If I were told by the economic gods that I could have the answer to one question about the fate of the global economy, I know what I would ask. "When will the American consumer start spending again?" I know that doesn't sound as sophisticated as a question about industrial production, interest-rate fluctuations, or the Chinese stimulus plan, but it's the key to understanding when we will get out of this recession"”and what the recovery is likely to look like. The rise of emerging powers like China, India, and Brazil is real. But for now, there is still just one 800-pound gorilla. The American consumer is the single largest factor at play in the global economy. Our spending is currently equal to the entire economies of China and India added together and then doubled.
The gorilla is showing some signs of life. It's rare for a statistical report to make news, but in late July, the release of the Case-Shiller Price Index was reported as the lead news story by both The New York Times and The Wall Street Journal. The re-port showed that the American housing market seems to have stopped declining. That's big news because the housing collapse has been the driving force behind both the economic recession and the financial crisis. Usually, recessions end with a return to spending on housing, automobiles, and appliances, followed by other consumer durables.
But this is not a usual recession. The United States entered this downturn with the average American deeply in debt. In 2007, total household debt was $13.8 trillion. Household debt per person nearly doubled between 1997 and 2007, from about $25,000 to $46,000. That means people might spend the next few years rebuilding their personal balance sheets, spending less, saving more. In fact, they're already doing that. The savings rate has shot up to almost 7 percent, the highest rate in 15 years. But many experts think that it will have to get up to 8 or 9 percent"”the historical average in the pre-credit-bubble years"”before Americans start spending again. That would mean either a longer recession or a much weaker recovery than most expect. The Chinese government is spending pots of money building bridges right now, German industries are retooling, but eventually they will all need to be able to export to Americans again.
We have come to believe that Americans are genetically coded to consume. In fact, it's not about DNA. Historically, Americans were seen as puritans, thrifty and hardworking. In the early 1970s, the American savings rate was more than 10 percent. But a change in economic conditions began to get Americans spending. Credit expanded dramatically in the last three decades, especially in the last eight years. The inflation of the 1970s left people worried that their savings could be wiped out. And a series of government policies and programs subsidized debt and expenditure and did nothing to reward savings.
The biggest of these, of course, is the tax deductibility of mortgage interest, which costs the country almost $100 billion every year. Please don't tell me it creates an ownership society. Margaret Thatcher eliminated a similar program in Britain, and Canada doesn't have one either"”and both have the same home-owner-ship rates as America. The policy does not encourage home-owner-ship; it encourages the accumulation of debt.
The point is that people respond to incentives. Japan had a relatively low savings rate until the 1950s and '60s, when the government put in place policies that raised the savings rate. Conversely, as Tokyo has tried to get consumers to spend over the last two decades, Japan's savings rate has plummeted. The Chinese may or may not have a propensity to save, but their current high savings rate reflects a government policy to create high savings. In addition, objective factors matter. Chinese know that they do not have a government safety net, that they will have to pay for their own health care and retirement, and so they save. The Japanese, by contrast, are aging rapidly and retirees are spending down their savings at a rapid rate.
What does this mean for America? I doubt that the country will return to historically high savings rates. The baby boomers are aging, which means that they will save less and spend more. Credit is not nearly as available as it was two years ago, but compared with the rest of the world, America remains awash in easy access to cash"”and at historically low interest rates. And perhaps most important, we have decided as a society to massively favor spending over saving. All the programs and incentives to pull out the wallet remain in place. For example, the United States is the only advanced industrial country that does not have a national sales tax. The American consumer will likely start spending sooner than many imagine. That's good for the world, but is it good for America?
Zakaria Is The Host Of Fareed Zakaria GPS On Sundays At 1 P.M. Et on CNN.
© 2009
Yet another mainstream media pundit pushing the idea that America is the world's free ATM. As long as we are carrying the burden everyone hates us and makes no bones about it. But as soon as we stop taking care of evryone else in the world and try to pay a little attention to our own "issues", the rest of the world suddenly realizes how much they need us. In my opinion the best thing we could do for everyone is stop ALL foriegn aid, and use the money on Americans. And Buy American should be our mantra.
Sorry Fareed, but after studying economics lately I have to disagree with you. Look up Peter Schiff on youtube and watch everything you can find on him. He is a student of Austrian economic theory and they have been right about every problem we've had in our economy since at least 2005 (like the crash) while Keynesian economists never saw it coming and are the ones telling broke and out of work Americans to "go spend". Really, really bad idea. Watch his videos and then study what happens to our budget after we have to raise interest rates due to the printing of money like we did for the bailouts. We'll be lucky to have money for education, Medicare, Medicade, Social Security or defense when those rates rise. If we don't raise rates then we add to the debt by printing more money, thereby increasing inflation to Weimar Republic levels.Seriously, it was shocking to me and yet I cannot fault his position because he has been correct so many times. Consider this constructive criticism as I'm ordinarily a fan of your work.
Perhaps we can look back and say that American consumerism fueled growth of American industries back in the day when the US used to produce the very best of what it consumed, and then export some. But now, American consumes what other countries produce and borrows from them too. Soon "Confessions of an economic Assassin" updated edition will feature China as the assassin and the US as the victim.
Enter comments if any for reporting abuse
Read Full Article »