Bob Simpson / Flicker CC

An Economy Out Of Balance

January 31, 2017

According to a recent survey by, over half of Americans are unable to afford a $500 emergency. Several recent economic trends explain this dilemma; primarily the prices of major consumer services such as health insurance and postsecondary education are increasing at rates that outpace inflation. This challenge is contextualized in an economic environment with mostly-stagnating-wages for middle-income Americans and slightly-declining wages for lower-income Americans. Such wage trends mixed with increased prices are diminishing the spending power of the American consumer. This decreased spending power, in turn, is driving a lower national savings rate. Most disappointingly, there is fresh evidence that a lower national savings rate may ultimately slow down a country’s income growth.

The Bureau of Labor Statistics announced that about 65% of Americans who graduated from high school in the 2012-2013 academic year enrolled in some form of postsecondary education by the following fall. Given the popularity of postsecondary education, it is troublesome that its cost has markedly increased over the past decade. Adjusting for inflation, College Board found that the annual increase of tuition at private non-profit four-year colleges, public four-year colleges, and public two-year colleges have all increased by over 2% per year from the 2006-2007 academic year through the 2016-2017 academic year. Furthermore, a recent analysis by used Federal Reserve data to show that total student loan debt has soared from about $627 billion at the end of second quarter of 2008 to about $1.36 trillion by the end of the second quarter of 2016. According to, the average annual inflation rate since official recording began in 1913 is 3.22%. Assuming a standard annual inflation rate of 3.22%, this uptick in student loan debt greatly outpaces the historic annual rate of inflation.

Postsecondary education is not the only part of the United States economy in which prices are soaring. According to a recent report by the Department of Health and Human Services, the average annual premium increase for Healthcare.Gov using a common industry benchmark (second-lowest silver plan) was 2% in 2015, 7% in 2016, and will be 25% in 2017. One recent study found that “the rise in health expenditures explains 83% of the drop in the United States savings rate.” The same study found that the United States savings rate has decreased “from 10% in the early eighties to 3% in the late 2000s.” Therefore, higher expenditures of consumer services such as healthcare are contributing to a lower national savings rate.

Another challenge compounding the concern of rising costs outpacing inflation is the issue of stagnating, or in some cases declining, wages. The Economic Policy Institute (EPI) analyzed government data to determine that “from 1973 to 2013, hourly compensation of a typical worker increased by 9% while productivity increased by 74%.” In addition, the EPI found that from the late 1970s through 2013, hourly wages mostly stagnated for middle income workers while hourly wages slightly decreased for lower income workers. Finally, the EPI found that real hourly wages for recent college graduates actually decreased from the late 1990s through 2013.

Rising costs of college tuition and healthcare, combined with large percentages of the United States population facing flat or declining wages, partially explain the troubling trend of a lower savings rate in America. A decrease in the savings rate is problematic because it could make it harder for families to be prepared for a financial crisis or retirement. Furthermore, a recent econometric analysis found that a country’s “savings rate has a positive impact on income.” In this way, the United States’ lower savings rate may be leading to even slower income growth.

Contact Information

Fels Institute of Government
University of Pennsylvania
3814 Walnut Street
Philadelphia, PA 19104

Phone: (215) 898-2600
Fax: (215) 746-2829