to be sustainable.

You know, if -- if all we're doing is spending and we're not making things, then over time other countries are going to get tired of lending us money and eventually the party's going to be over. Well, in fact, the party now is over.

And so the -- the sequence of how we're approaching this is as follows. Our immediate job is to stop the downward spiral, and that means putting money into consumers' pockets. It means loosening up credit.

It means putting forward investments that not only employ people immediately, but also lay the groundwork for long-term economic growth.

...

Now, what we are going to also have to do is to make sure that, as soon as the economy stabilizes, investment begins again, we're no longer contracting but we're growing, that our mid-term and long-term budget is dealt with, and I think the same is true for individual consumers.

Right now, they're -- they're just trying to figure out, how do I make sure that, if I lose my job, you know, I'm still going to be able to make my mortgage payments? Or they're worried about, how am I going to pay next month's bills? So they're not engaging in a lot of long-term financial planning.

Once the economy stabilizes and people are less fearful, then I do think that we're going to have to start thinking about, how do we operate more prudently? Because there's no such thing as a free lunch.

So if -- if you want to get -- if you want to buy a house, then putting zero down and buying a house that is probably not affordable for you in case something goes wrong, that's something that has to be reconsidered. So we're going to have to change our -- our bad habits.

But right now, the key is making sure that we pull ourselves out of the economic slump that we're in.

The tone and the sequencing of the answer seems right, and hints that in the midst of trying to jumpstart the economy, the President takes seriously the importance of individual savings as a long-term strategy for economic stability. While it is true that declining consumer spending on its own could have a negative effect on an already shaky economy, it is also certainly the case that a reemphasis on savings will facilitate long-term growth.

The balance and timing are tricky, but the argument can easily be made that, in a time of de-facto belt-tightening by the average American consumer, the federal government should fill the void being left by consumers. This makes it possible for people to save without shouldering the burden of economic recovery now, and it lays the groundwork for policy that incentivizes responsible behavior by consumers and businesses down the road.

The Case for Savings (Cartoon version)

Mark Huelsman — Mon, 15 Dec 2008 14:26:00 -0500

A little Monday morning humor, courtesy of Tom Toles at the Washington Post :

We understand if you're confused too. While both of these pear-shaped cartoon Economists have a point, we tend to side with the lady to the left.

The Next Mortal Combat Match-Up: Thrift vs. Debt?

Jamie Zimmerman — Tue, 09 Dec 2008 19:56:00 -0500

Ohio State University's Devfinance listserv, an email network for students, practitioners and researchers of development finance and economics, is one of my go-to lists for fresh debates and hot-off-the-press publications and research on all sorts of microfinance issues. Every once in a while it's also surprisingly entertaining. Take, for example, last week's pro-thirft/anti-debt post announcing a new competition to develop a thrift-focused video game (re-posted here with permission from Jane, the original author):

It's not as cool as buying a beneficent bank in Bali or doing an IPO or private placement, nonetheless it is a counterpoint to the current credit mania.

The Peter G. Peterson Foundation is sponsoring a campaign to encourage personal and governmental frugality in the U.S. One element of this is issuing what they call an INDEBTED $10,000 Challenge. It is aimed at college students and will award $10,000 to the student(s) who develop the most effective video game about the U.S. fiscal mess. I suspect they would like to see the video game promote saving.

On the one hand, the Peterson Foundation joins the Templeton Foundation in suggesting that thrift, after all, might not be such a bad idea. On the other hand, a gaggle of other foundations, government organizations, and disaster relief agencies are pushing debt as the next best thing to ice cream. Besides being highly profitable for a few -- both in low-income countries and on Wall Street -- the finance industry can also be extremely entertaining to watch!

Will the microfinance industry counter the Peterson Foundation heresy by promoting a competing video program whose end point is getting all of the poor women in the world in debt? Perhaps the prize could be a $10,000 loan (at say, a 100% interest rate) for the college student(s) who develop(s) the best debt-extolling video.

For all her sassy sarcasm, Jane reveals here a growing trend within the financial services field, not only in the United States but in developing countries around the world: a disillusion with unchecked debt as an economic empowerment or poverty reduction strategy (i.e., microcredit abroad or credit-fueled consumer spending here in the U.S.). However, the credit crisis in the US (and subsequent global financial meltdown) has also prompted microfinance and financial services practitioners to think about, and in this case, advocate for the reemergence of a once-heralded yet long-abandoned concept: thrift.

Global Asset Building Beyond Microfinance: the Forgotten Bottom and the Missing Middle

Jamie Zimmerman — Tue, 07 Oct 2008 21:32:00 -0400

On the horizon of this year's Clinton Global Initiative, I saw the next frontier for pioneers of the global asset-building field. At past CGIs, microfinance (and microcredit in particular) has been centrally celebrated and largely heralded as a panacea to global poverty. However, this year, there seemed to be an undercurrent of recognition the microfinance field, in its current construction, simply can't do it all. More specifically, there are two very important poor populations that microfinance simply doesn't reach - those in extreme poverty whose needs are too small for average microloans, and those who own small and medium-sized businesses too large for the average microloan but too small to access finance from formal banks. A big players are lining up to fill the void.

Oxfam has committed to expanding to ever-elusive access to savings services for the extreme and rural poor through its Savings for Change program. Sonal Shah, of the Google Foundation, spoke of its commitment to focus its efforts on expanding Small and Medium Enterprise (SME) development. A central challenge is figuring out how to facilitate "graduation" from microenterprise into small and then medium-sized enterprise, a theoretically natural transition that has unfortunately not materialized for most micro-entrepreneurs, even as microfinance has exploded around the world. Among the most striking commitments to SME development at CGI was the creation of the Aspen Network for Development Entrepreneurs (ANDE), a $300 million public-private partnership that will invest in SME development and technical assistance.

