It’s well known that people around the world can be really bad at saving money. Pre-pandemic, Americans saved an average of 7.6% of their income, electing to spend the rest. If people saved more money and invested it, then they’d be able to retire earlier, be wealthier, and therefore probably be better off. Yet, people visibly aren’t choosing to do that, so what’s going on here?
One possibility is that most Americans are just scraping by, and can’t afford to drop their spending without something really bad happening to them, like starving to death. That hypothesis may be true for some, but it can’t possibly be the case for most. The savings rate does rise with income, but not nearly as much as you’d expect if there was some baseline standard of living that most people try to meet while saving the rest.
The ultimate explanation for the low savings rate seems to be that people are myopic. In other words, people implicitly care more about having stuff now, rather than later. But saying that the problem is just myopia leaves some important details out.
Omer Moav and Zvika Neeman have a neat story (predictably: signaling), and it goes something like this. Assume that all people desire high status, and the arbiter of your status is how other people perceive your wealth. If you conspicuously spend money on a fancy car, people will readily see that, and assume that you are wealthy. By contrast, if you lock your money away in a vault, no one will observe it, and therefore will not raise your status. The result is that people will spend their money frivolously rather than investing it, even though if they invested their money everyone would have more wealth.
To introduce their case, they present some anecdotes that highlight just how absurd this problem might get,
A recent New York Times article (Moonshine or the Kids), illustrates the magnitude of such spending. It describes the financial situation and spending habits of a poor family from the Republic of the Congo. According to the article, the Obamza family is eight months behind on the $6 per month rent and is in danger of being evicted, they have no mosquito nets, even though they have already lost two of their eight children to malaria, and they cannot afford the $2.50 per month tuition for each of their three school-age children. Yet, Mr and Mrs Obamza spend $10 per month on cell phones, and Mr Obamza drinks several times a week at a village bar, spending about $12 per month. As the Obamzas are not an outlier, the reporter concludes that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed.
If this theory is right, as I believe it probably is, then it seems like there’s a rather natural policy solution: make everyone’s savings more visible.
Theoretically, everyone could go around and show people their retirement account in order to show off. However, as observers have pointed out before, that solution won’t work because no one wants to be perceived as bragging. People want a plausible excuse for their signal. People want to be able to say, “I bought this car because I need to go from point A to point B, obviously. Not to signal that I am wealthy enough to buy it.”
But suppose everyone was required to show off their account balances. As an example, imagine a system where anyone could easily look up the wealth of anyone else, via some database. Then people would probably shift towards conspicuously saving more and conspicuously spending less.
Many will be concerned with privacy, and that’s valid. We could alleviate the privacy concern by allowing people to opt-out.
In The Elephant in the Brain, Kevin Simler and Robin Hanson mention that policies which are realistic about people’s selfish motives are more likely to work than ones which pretend humans have more virtuous motives. My proposal is essentially an attempt to apply that advice in the real world. What might go wrong?