Laura Rowley Money & Happiness

Here's a tale of two homeowners, the Smiths and the Joneses. The Smiths are savers.

They have no revolving debt; 50 percent equity in their home; an emergency fund with six months' living expenses; a retirement plan to which they regularly contribute; and 529 college plans for their children's education.

The Joneses are spenders. They bought their home with no money down and have a subprime mortgage. They live from paycheck to paycheck; carry a balance of $10,000 on their credit cards; lease their cars; have no emergency fund; and have nothing saved for college or retirement.

A Tale of Two Lifestyles

The second household enjoys more material comforts, but the first household enjoys more security. Why should they care if their neighbors save -- or default on that mortgage and eventually go bust?

"We would all be better off if the neighbors had saved," says Ron Wilcox, professor at the Darden School of Business at the University of Virginia, and author of "Whatever Happened to Thrift?: Why Americans Don't Save and What to Do about It." He argues that the failure to save by many American families led to the mortgage meltdown and subsequent economic crisis -- and may be sowing the seeds for another disaster.

"The U.S. attracts a disproportionate amount of foreign capital because our government is stable, so interest rates remain low," Wilcox explains. "On the domestic side, way too many people have very little in the way of savings. These things worked together to produce the housing crisis. People were able to borrow cheap, and because they had no savings, often did not put a down payment on the home. When the price of the home goes down, it's much easier to walk away."

On the Hook

The savers are now financing the $700 billion bailout along with those who spent -- and may be forced to foot an even bigger bill as the baby boomers retire, says Wilcox, a former economist for the Securities and Exchange Commission who blogs here.

"If lots of people don't save and end up upon retirement being poorer than they would like to be, there will certainly be pressure to impose taxes on working people to more richly fund the retirements of individuals who have not saved," he says. "You'll see political pressure for wealth transfer -- and if you have saved responsibly, you'll be paying for people who have not."

Wilcox argues that savers who are dutifully contributing to their 401(k) plans face a real risk, because they won't pay taxes on the money until they retire. "It's easy for me to imagine 10 years from now a political candidate saying, ‘We have all these people with $3 million in their 401(k) plans and we need to impose taxes on those people and shore up Social Security for people who didn't have access to these 401(k)s,'" he says. "It's a big fat target for politicians." (And another disincentive to saving.)

Defining Savings

But let's back up a minute: Is it true that Americans aren't saving enough? Some economists argue that the official government measures of savings -- the National Income and Product Accounts (NIPA) and Flow of Fund (FOF) -- are flawed. Their definition of "savings" does not include home equity, capital gains, or the benefits from private pension plans such as 401(k)s, since some part of those benefits are paid for by capital gains. As the population ages and more people rely on pensions for income, critics suggest, the savings rate naturally declines.

"Those are valid criticisms," says Wilcox. "But there have been a number of attempts to scrub that data and reintroduce the things we think of as saving. If you put that data back in, you do find higher savings than NIPA suggests -- but it's not sufficient for most people to suffer a major loss like a medical bill, or to take care of themselves in retirement."

So what's at the heart of the U.S. savings problem? Wilcox dismisses the usual suspects -- such as advertising and easy access to consumer credit -- as too simplistic, arguing that the influence of advertising has been decried since Victorian times, and credit was invented more than a millennium earlier. (The Greeks and Romans used credit extensively to finance far-flung commercial ventures and personal consumption -- with decidedly harsher consequences: Debtors who defaulted were sold into slavery.)

Wealth Disparity and he Decline of Saving

Instead, Wilcox points to the widening gap between rich and poor. The concentration of income among the wealthiest 1 percent of Americans has roughly doubled in the last 30 years. In 2004, for example, the wealthiest 1 percent of Americans enjoyed a 12.5 percent increase in income, while the bottom 99 percent gained only 1.5 percent. (The gap is likely wider, since capital gains are excluded.)

As a result of social and geographic mobility, most individuals have a consumption reference group that comprises people with varying amounts of income. Those at the top shift our frames of reference (something Robert Frank also argues in his book "Falling Behind."

"As income disparities accelerate, I observe some people in my reference group who seem to be able to afford nice things that I do not currently have," Wilcox writes. "Because this observation is a one-sided event, and individuals may exaggerate their own consumption when speaking with others, disparities in remembered consumption accelerate even more quickly than actual disparities."

The Extravagance of Memory

Combine the bragging of increasingly wealthy neighbors with the psychology of memory, and you have people not just competing with the Joneses, but competing with their embellished memories of the luxuries the Joneses enjoy.

"The psychological trick people play on themselves is that when they view consumption, they tend to concentrate on idealized consumption," says Wilcox, adding that the psychology of arousal comes into play (in a mental, not sexual context). Research has found that brain activity increases when we see something novel or unexpected.

"When we are aroused mentally, we deal with information differently," Wilcox explains. "People's memories are stronger. We take as anchor points what people around us consume -- we remember things we like and don't like, and then construct an idea of what is appropriate to consume. What the memory constructs is more extravagant."

Consumerism Beyond Capability

In his book, Wilcox proposes a number of private and public initiatives to boost savings rates. But given that no one expects either income disparity or human psychology to radically change in the future, is there any moral appeal that might convince spenders to save?

"Spending more money than you have -- consumerism beyond capability to buy -- it seems to me that's a moral vice," Wilcox asserts. "There are reasonable uses of debt, but lifestyle debt is not one of them. Who ends up paying the bills? Either you pay the bills down the road, or if you seriously mismanage, someone ends up paying the bills for you -- you need someone to bail you out. I'm hard pressed to think that's a virtuous way to live life."

So are the savers footing the $700 billion bailout tab.