My wife an I went out for a Sunday stroll today in Santa Monica. On Montana Avenue, the chic shopping street, every third store is empty with a for lease sign in the window. A year ago our U.S. personal savings rate was almost zero and by next month it will be over 6%. Besides saving more we are beginning to pay down our credit cards. Earlier this year household debt as a percentage of disposable income was 134% up from 68% in the early 1980’s. My Princeton classmate Vince Farrell notes that this is a huge difference.
Disposable personal income is close enough to $11 trillion that we can use that as a number. If household debt were to retreat to, say, 100% of income, it would be a retrenchment of a good bit over $3 trillion. That would be one big bite out of consumer expenditures. I have no idea where this debt to income will or should go. Things tend to revert to the norm over time, and if we were in the 70% range in the 1980’s, I don’t think returning to 100% is a crazy view. If the savings rate were to return to its 70-year average of 9%, that would chip in almost $1 trillion a year.
Vince is saying that the consumer’s reversion to a cosmology of thrift will take $4 trillion out of annual consumption which represent 72% of our GDP. This would be a very different America and there is not a single politician, including our President who is willing to cop to this fact. Look at the capacity utilization rates in our key industries.
Issues of overcapacity have plagued the capitalist system since the 19th Century. The economist Michael Bernstein gives us some insight to the important work of the Austrian economist Josef Steindl on the causes of our Great Depression.
Reductions in capacity utilization imply not only declines in national income but also increases in unemployment. In the presence of underutilized capacity, firms will be increasingly disinclined to undertake any net investment. A cumulative process is thereby established wherein a decline in the rate of growth, by generating reductions in the rate of capacity utilization, will lead to a further decline in the rate of expansion as net investment is reduced. Individual firms, by believing that decreases in their own investment will alleviate their own burden of excess capacity, merely intensify the problem economy-wide.
It seems to me that the American public has already made a shift to a culture in which spending at the mall will be a lot less important and yet the politicians are acting like their job is to restore the status quo ante–a world the public no longer cares about. Larry Summers talks about getting the big banks lending again, but what business wants to borrow when there is so much excess capacity? There are too many damn malls. Too many car dealerships. What person in their right mind would start a new retail clothing business today?
The Big Lie of the current economic debate is that we just went through a “hundred year flood”–that this was all caused by the Sub Prime mortgage crisis. But the problems of stagnation and capacity utilization have been increasing since 1975 when overall capacity utilization was at 86%. It hasn’t been above 82% since 1995 and today it is below 77%. But the larger problem has been that we have misallocated our capital since the problems of economic stagnation first raised their head in the mid 1970’s. Steindl knew there were solutions, but he doubted we had the political will to solve them.
With the 1976 republication of his Maturity and Stagnation in American Capitalism, Steindl allowed that technical innovation, product development, public spending, and research and development initiatives might provide the means to escape from investment inertia. Even so, he was extremely concerned that most accumulation strategies in mature capitalist nations would focus on military-industrial activity and war itself. Using both public and private investment funds for other purposes, while obviously desirable, would be “exceedingly hard” given “the workings of political institutions.”
Reagan’s solution to stagnation was Military Keynesianism. Instead of investing in alternative energy solutions or more efficient transportation when the Arab Oil Embargo was staring us in the face, he chose to create the largest military expenditure in peace time history with borrowed money. And what do we have to show for it? Our current economic crisis.
Now there really is only one solution. We have to wean ourselves from the mall economy and begin to make things that other countries want to buy. I believe the citizens are way ahead of the politicians in this project. If Vince Farrell is right and we are in the process of moving $4 trillion in a $13 trillion GDP away from consumption, that is a 40% drop in annual consumption expenditure. Of the three buckets of the economy (consumption, investment and exports) we can already see that investment will increase by at least $1 trillion (the increased savings rate). The missing piece is exports.
There are two problems with exports. First, the stuff we make that the rest of the world wants (movies, music, video games, software, drug patents) are all subject to the crushing disdain for our intellectual property on the part of most of the world’s citizens (as well as our own public). We have built a knowledge economy, but China doesn’t give a fig for our IP regime. If the people want cheap Viagra, China will tell Pfizer to pound sand. If the Brazilians want pirate copies of Shrek, Lula could care less. Second, we are lagging behind in making the technology of the future. Why isn’t General Electric the world’s largest exporter of wind turbines? Why isn’t Babcock and Wilcox’s new preassembled nuclear reactor being exported to France and Japan? These kinds of technologies are not easily assembled by cheap labor in third world countries. Germany is the largest exporter of Solar power equipment.
It seems to me that President Obama is going to have to level with the American people pretty soon. We cannot go back to Larry Summers Status Quo Ante. Obama knows we need to make this shift and he talked about it in his campaign. But now the administration seems so concerned on putting a band aid on the banks that they are not really thinking beyond 2010. The auto business will never be the same. The malls will slowly disappear. Unless we figure out how to get paid for our knowledge economy and also start manufacturing new products that the world needs, we are going to be in a world of hurt. The summer of 2009 will be seen as the calm before the real storm.