Looking outside of the microfinance box is an important step towards recognizing a more complex and dynamic reality of the needs of poor, low- and moderate-income people around the world. We are so far only skimming the surface of discovering innovations and changes that must be made to reach these very different populations and provide them with the services they need to be included and productive in their economies and societies. The expansive microfinance field just recently began acknowledging (in a significant way) the vast demand for savings among the poor. Now, there seems to be a desire to temper the enthusiasm around reach of the field and its ability to provide global financial inclusion and empowerment for all. Microfinance hasn't already lost its day in the sunshine, not by a long shot. But I applaud the CGI for reminding the global development community "forgotten bottom" and for including, in a major way, the "missing middle" in efforts to expand financial services and asset-building programs, products and policies for all populations in such desperate need of them.

Mailing Our Way to Savings

Reid Cramer — Mon, 06 Oct 2008 13:52:00 -0400

Our New America colleague Michael Lind suggests a novel way to revive America's savings culture in today's New York Times. He proposes that we bring back one of the old ways that people saved, which was through a postal savings bank.

Congress created such a system in 1910 and it thrived for decades as a place where small savers could store up their cash. The advent of FDIC insurance shored up the instability of the banking system and postal accounts fell out of favor and then out of commssion. But Lind argues that it is time we rekindle this flame. Small savers remain unpopular among most banks and millions of Americans do not own a basic transaction account, which means they have to pay more for everyday financial services.

Given the financial crisis, we know that we will need to realign our consumption habits to save more. We will need to do so for small and middle-sized savers alike. What we lack now is the infrastructure to support a savings revival. Perhaps the post office, still a ubiquitous presence in communities throughout the country, can be part of the solution.

If Auto-Enrollment Isn't Quite Enough, Why Not Make it Better?

Mark Huelsman — Wed, 01 Oct 2008 22:31:00 -0400

If you’re like me, you have no interest in foolishly looking at the dwindling numbers in your retirement plan. Luckily, I’m decades away from retirement and can afford occasional market volatility. My initial concern during this crunch, however, wasn't the fluctuating values in our nest eggs. Instead, my worry was that employers might draw back from automatic enrollment programs, and that new employees might consider opting out of plans more frequently. Not so, according to people smarter than myself. According to a recent Chicago Tribune article, not only has the number of companies automatically enrolling employees in retirement plans doubled, but there shouldn’t be much cause for concern that, despite what looks like prolonged doom and gloom for our economy, companies may find auto-enrollment less attractive.

For behavioral economists (and their many fans), this probably comes as no surprise—default options work. What the article argues and suggests by its title, however, is that automatic enrollment (despite its increasing popularity) is insufficient in creating a robust nest egg at current match rates. Likely true, though the Tribune makes it seem as though auto-enrollment is a static business decision by saying that it “may create a false sense of security and discourage workers from putting more away.” A false sense of security is an issue, of course, but I would argue that a balance of $0.00 in an employer-sponsored plan is far, far riskier.

The real fix lies in automatic escalation—the next generation of automatic enrollment. Instead of automatically enrolling workers at a higher, static contribution rate, auto-escalation would simply add a higher percentage of the employee’s pay into the company plan over time (while still maintaining the opt-out option at any point). This strikes me as a way to solve the problem of insufficient funds without crippling an employer with mandatory higher match rates—though ideally, a company would increase its match rate if possible.

In 2007, according to the Profit Sharing/401k Council of America, 81.9% of eligible workers had balances in their plans—up from 78.9% in 2006. Those 3% may not have sufficient funds for retirement, but it’s certainly better than not contributing. The alternative to automatic enrollment isn't forcing employees to fend for themselves, it's nudging them toward even more beneficial decisions.

The past few weeks and months have taught us the value of savings and responsibility on a personal, corporate, and federal level. Automatic enrollment, by any measure, has been beneficial to America’s workers. The discussion shouldn’t be about how comprehensive it isn't. It should be about how comprehensive it can be.

CGI Closes: Amidst Glitz and Pomp, Substance

Jamie Zimmerman — Fri, 26 Sep 2008 18:32:00 -0400

The Clinton Global Initiative is coming to a close and as I sit here listening to Gordon Brown talk about the importance of the global economy and the gap between the rich and poor, I find myself also thinking about the images of Drew Barrymore, Matt Damon, Muhammad Yunus, Bono, Bill Gates, Wylclef Jean and Bill Clinton on my camera, and last nights performances of James Taylor and Yousoo Ndour's. Waking up from my day dream, I realize that this conference could have easily succumbed to three days of a star-studded, papparazzi-riddled social affair. And perhaps in some ways it is.

But as I go through the notes I've taken over the last three days, I am quite pleasantly surprised by the amount of substance and the breadth of issues and innovations covered over the last three days. Indeed, I'm so impressed that I find myself at the end of this conference in 30 minutes unwilling to end my blogging on its sessions and commitments. Over the next week, I plan to continue providing commentary on CGI sessions, issue areas and commitments. Here is a sampling of topics I plan to cover:

Asset Building Beyond Microfinance? The Forgotten Bottom and the Missing Middle
Rural Finance: a New Frontier for Global Asset Building?
Technology, Information and the New Age of Access
Energy, Climate Change and Sustainable Development: An Opportunity for Microfinance?
Food Prices Shifting Microfinance Focus?
CGI Commitments: My Top 10 List

Send questions, comments, and stay tuned!