Washington DC, August 11, 2009 --  

America is coming out of its recession with its manic consumerism in check. Americans must rebuff short-term thinking that would reverse these gains.

With leading indicators pointing to a recovery from America's economic downturn, but improvements in the job market lagging behind, impatient politicians and pundits are calling for an increase in consumer spending to bring the economy back to normal. American consumer spending has dropped by 231 billion in quarterly terms between its peak in the summer of 2008 and the spring of this year.¹ The only way to have a quick recovery, we are told, is for consumers to open their wallets and drive the economy forward.

As far as bad ideas go, this one is a doozy. The problem is that the unhealthy and unsustainable level of American consumer spending was one of the primary drivers of the economic crisis. Throughout this decade, consumer spending has accounted for about 70 percent of America's gross domestic product.² Americans spent so much during the 2000s that the personal savings rate dropped to almost nothing in the middle of the decade. Consumer credit grew as people financed expenditures with credit cards, then periodically paid them off with home equity loans fueled by the housing bubble. This cycle then enabled Americans to spend even more money. To even suggest that Americans should return to these profligate ways as a means of improving the economy is like suggesting a drug addict should inject some heroin as a means of correcting his symptoms of withdrawal.

While painful, recessions have a great ability to correct this kind of dysfunctional economic behavior. This is precisely what has happened. Since the recession took a firm hold last fall, American consumers have been reducing their debt for a record 10 straight months³, and increasing their savings rate to levels not seen in over a decade.⁴ This has improved some of the long term structural problems with the American economy. The gulf between imports and exports has been a major American problem for years. Yet the recession-inspired cutback in consumer spending has improved this to a degree that seemed unimaginable just a few years before. The trade deficit fell by nearly 60 percent since January of 2008.⁵ Much of this is due to the fall in the price of oil, but even excluding petroleum, the trade deficit is still down by about half -- 51 percent over the same period.⁶

Let there be no mistake: these are very encouraging numbers. Importantly, they cannot be dismissed as artifacts of the business cycle. During the last recession in 2001, America simply did not see significant improvements in the savings rate or the trade deficit. Instead of a temporary side effect of the recession, these shifts may be the beginning of long overdue changes in the American economy.

To be clear, recent changes in the American economy are far from uniformly good. While consumers have behaved in an increasingly responsible manner, the American government has done quite the opposite. The spendthrift ways leftover from the Bush administration, combined with the Obama administration's biggest spending spree in history (named "stimulus") will pile nearly two trillion dollars onto the federal debt this year alone. ⁷ If reductions in consumer deficit spending is offset by even larger increases in government deficit spending, the nation will be on an even less sustainable course than before.

And purely on the consumer side, it is important to note that Americans still have plenty of room to improve their behavior. Consumer spending still accounts for 70 percent of the American GDP -- it's just that spending has shrunk in the same proportion of GDP. Americans consumers still spend too much, as can be seen by the continued failure of the country to export as much as it imports.

Though these are serious caveats, the real changes in consumer behavior are so significant, so positive, and so overdue that they must not be ignored -- they must be praised and encouraged. Instead of seeking a return to irresponsible consumer spending as a quick fix for unemployment, Americans should focus on growing export industries as a means of creating displaced jobs. (Don't think of 20th century export industries like automotives -- think of 21st century exports like software, entertainment and financial services.)

Unfortunately, America's politicians seem hell-bent on taking the opposite tack. To members of the House of Representatives, elected on a two-year cycle (and even the president who faces the polls after only four years), significant improvement in the job market can't wait several years to build export industries. To the short-term mind of the politician, the quick fix of increased consumer spending is clearly the way to go. Hence, we get the wildly popular yet completely irresponsible "Cars for Clunkers" program. Apparently, politicians are so intent on getting American consumers to spend money, they'll even give them the money to do it.

Since the American politicians will clearly do anything in their power to fight the positives shifts in consumer behavior, the only way they can be sustained is if they become a cultural phenomenon. Being thrifty has to be perceived as more stylish, patriotic, or just smarter than being a spendthrift. Such a change is far from certain. But no thanks to American politicians, such a change is actually conceivable for the first time in many years.

Related Web Columns:

Persistent Problems, Painful Solutions, February 10, 2009

Stagnation's New Decade, September 16, 2008

Yawning Toward Disaster, September 2, 2008

Aggravating the Hangover, August 5, 2008

House of Cards
The Collapse of Credit-Driven Spending, November 27, 2007

Notes:

1. Bureau of Economic Analysis, National Income and Product Accounts Table, July 31, 2009

2. Ibid.

3. Bloomberg News, U.S. Consumer Credit Fell 5th Straight Month in June (Update1), August 7, 2009

4. Bureau of Economic Analysis, Ibid.

5. U.S. Census Bureau, U.S. International Trade in Goods and Services May 2009, July 10, 2009

6. Ibid.

7. Bloomberg News, CBO Projects 2009 Deficit Will Reach $1.85 Trillion, March 20, 2009