Tuesday, March 03, 2009

Is the US Economy Sustainable?

For quite a while, I have felt that if the US economy was so dependent on consumer debt, there was no way it's growth could be sustained. Sooner or later, unless wages across the entire population rose more than the growth in GDP, the proverbial "minimum monthly payment" on consumer debt would surpass their ability to make those payments. In an economy such as the US, where consumer spending is such a major component of GDP, growth in consumer spending needs to be backed by growth in consumer real wages, or sooner or later, the house collapses. And it has.

I ran across an interesting article today. Someone seems to agree with my reasoning. I sure wish I was wrong, for my reasoning carried me to conclude that America needs a significant reset of its economy, and that means that either we accept a significantly depressed economy, or wealth must be distributed differently.

Note that I am not suggesting a "redistribution of wealth". But, somehow, more wealth needs to land into the hands of the masses for them to be able to spend without the assistance of excessive debt. In sort, if the rich keep getting richer and the poor keep getting poorer, the consumer spending of the rich will not support the economy. "Trickle Down" is pure horse-hockey.

Temporarily, however, as a result of the economy going over the edge, the only way to "prime the pump" of the masses' ability to spend is a redistribution of wealth, and Obama's tax policy is the only available tool in the tool box that can do that.

But, to get the rich to understand that they are better off in the long run to be slightly less rich requires a major culture shift. So far, all too many of them operate under the delusion that their personal well being is all that is needed for a robust society and economy. As more and more of the other 95% see that their economic well being is what really drives the economy, times in the US could get very interesting.

13 comments:

FDChief said...

The huge difference I see between 1929 and today is in the Twenties the rich had the ghosts of dead Russian aristos to haunt them into shutting the fuck up. Roosevelt, that cunning old patrician, understood that in order to prevent every Nob Hill oak bearing the bloated fruit of the corpses of wealthy matrons and their plutocrat husbands he had to kick down some jack to the proles.

Today we've been fat, dumb and happy since Saint Ronnie told us it was morning in America. We don't really BELIEVE that the boogiemen will come and get us, that the Morlocks will rise. So we're going to drive off the cliff. Okay, we pretty much deserve it.

But my kids and everyone else's kids are going to get schooled, too, andit's not their fault. THAT's the unfair part.

Me? I'd happily loot, pillage, rape and burn my way through the West Hills. The rich are different from you and I, all right: they crackle delightfully when fed to the flames of their burming houses. The world needs to instill a healthy fear of the criminal classes into the malefactors of great wealth.

wourm said...

The problem is not so much that there are not enough consumers. It's more that the consumers out there have had the s**t scared out of them. Everyone's stuffing their mattresses with tens and twenties. A year ago they'd have been blowing that money on the latest electronics, fake nails, fillin' the tank of their H2. Sure the consumption that we saw in the past few years was hot. A little too hot. Then when you frighten all those consumers with talk of depressions, job cuts, armageddon, etc. it's a no brainer that the consumption will slow.

The thing that will turn the Dow and the economy around is alleviating that fear. Getting people to realize that it's not as bad as the talking heads say it is. And no tax cuts are not the only answer.

The good thing that will come out of this is that people will realize that debt based consumption is just plain nuts. And maybe we should live within our means.

At least that's my hope.

Pluto said...

Wourm - I think you've got part of the answer when you say that the consumer is running scared.

The consumer SHOULD be running scared, about a third of them bought a ton of stuff on credit and figured the bill would never come due. Now it is overdue and the interest and penalties are KILLING them. The American people (and the world) are getting a lesson in debt and risk management that should hold us for at least another 30 years before we do this again.

You also mention that people shouldn't believe that things are as bad as the talking heads say they are. Again, I believe you've got part of the truth. The situation is considerably worse than the talking heads would have you believe but train wreck is moving in slow motion so you can almost believe that it is about to end when there actually is no end in sight. My best guess is that we're in for another two years or so but I can be as wrong as the next person.


Chief -
I strongly understand your urge to whack somebody. I've also got kids and I also understand the burden we are placing on them. But we need to understand that this is likely the end of America as we know it and that things will necessarily be different when the dust settles from this train wreck.

Regardless of whether things are better or worse for the general population, a time of change is also a time of opportunity for the individual. Keep your eyes open and teach your children well and everything should turn out well as possible.

mike said...

Rich is relative. The news today had a story of an unemployed executive who has taken a job as a janitor. Now he is polishing brass doorknobs to feed his family. Good on him.

Chief - My old man never registered in any political party. Called them both a den of thieves. But he always used to joke with Republican friends that when the revolution came that we were going to go after everyone with two refigerators.

mike said...

PS - Al: As an old Whidbey Island guy, you will be sad to know that this weekend you are going to miss the Penn Cove MusselFest.

http://www.thepenncovemusselfestival.com/

Aviator47 said...

If anyone thinks the problem has been over stated, try this from today's AP wire:

All told, the number of unemployed people climbed to 12.5 million. In addition, the number of people forced to work part time for "economic reasons" rose by a sharp 787,000 to 8.6 million. That's people who would like to work full time but whose hours were cut back or were unable to find full-time work.

That's a significant portion of the population that is out of work or under employed. These folks will be spending significantly less ( as well as millions of others), further reducing demand for consumer goods, jeopardizing even more jobs. Until we reach an "equilibrium", things will continue to worsen.

The question is: What is the point of equilibrium?

mike said...

Al -

I agree that the problem is not overstated. But I have problems with any solution that touts buying more consumer goods. IMHO if buying consumer goods made in China or elsewhere overseas is the onlly thing to save our economy, then the economy can go to hades - including my own 401K.

