What if we all got money-smart?

The new new economy

Eventually, economies in the U.S. and beyond would adapt and begin to grow again. But there would be some lasting changes. To wit:

We'd be less vulnerable to the whims of foreign investors. When people save a lot, that increases the pool of money available for investment and keeps the cost of borrowing money down. When people save too little, the pool of money shrinks and the cost of borrowing typically soars. So a personal savings rate as low as ours has been should have caused interest rates to skyrocket by now. (After averaging 8% between 1980 and 1994, our savings rate has plunged to less than 1% and sometimes goes into the red.) We've been saved by the willingness of foreign companies and individuals to invest their savings here. A bigger pool of domestic savings would make us less vulnerable should these foreigners suddenly decide that another country is a better bet.

More people would retire earlier. The typical retirement age is currently pretty early -- 62 -- but many economists predict it will inch upward as baby boomers either need or want to work longer. If, however, everyone saved at least 10% for retirement starting with his or her first job, the ranks of those having to work well into their 60s would drop precipitously. (Currently, only 19% of workers have consistently saved at least 10% of their working incomes, a recent Hewitt Associates study shows. If more workers retired early, businesses would, all things being equal, need to replace them. This increased demand could lead to higher wages or loosened immigration standards, or both.

The real-estate market would settle down. During the mortgage boom, lenders abandoned all pretense of making sure borrowers could afford their loans. That led to dizzying price increases in many markets. The unwinding of the boom has been painful as home prices have plummeted and foreclosures have spiked.

At some point, though, real estate will hit a bottom and buyers will once again return to the market. If they limit themselves to only as much mortgage as they can truly afford, growth in home prices will more closely track growth in personal income.

In other words, "the real-estate market would look like it did eight or 10 years ago," said economist Richard Green, director of the University of Southern California's Lusk Center for Real Estate, "before the subprime mortgage boom got started."

That doesn't mean homes in Manhattan or Santa Monica would suddenly become cheap. Desirable areas that attract wealthy people will stay expensive, Green said, since those folks can afford to outbid the rest of us for homes.

But overall, homes would remain affordable for most buyers in most markets while still offering modest appreciation over time.

Bankruptcies would plummet. People would still go broke, of course. Even without credit card debt, there would be people who couldn't afford to pay their bills.

Still, more people would be able to survive the events that typically trigger bankruptcy -- such as job loss, death of a wage earner, illness, disability and divorce -- if they didn't carry credit card debt and had some savings.

The wild card would be medical debt. More than 45 million people lack health insurance, and medical bills are a factor in half of consumer bankruptcies, according to Harvard bankruptcy researcher Elizabeth Warren. If health care costs continue to escalate and we don't figure out how to insure more people, bankruptcies will mount.

The economy might be somewhat less prone to booms and busts. Consumer spending makes up 70% of our nation's economy, so our decisions about spending and saving have a big impact. If we resisted the temptation to overspend or do other stupid things with our money, there might be fewer bubbles that could burst in a way that devastates our economy.

But we're not the only factor. Recessions also can be set off by other events, like big oil price shocks. And once a recession starts, consumers' willingness to spend -- and incur debt -- can determine how long they last.

If consumers cut back sharply, the ripple effects can make a recession worse. If instead they whip out their credit cards to maintain or "smooth" their consumption over time, the economy can benefit.

"After the 2001 terror attacks, consumers kept spending and muted the cycle," Hoyt said. "That type of temporary willingness to (take on) debt can be a good thing."

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Aug. 11, 2008

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