One of the few statistics agreed upon by writers on both the political left and right is that about two-thirds of the U.S. economy is based on consumer spending. In Nevada we can add without too much debate that consumer discretionary spending yields about two-thirds of our total state revenues. The Nevada Department of Administration illustrates the source of projected state revenues as follows:
And, here we have the core of our 67% problem. When consumer spending drives 67% of our economy and 67% of our state’s revenue any force which restricts discretionary consumer spending is a major problem. This is usually the point at which the radical right pops up with “Reduce Taxes And People Will Have More Money In Their Pockets To Spend.” The notion has been demonstrated to be simplistic, counter-productive, and wrong. Again, Americans now have the lowest tax burden since the Eisenhower Administration, and Nevada touts itself as one of the lowest tax rate states in the nation — and consumers still couldn’t drive the U.S. economy or even the state of Nevada completely out of the 2008 Recession.
There are several ways of approaching an explanation for the current economic doldrums.
The Supply Side Hoax: This economic construction, once called ‘voodoo economics’ by former President George H.W.Bush, is the political statement of corporate Christmas Lists: De-regulation, lower taxation, and privatization. We had a decade of this policy and the yields weren’t indicative of any level of economic success. We had, in fact, a Lost Decade.
The charts from The Economist certainly do not illustrate the economic efficacy of “Deregulate, Un-Tax, and Privatize.” Indeed, the only decade that looks worse on paper than the 00’s is the 1930s. It’s difficult to understand how some voices might continue to argue that we didn’t do enough deregulation, privatization, and lowering taxes during the previous decade — when the recipe obviously wasn’t working.
Consumer Deleveraging: This argument has gained some recent popularity among economic pundits. The essence of this line of thought is that consumers bought more than they could afford during the boom years and now they are restricting their purchases and increasing their personal savings to salvage their individual economic existence. A related argument contends that individuals were borrowing more than they could actually afford during the period in order to maintain middle-income life styles, and they are now “deleveraging.”
This theoretical framework comes perilously close to blaming the victims. IF you had not spent profligately on everything from home mortgages to household items, THEN you would not be in economic trouble now. Or, IF you had been willing to reduce your standard of living, THEN you would not be in the midst of restricting your consumer spending in the present.
Some economists and politicians labeled consumer spending as “affluenza,” leading Senator Hatch (R-UT) to opine that people were running up bills and expecting society to pay for them. [BR] Probably not. People were running up bills, but that’s the entire point of advertising, and besides — people were led to believe that all things were affordable because banks and other lending institutions were devising all manner of new and engaging financial products to make “things affordable.”
One of the results of this argument is the notion that Congress is focusing on the wrong debt, i.e. the federal debt, and not paying enough attention to consumer indebtedness which might be alleviated by creating favorable tax breaks for banks that negotiate with home mortgage holders, or limiting the amount credit card companies can extract from consumers under usury laws. [HuffPo]
The deleveraging argument has some strong indices and statistics to support it, but the underlying assumptions, like “people spent like stereotypical sailors on shore leave,” needs more scrutiny.
Inoculating ourselves from Affluenza? A 2005 analysis of consumer spending found that a 1973 family of four was spending, on average, $750 more on clothing annually than its 2005 counterpart. The 2005 family was spending 22% more on food than its 2005 counterpart. Cars? “Today’s families pay more for their new car than their parents did, but they hold onto it longer too. In fact, when we analyzed unpublished data from the Bureau of Labor Statistics, we found that the average amount a family of four spends per car (including insurance, maintenance and so forth) is 20 percent less than it was a generation ago.” [BR]
One of the problems with the “affluenza” argument is that the definition of frugality is highly personal, and all too often highly judgmental. OMG! wails the Heritage Foundation, “97% of the poor have color television sets.” Question: Name a major manufacturer of black and white television sets? “98% own a refrigerator.” Question: Name a major city with ice distribution in 2010? Almost 73% own a car or truck — yes, and how do they get to work otherwise?
Disparaging a poor family for owning a television set, a refrigerator, or a microwave oven, is merely to plug the long discredited “welfare queen” myth, and to imply that only street people are truly poor — and even they aren’t really poor because with more “effort” they could find “jobs if they wanted to…” Adopting the Affluenza argument requires that we avoid the actual data on consumer spending patterns, and that we also avoid talking about the housing market and medical expenses which account for far more personal bankruptcies than Marching through the Mall.
Other Solutions: Consumer spending did increase in the period between 1970 and 2005, but so did the number of two income households. Unless we are going to advocate for the return of child labor (and there are those who do) then we need to address wage stagnation because in order to see family income growth such as we observed between 1970 and 2005 we either have to put more children to work or increase the number of parents in the household. Neither of these options appears even superficially rational. What might make sense?
So, here for the umpteenth time are some factors which should be considered in devising a plan for prosperity:
(A) Establish a long-term manufacturing policy which promotes U.S. manufacturing of products for the 21st century. This means encouraging research and development, promoting technological advancements, and streamlining our patent process. This does not mean continuing to subsidize 19th/20th century industries and their special interests.
(B) Revisit our trade policies. If free trade agreements do little more than facilitate the flight of capital then the FTA’s aren’t doing us all that much good. If an FTA can be considered a “success” because it increased employment in Mexico, then it’s difficult to understand why this agreement hasn’t been revised to better promote American interests.
(C) Invest in American infrastructure. We have some electrical grid issues, and some improvements needed to make our air transportation system more reliable. We have urban traffic congestion issues which impinge on our productivity. We need to upgrade our water treatment facilities. The longer we sit, do nothing, and bemoan how “expensive” these projects might be, the more expensive they become. Sometimes it appears we forget that the second element of an economy (production, distribution, and exchange) requires an efficient infrastructure to facilitate growth.
(D) Encourage long-term industrial and economic progress rather than short-term profitability. If memory serves, when Microsoft went public the share price was about $21. The last trade is now listed at $27. [YahFin] If instant profitability is the standard then Microsoft isn’t much of a big deal, but that would be to ignore the number of splits and the expansion of the company. As long as our policies encourage speculation at the expense of investment, then we’ll continue to witness market volatility and struggling industrial sector economic improvement.
Solving Problems Is More Difficult Than Offering Solutions
No problem, economic or otherwise, gets solved until those addressing it do so with a realistic appraisal of its components. We probably aren’t going to see any improvement in Nevada’s revenue issues, 67% dependent on consumer discretionary spending until we look carefully and rationally at those factors which are restricting family incomes. And, that isn’t going to happen as long as we are saddled with ideological variations on the same old Supply Side Hoax cacophonous symphony.