The only consumer goods I will be buying are Energy-Star appliances, but only when the current ones wear out. Hopefully I will be able to find some made in this country, but I am not optimistic about that.

We need a revived American manufacturing base to revive the economy. Maybe I can start making furniture in my shop and trade for dental work, or essential groceries.

Most of my neighbors know how to weather this downturn. There are plenty of fish in the river. There are lots of clams and oysters in the bay. My little acre and a half is not huge but big enough for planting tomatoes, squash, beans, corn, and chard. In Asia I saw farmers support their family on a quarter acre. And if the deer get in and start tearing up the garden at night, maybe I can remember how to jacklight to put some meat on the table.

Pluto said...

To balance Al and Mike's points:

Nobody knows where the new equilibrium point will be or how we will find it. This is a really scary thought especially because I just read that the US manufacturing sector has already laid off 1/3 of the workforce they employed in 2007. (http://marketplace.publicradio.org/display/web/2009/03/06/pm_jobs/)

We probably won't need to go to Mike's subsistence-level thinking but, since we don't know where this will all end, it probably isn't a bad idea to think about the absolute worst case and what you'd do about it.

As I suggested earlier, we should all look for ways we can make the situation work for us instead of against us. There are opportunities in them thar hills, if we have the wit and strength to find and use them.

wourm said...

Damn.

I'm an optimist to a fault.

My apologies, but I've got to be. I've got three young men who'll soon have to make their own way through this f-ing mess. I'd just like to believe they'll have a better shot at it than I did.

Some more on Pluto's points:

Manufacturing has been leaving the country slowly over the last 20 years. I'm a electronics design engineer and I've watched as manufacturers and assemblers have closed down or moved overseas. These days the rule of thumb is that any amount over about 500-1000 pieces is much more cheaply manufactured in Asia.

I talk a lot to the owner of the machine shop that makes parts for us. It's a real low budget operation with the owner and two full time employees and about 3-4 part timers. He's told me of numerous shops in the area that have closed down over the last 10-15 years. It's been too easy to buy overseas and too expensive domestically.

He has noted a minor turn-about recently though. He notes that it's hard to maintain quality when you buy foreign made parts. So people do buy domestic when they need quality they can count on.

He's found his opportunity.

Pluto said...

Wourm,

I've also got a couple of young men that are getting ready to leave the house in the next couple of years.

I'm doing my best to prepare them for the challenges they are going to face and believe it will be enough to get them started. The most important thing is to make sure that they understand what they are in for and to get them thinking about their futures.

I recently overheard a conversation that drove me almost nuts. A father and teenage son were assembling newspapers to raise a little spare cash (as were my son and I) and the son comes upon an article about people raiding their IRA's and 401(k)'s to pay off this month's mortgage.

The son asked, "What's an IRA?"

Father: "Don't know, don't think you'll ever need one."

Son: "Oh" and he moves away.

Another father overheard the discussion as well and commented to the first father that he'd missed a "teaching moment."

The first father replied that he wanted to shield his son from such stuff because he didn't want the boy to become concerned about his ability to get a good-paying job after high school. Money quote: "I'm sure something will turn up for him. It did for me in the early 1960's and those were pretty tough times too."

I really liked your story about the machine shop owner who found a way to make things a little better for himself, that's exactly the kind of thing I meant. It occurred to me later that I could have been interpreted as advocating some sort of criminal behavior which wasn't where I was going at all.

Anonymous said...

Hi Al,

Actually, you are indeed talking about redistribution of wealth. But so what? Every tax, every subsidy and every offshore tax shelter is a redistribution of wealth. But to the rich, it only counts as redistribution of wealth when money comes out of their own pockets. As Warren Buffet famously said, "If it's class warfare, my class is winning...."

Who gets the most benefit out of infrastructure investments and subsidies? E.g., roads, bridges, airports, etc.? Who gets the most benefit from protection from firemen and policemen? This is why payment for these things ought to be thought of a user fee -- those who get the most benefit pay proportionally more in the taxes that support this infrastructure.

Funny you should use the 'horse puckey' metaphor (I assume you meant that rather than 'horse hockey') for trickle-down economics. I've seen trickle-down described this way: The rich feed the horse with their valuable oats while the poor pick get to pick undigested oats out of the horse shit. Trickle-down says that if you give more money to the rich, they will feed the horse more oats. But that just gives the poor a few more oats to find in the manure.

Cheers,

JP

P.S. Nice to see some activity in here. The quality of discourse is still right up there with the best of the blogosphere.

Fasteddiez said...

Ah, JP:

I was searching for an apt metaphor for the Amerikan everyman's plight, since real wages have declined for this lot (I am a member), for lo these many past years.

Some prisoners of war in the big one (Whiskey Whiskey II), notably: Red Army Types caught by the Germans; Germans caught by the Red Army: and coalition types caught by the Japanese; have passed on oral histories that have included the descriptions of extreme measures taken by them, in order to survive. They sifted their own shit to recycle kernels of corn and other undigestibelania, to get their calorie count up.

Yeah, Trickle down; what's the Sumbithce's name that invented that? I know that washed up QB from Buffalo and the Raygun meister were adherents.

JP, you gave life a new meaning...going forward, I mean.

Aviator47 said...

JP

I have heard the horse analogy as the "Horse and Sparrow". The more oats the horse eats, the more oats the sparrow finds in the dung. Thus, gluttony is transformed into virtue!

Al