Reviving Domestic Demand is Key to U.S. Prosperity
Posted by Michael A. Kamperman on November 17, 2009
The mantra that is being repeated over and over again amongst the political intelligentsia is the U.S. economy consumes too much, imports too much, doesn’t produce enough, and exports too little. The Whitehouse shares this view. President Obama would like to see Americans consume less, save more, and export more. He is in the middle of a trip to Asia telling China, Japan, and others that they can no longer rely on the U.S. consumer and that trade needs to needs to be rebalanced. The reception he has received can best be described as a cold shoulder. The President and his collection of academic advisers seem oblivious to the real world reality that these nations are not going to shutter their own factories and let go their own workers go just to buy more goods made by U.S. workers. Exports will not revive our economy because the overseas consumer markets are not large enough to absorb all of the products they can make, no less the products we can make.
The U.S. is currently only using about 70% of its industrial capacity because of a lack of demand, both internal and external. Normally a country needs to use over 80% of its industrial capacity before it begins to invest in more production capacity. The U.S. doesn’t have a production problem. We have the capacity to produce a lot more than we are currently producing. What the U.S. has is a demand problem. We do not have enough demand from consumers in our country, or in other countries, to buy all of the goods and services we can produce. For example, while we can produce over 16 million cars a year and we are currently selling a little over 10 million cars a year. We used to sell over 16 million cars a year when our consumers could easily access affordable credit, even if they didn’t have a prime credit rating. What we need to weigh as a nation is the cost of losses from subprime lending versus the benefits of employing millions of people to make more trains, planes, and automobiles.
President Obama’s economic philosophy of restrained consumption, exports, savings, and responsible lending is boxing him into an untenable position. He cannot create the 10 million jobs the economy has lost unless U.S. consumers resume spending. The Asian nations just rudely told him don’t look to us to bail you out of your problems. The only way consumers can spend more is to borrow more. The President will have to choose between a country that continues to borrow and spend or a country that continues to have double digit employment and huge fiscal deficits for as far as the eye can see. The jobs situation is so bleak that Teach for America has created a waiting list for qualified applicants because they are not sure they will have as many teaching positions available as they have in the past. The coalition the President put together to win included enthusiastic young voters. He will not have these voters with him in 2012 unless he finds them jobs. And he will not find them jobs unless he fixes the broken credit markets allowing small businesses and consumers to borrow and spend again.
Allen Taylor said,
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
Badtux said,
Unlike you, I do not believe it is possible for us to consume our way out of this mess. The fundamental problem is that we have become so efficient at production that a) we can produce more than is reasonable to consume if we operate our industrial infrastructure at the full capacity allowed by available manpower, and thus b) full employment at productive occupations is physically impossible. This was papered over for most of the Clinton era and early Bush II era by employing the surplus people in either creating useless web sites or in selling overpriced real estate to one another, but there is a limit to that, and we reached that limit.
So yes, consumption is down, but not down enough to explain why we have so many unemployed people (roughly 20% unemployed or underemployed if you add up all the numbers). That’s a direct result of our efficiency at making goods, where we have become so efficient we can no longer employ everybody while producing everything that everybody would ever want to consume. But if we can’t consume our way out of the mess, what next? After all, people do not willingly starve to death, so we cannot simply turn all the newly employed out onto the streets to die of starvation.
What we need is some socialism. Socialism adds inefficiency to an economy, and given that our problem is too much efficiency (able to produce too many goods with too few people to produce full employment), that is a good thing. We had ad-hoc socialism-by-proxy over the past fifteen years as the government and the Fed pumped up bubbles in order to employ these people, we need to formalize it into a real safety net rather than keep pretending that we’re not doing socialism. As I’ve pointed out, the current decreases in consumption and increases in savings rates are directly due to the woefully inadequate unemployment insurance programs in this country, people fear losing their healthcare and their homes if they become unemployed and thus “self-insure” via savings to try to offset that instability. A real safety net that guaranteed that people would not lose their homes and cars and health care upon unemployment would stop that. That brings consumption back up to norms, which helps. Beyond that, we need socialized medicine to create job growth in the health sector, we need works programs to create infrastructure, we need higher taxes upon those who are currently stashing savings under mattresses (or into Treasuries at 0%, same difference) in order to get that money back into circulation doing something productive in the economy, there are just so, so many things we could be doing, if not for “conventional wisdom”.
As for that “conventional wisdom”… bah, humbug. Take the conventional wisdom that we need to “save more”, exploding savings rates and the near-0% effective interest rates say the contrary. People are stashing money under their mattresses (or into Treasuries at near-0% rates, same deal) rather than spending, nobody is actually lending money so saved money does not increase economic activity due to bank loans, and money that is stashed under mattresses rather than put back into circulation is money that might as well not exist insofar as its contribution to economic activity is concerned. Clearly the “conventional political wisdom” is ignorant and idiotic and is about as reality-based as the tooth fairy and Santa Claus. Yet we have idiots electing idiots, so that’s what we get… idiocy. Siiiiiiigh!
Michael A. Kamperman said,
I agree we can produce more than we can consume. My idea is to lower the eligibility to age for full Social Security and Medicare to age 60 and to give everyone on Social Security a 20% raise. This will instill confidence in the older population lowering needed savings rates and raising consumption. It will also open up jobs for younger workers. Importantly, it will reduce state and federal expenditures on both unemployment insurance and on Medicaid. Additionally, it will lower health insurance premiums for employers.
This will cost $400 billion per year in today’s dollars. Some of the cost will be paid for from the above mentioned savings. But I would fully pay for it by printing enough money to purchase most of the outstanding U.S. Treasury bonds eliminating most of the $450 billion in interest payments currently built into the budget. The advantage to this is these programs are already in place and it could be implemented in weeks.
Tom Head said,
Didn’t a credit bubble cause the current mess. The author would have us believe that the solution to this mess is to inflate the credit bubble further. Insanity!