Personal income dropped 0.2 percent in November while personal consumption rose 0.2 percent. The U.S. savings rate, already negative, thereby lurched still further into the red.

Conventional wisdom has it that the savings rate is a matter of little importance. It is greatly understated, because capital gains, huge in recent years, are not counted as income. And even if the savings rate is insufficient to fund U.S. capital investment, funds flow from abroad has shown time and again that it is able to fill the gap.

Of course, financing investment through foreign funds flows involves a balance of payments deficit equivalent to the flows, but conventional wisdom suggests that confidence in the U.S. system is so great that such flows can be expected to continue indefinitely.

I disagree.

During 2000, stocks have been consistently weak, and NASDAQ, in which much retail investment is concentrated, is down almost 50 percent from its high. While much of this weakness is simply a retracing of a very recent move — NASDAQ was at its present level as recently as August 1999 — the negative savings rate indicates that much of the NASDAQ profits from the rise have already been spent, often in advance of their being realized. Indeed, such has been the shock of falling tech stock values that a number of retail investors have gone into denial, have decided that saving to invest in the tech stock market is not worthwhile, and have gone out to spend their tech stock profits, which in many cases no longer exist. After five years of fantastic wealth creation, in which bears were consistently and rightly derided, it will be very difficult for many consumer/investors to realize that the great money machine has ended, and to readjust their spending patterns accordingly.

The other side of the private savings deficit is, of course, the inexorable rise in consumer debt, at $1.49 trillion up around 9 percent over the past year compared with a rise in disposable income of around 5 percent. With unrealized stock market gains disappearing rapidly, consumer debt looms as an increasing problem in the years to come. Indeed, the real damage done by the stock market bubble may be in the savings and consumer credit sector; not only have people spent stock market gains that may prove to have been ephemeral, but their example has driven their non-investing neighbors into equivalent consumption, financed by accelerating and unsustainable consumer debt.

As well as private saving, there are two other programs which are likely to run into funding problems in the next few decades as baby boomers reach retirement –Social Security and Medicare. Both programs, solvent now because baby boomers are still in the workforce and unemployment is unprecedentedly low, will run into increasingly severe deficits, leading to insolvency after 2010.

The savings deficit is therefore a problem on not one but four fronts.

Voluntary encouragement of saving, in the United States, doesn’t seem to work. There are too many spending possibilities out there, each advertised with a bigger budget and much more verve than any savings program. Only 5.1 million of 122 million taxpayers in 1997 made payments into an IRA or Keogh plan; thus less than 5 percent of taxpayers took advantage of the most generous of the IRS savings incentives.

One of the reasons why the thrifty Japanese save so much is the inefficiency of Japanese retailing; poor distribution and high prices make the tradeoff between saving and spending quite different from here. There are great advantages in the U.S.’s wonderful distribution and marketing capability, but encouraging thrift is not one of them.

One possible solution to the savings problem lies in adopting the Singapore approach of a Central Provident Fund. Under such a system, a substantial proportion of each taxpayer’s income, 20 percent in the Singapore case (with matching employer contribution) is diverted compulsorily into a fund, for the benefit of the taxpayer, and the investment of that is controlled by the taxpayer (under overall fairly strict guidelines.) This fund is then used to provide medical benefits and retirement income, and can be borrowed against to finance a house purchase, with mortgage repayments coming from future fund contributions (but no consumer debt, and no second mortgages or “re-financings”.) On the taxpayer’s death, the amount remaining on his account in the fund passes to his or her heirs.

Replacing Social Security, Medicare and medical insurance with a fund of this kind would have considerable benefits. The assets of the fund would be real, unlike the Social Security trust fund, and its investment would be directed by the taxpayer, thus removing the problem of government economic control inherent in President Bill Clinton’s Social Security reform scheme. Spending from the fund would also be directed by the taxpayer, which would remove the problem of excessive cost in the medical industry resulting from third party spending.

Instead of the current incentive to get as much as possible from the insurance company or HMO, the taxpayer would be incentivized to minimize cost, since he would be spending what in the long run was his own money. There would be a further option of a catastrophic medical crisis/long-term disability insurance program for those taxpayers wishing to cover the worst eventualities.

For retirement saving, taxpayers would invest the fund money to provide their own pensions, thus removing the current problem of the pathetic returns achieved on Social Security payments. There would, of course, have to be regulations similar to the British Trustee Investments Act preventing taxpayers from investing the lot in witless dot-coms — a requirement that stocks be dividend-paying would seem a sound one. These investments would form a vast pool of investment capital, directed by taxpayers themselves, which would be available as a domestic resource to grow the U.S. economy.

As Lee Kuan-yew himself says, the Central Provident Fund does not solve the problem of the “irresponsible or the incapable, some 5 percent of the population.” Here a 19th century style safety net needs to be provided, designed so that nobody uses it who doesn’t need to.

Since this system would replace Social Security and Medicare, it would involve additional withholding of 10.55 percent (20 percent minus 9.45 percent) of pretax income for earners up to the current Social Security tax limit (about $70,000). It would then need to be combined with a tax cut in the upper brackets, where only Medicare of 1.4 percent is currently payable, so that the progressiveness of the system was not markedly increased. However, since the fund’s resources are the property of the saver, the disincentive effect of the additional withholding would be minimal. The $1-million-a-year earner would know that his $200,000 per annum paid into the fund would not go to subsidize others, but would provide him with the world class health care and luxurious retirement he would have earned.

A system of this kind would solve the Social Security and Medicare funding crisis, it would cut medical costs by ensuring that consumers paid their own bills, and, most important, it would provide a pool of capital resources so that the U.S. financed its own growth.

To finance growth by foreign investment is not only in the long run disgraceful, it is also very dangerous, because in a recession foreign investment will dry up and U.S. businesses will be starved of the capital they need to grow — thus the recession would be prolonged, and would possibly turn into a true depression, with all the cost in human misery that would bring.

The initial effect of this change would be deflationary and would exacerbate the near-term recession, which is in any case inevitable. This was always the problem that Keynes saw with saving; indeed he had a typical Bloomsbury Group antipathy to the middle class virtues of thrift and provision for the future. However, the long-term effect, provided the errors of both Hoover (raising taxes) and Keynes (raising government spending on make-work projects) were avoided, would be to allow the U.S. economy to emerge from the recession more quickly, and in a condition where future growth could be financed domestically from the savings of a people dragooned into financial virtue.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.