Robert Samuelson, Business Times 24 Apr 08;
TRANSFIXED by unruly financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree.
For the past quarter-century, Americans have gone on an unprecedented consumption binge - for cars, TVs, longer vacations, almost anything. The consequences have been profound for both the US and the rest of the world, and the passage to something different may not be an improvement.
It was the ever-expanding stream of consumer spending that pulled the US economy forward and, to a lesser extent, did the same for the global economy (the reason: imports satisfied much of Americans' frenzied buying).
How big was the consumption shove? Consider. In 1980, Americans spent 63 per cent of national income on consumer goods and services. For the past five years, consumer spending equalled 70 per cent of GDP. At today's income levels, the difference amounts to an extra US$1 trillion annually of spending.
To say the shopping spree is over does not mean every mall in America will close. It does mean that consumers will no longer serve as a reliable engine of growth. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. The implication: Without another source of growth (higher investment, exports?), the economy will slow.
Why did Americans embark on such a tear? In his book Going Broke, psychologist Stuart Vyse argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards separate the pleasure of buying from the pain of paying. Toll-free catalogue buying, cable shopping channels and Internet purchases don't even require a trip to the store. There's something to this. But the recent consumption binge probably has more immediate causes. One was the 'wealth effect'. Declining inflation in the early 1980s (in 1979, prices rose 13 per cent) led to lower interest rates - and they led to higher stock prices and, later, higher home values. People regarded their newfound wealth as a substitute for annual savings, so they spent more of their annual income or borrowed more, especially against higher home values.
The 'life cycle' (aka demographics) also promoted the shopping extravaganza. People borrow and spend more in their 30s and 40s, as they buy homes and raise children. In the 1980s and 1990s, many baby boomers were passing through their peak spending years. That reinforced the wealth effect. Finally, the 'democratisation of credit' supported the shopping spree. At the end of World War II, it was hard for most Americans to borrow. Since then, mortgages, auto loans and personal credit have been liberalised. By 2004, three-quarters of US households had debt.
All these forces for more debt and spending are now reversing. The stock and real-estate 'bubbles' have burst. Feeling poorer, people may save more from their annual incomes; it's already much harder to borrow against higher home values. Demographics tell the same story. 'Life-cycle spending drops among 55- to 64-year-olds' - they borrow less and their incomes decline - 'and that's where our household growth is now,' says Susan Sterne of Economic Analysis Associates.
And credit 'democratisation'? Well, the message of the sub-prime mortgage debacle is that it went too far. Up to a point, the spread of credit was a boon. Homeownership increased; people had more flexibility in planning major purchases. But aggressive - and often abusive - marketers peddled credit to people who couldn't handle it. There are no longer large unserved markets of creditworthy consumers. Indeed, many Americans are overextended. In 2007, household debt (including mortgages) totalled US$14.4 trillion, or 139 per cent of personal disposable income. As recently as 2000, those figures were US$7.4 trillion and 103 per cent of income.
What can replace feverish consumer spending as a motor of economic growth? Health care, some say. To be sure, health spending will increase. But its expansion will crowd out other forms of consumer and government spending, because it will be paid for by steeper taxes or insurance premiums. Both erode purchasing power. Higher exports are a more plausible possibility; they, however, depend on how healthy the rest of the world economy remains without the crutch of exporting more to the US.
But what if nothing takes the place of the debt-driven consumption boom? Its sequel is an extended period of lacklustre growth and job creation. Sombre thought. The ebbing shopping spree may challenge the next president in ways that none of the candidates has yet contemplated. -- The Washington Post Writers Group
