Big Houses Are A Form of Saving

Megan McArdle wants people to save more money and invest it wisely—in mutual funds. Then she moves on to a bit of scolding:

Oh, I know what you’re going to say: 15% is a lot of money!  Wildly impractical for an average family!  Impossible!  And if your little family of 4 is living on $35,000 a year, I’m sympathetic.  

But most of my readers aren’t.  You guys have enough money to save, which I can scientifically prove because your grandparents almost certainly lived on a small fraction of what you now do. And don’t tell me things were cheaper, back in the good old days: in almost all cases their houses were smaller, less well heated, and entirely un-air-conditioned; their entertainment budgets were much leaner; their groceries heavier on the cheap and utilitarian and lighter on the tasty and expensive.  They literally had about a quarter as many clothes as the ones bursting out of your closet. Their health care was cheaper because it sucked and they died quicker.

There’s a lot of truth to that. But it’s also worth saying that aquiring large houses and filling them with durable goods is a form of saving. After all, if you find yourself needing money you can always sell the house and move into someplace smaller. In principle, having the house that you live in be one of your largest investments is a pretty terrible idea. But in the real world, very few people manage to engage in anything remotely resembling an optimal savings strategy. The American culture of homeownership has a lot of problems with it, but it does function as one of the more psychologically tractable means of precommitting yourself to saving money.

Loosely related, whenever I look at the trend in the personal savings rate I wonder to what extent the low inflation environment of the “Great Moderation” played a role. If people suffer from money illusion (which they do) then a low interest rate environment is going to make interest rates look lower than they really are, and perhaps discourage saving and encourage borrowing.