Consumer-based economy is dead; let’s turn the page

opinions

July 19, 2011 - 12:00 AM

Looking around for the reason the economy hasn’t recovered, David Leonhardt, who writes about the economy, found the culprit. It’s us. We aren’t spending like we used to do. Here are snippets of his analysis in the New York Times:
“ . . .  We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.
“The auto industry is on pace to sell 20 percent fewer new vehicles this year than it did 10 years ago  — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
“The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.”
Leonhardt’s article cites more evidence that consumer spending not only has fallen across the board but is showing few signs of recovery.
“If you are looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future. Both consumers and executives are easily frightened by the latest economic problem, be it rising gas prices or the debt ceiling impasse.
“. . .  The notion that the United States needs to begin moving away from its consumer economy — toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs — has become so commonplace that it’s practically a cliche. It’s also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back.
“Sure, house and car sales will eventually surpass their old highs, as the economy slowly recovers and the population continues expanding. But consumer spending will not soon return to the growth rates of the 1980s and ’90s. They depended on income people didn’t have.”
Leonhardt then moves from analysis to prescription.
“The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty. . . . (but) If governments stop spending at the some time that consumers do, the economy can enter a vicious cycle, as it did at the beginning of the Great Depression. The prospect of the cycle is one reason an impasse on the debt ceiling, and a government default, could do so much damage. Global investors may be the only major constituency that has been feeling sanguine about the American economy. If Washington unnerves them, and sends interest rates rising, the effect really could be calamitous.
“But the debt-ceiling debate doesn’t have to be yet another problem . . . the right kind of agreement could help soften the consumer bust and also speed the transition to a different kind of economy. What might that agreement look like? First, it could reduce deficits in future years, to keep investors confident that Washington too could begin living within its means after years of excess. Second, a deal could avoid . . . having government cut back at the same time as consumers. .  . . Today, the most obvious options for stimulus are extensions of jobless benefits and a temporary cut in the Social Security tax. But they probably shouldn’t be the only options. The biggest flaw with the past stimulus was that it imagined that the old consumer economy might return.
“ . . . A budget deal could increase funding for medical research and clean energy by even more than President Obama has suggested. These are the kinds of investments that have brought huge returns in the past — think of the Internet, a Defense Department creation — and whose price tags are tiny compared to, say, Medicare or the Bush tax cuts. …”

LEONHARDT IS A realist. He understands that politics isn’t likely to allow this government response to occur — until things get worse. Not to worry, he says, things to come will satisfy that demand. “ … The debt-ceiling talks won’t be the final chance for Washington to help the country recover from the great consumer bust. That’s the thing about consumer busts. They last for a very long time,” is his well-informed conclusion.

— Emerson E. Lynn, jr.

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