Consumer Spending Is an Important Place to Start In Getting Our Economic Strategy Right
Mar 06, 2009
Author: SCP Editor
March 6, 2009 - Another key report due out this morning is the Consumer Credit report for January, which is expected to show that borrowing declined by $5 billion. In December, borrowing fell $6.6 billion. In November, borrowing fell $11 billion. Conventional ‘wisdom’ is that this is a bad thing, but in my opinion, it is much needed. I have complained for years now that the negative personal savings rate consumers have built up is not sustainable and would ultimately help to undo the economy.
True - that a contraction in consumer spending of the magnitude that they are being forced into now, is going to be painful for our businesses and the economy. But so is taking the crack pipe out of the addict’s hands painful for the addict. According to recent data, the savings rate jumped to 5% in January from zero last spring. That is the highest rate since 1995. When consumer spending topped out in 2005 as a 71% portion of GDP, personal savings were negative. Some asked Greenspan, when he testified before Congress whether he was concerned about the negative savings rate, he commented that the increase in values in homes was an offset. We saw what happened there.
The bottom line, in my opinion, is that the fact that consumers are expected to hold up more than 70% of GDP is a bad thing and a damning characteristic of this system. It is indicative of the sad fact that we have overbuilt the consumer infrastructure in the US and have massively overlooked the importance of production. US exports generally represent only about 11% of GDP. The trend in recent years is for countries like China to loan us money only so we can turn around and buy their goods. I am not preaching protectionism here, but this is a fatal flaw in the US economic system and we need to get back to a point where we are building more, competing more effectively and increasing exports, while our consumers are not left to hold such an unrealistic level of the GDP bag.
Meanwhile, our representatives on both sides of the aisle can’t get their act together on Capitol Hill, bickering at every turn about the direction that needs to be taken to get our economy back on the rails. In the Senate, the $410 billion appropriations bill is being heatedly contested by the GOP, calling it bloated and irresponsible. The whole pork-barrel issue is a joke and an instrument that both parties use when they are not in the majority against the other. That being said, the Democrats are doing a poor job making the case for more spending to the American people. The fact that the GOP is complaining about heightened spending, when no political platform leverages consumption that supply-side economics, the darling of the GOP economic policy since Reagan, is also laughable.
The problem is that all of the finger pointing and self-righteous ballyhoo is not making the country any more confident that this is a group of politicians that are capable of seeing the forest thought the trees. It is definitely not instilling any votes of confidence in the rest of the country. The root problem is not that difficult – we have spent too much, we have levered too much, we have relied too much on consumer consumption. The answer shouldn’t be either – we need to rebuild our production infrastructure, where we invest and spend, we need to invest and spend in core products that the US can master, and ultimately export to the rest of the world in this global economy. The trick is what policies will get us there.
The GOP thinks less spending and lower taxes will do the trick. This is intuitively appealing. The problem is, as I have opined for years now, is that the Bush tax system was spending in its own right. Cutting taxes in areas the manner they were cut in recent years created a vacuum which needed to be filled by debt spending and borrowing in order to support GDP growth. Hence, critics of this system like George Akerlof accused the Bush economic policy of looting the treasury (he and many other Nobel Laureates took a full page ad in the NY Times out back in 2003 making this point).
But the core principles here can’t be wholly contributed to the Bush administration. David Stockman acknowledged back in the 1980s that one of the core objectives of supply-side economics is to create enough of a deficit to force a dilemma, whether to cut military and defense spending or to cut social spending. Bush didn’t have Russia, Reagan’s evil empire to create urgency, but he did have Bin Laden.
In any case, the point here is that by creating such a massive vacuum in government revenue and leveraging debt to the extent we have, suggesting that there was really a tax cut environment that Americans would benefit from was really disingenuous. I wrote previously that as the Bush administration was leaving office with a record national debt firmly in place, that the taxpayer burden on the debt created would be about $34 ,000 or so, and that in its own right, is a backdoor tax.
The purpose in making this point is not to play the blame game. The Democrats have historically been susceptible to bad economics in their own right. The point is to suggest that the argument being put forward by the GOP that tax cuts and less spending is bad economics on the ‘tax cuts’ side and hyperbole on the ‘less spending’ side.
Where the GOP would be wrong would be to suggest that investing in the productive infrastructure of this country, and into core goods and services is irresponsible, and where it would be wrong would be to suggest that tax cuts would do the trick, because that just goes to the ‘tickle down’, consumptive attributes of the US economy which have tilted so far in the favor or leverage and debt.
Where the GOP is right is to point out that the Democrats have been moving too fast and too quickly in building up its stimulus budget. The Democrats would have done well to make a better case about why investing in core goods and services is necessary, and to have provided assurances that it was going to move into a stimulus strategy with a more measured approach. The impression, unfortunately, that the Democrats’ approach has left too many is that it is playing ‘fast and loose’ with the Treasury. Right or wrong, the mere impression that this has created is, admittedly, irresponsible. Obama needs to correct that.
To be sure, this is all an oversimplification and would require chapters of historical economic and political analysis and more chapters to effectively make the case we are glibly claiming, but the purpose here is just to provoke some a discussion on the matter. It is probably more of an oversimplification because we are also staring into the heart of darkness, with a looming $7 trillion unfunded liability for Social Security and a $34 trillion unfunded liability for Medicare. These are massive problems we are facing. But until the GOP and the Dems can get their collective acts together, and stop holding so closely to political purism and positioning for the next election, the pursuit of taking and implementing corrective and risk management measures into the economy are going will be strained.
A starting point has got to be, however, that this notion of consumers being responsible to drive 70% of GDP is a core, fundamental, and damning flaw to the US economic system as it stands.
