You know what you almost never hear about anymore? How the American consumer will lead the way to an economic recovery. Just a year ago learned pundits were holding out hope for another consumer-led recovery. The New York Times was still clinging to the consumerist wreckage as recently as May. Just last month, the remarkably durable idea that U.S. consumers will restore prosperity was still generating such brilliantly tautological news as “Consumers give boost to holiday sales.”
But the mirage of the consumer-led recovery has been fading for years. Retail sales rose 0.6 percent in the month of December [pdf], an increase that fell well below expectations of 0.8-0.9 percent, and a letdown after a Festivus season filled with tales of confident, resurgent shoppers.
Consumer stinginess didn’t just disappoint retailers who have now endured anemic or declining rates of Christmas-season personal consumption expenditures for four straight years. They are thwarting Ben Bernanke’s Plan A (which is the same as his Plans B through Z) for reviving the American economy. The Federal Reserve Bank chairman’s transparent efforts to ramp up demand—evident in the Fed’s multi-trillion-dollar monetary loosening and even in its comic books—depends not just on creating inflation but on getting people to respond to inflation. Without more consumers flushing ever larger numbers of devalued dollars down ever greater numbers of drains, the Fed’s bubble-centered growth strategy (or for that matter the Treasury Department’s own trillions in fiscal stimulus) is a bust.
That this is the same pneumatic strategy employed by Bernanke’s predecessor—and by secretaries of the Treasury long before Tim Geithner—does not mean it makes any sense. As Mark Skousen argued last year, economic growth proceeds from value, savings, and investment. Follow a strategy of spurring and riding the American consumer and you’ll just end up continuing a succession of bubbles: from energy to real estate to financial services to dotcoms to real estate again and now (possibly) back to financial services.
It’s telling that while the Fed and the Obama Administration use every known policy tool to discourage savings, you’re hearing more talk of the Solow–Swan growth model (which among other things underscores the importance of savings rates in economic growth) and even occasional kind words for savers from Geithner. This is the tribute vice pays to virtue. In the Keynesian universe of policy-making, boosting “aggregate demand” is the only goal, and economic activity, no matter how frenzied or nonsensical, is the only tool.
But consumers are not delivering the goods this time—mostly because they can’t. A dismaying Deutsche Bank report on household balance sheets shows that the ratio of household assets to liabilities—which averaged about 2.3 to 1 from 1980 to 2008—is now down to a little more than 1.5 to 1, and still falling. The American way of dealing with a problem like this is to buy on credit, but this has become more difficult to do, as credit delinquencies, after a 2010 remission, have spiked again.
It’s hard to overstate the direness of American household finances. While the 9.4 percent unemployment rate gets all the attention, the real story is Americans’ massive loss of wealth. Federal Reserve data show U.S. household net worth at $53.5 trillion—more than $5 trillion below where it was in 2007, although we’re told the recession ended more than 18 months ago. As house prices continue to slide (and are expected to keep falling throughout this year), Americans are seeing a steady depletion of what is for most people their highest-ticket asset. They’re also seeing a steady decline in the equity portion of their homes, which has been in almost constant decline since 1983 (when homeowners had about 70 percent equity) and last month fell to an abysmal 42 percent. (Homeowners’ equity portion was as high as 80 percent in the 1950s.) The result is that the asset/liability ratio Deutsche Bank describes above will continue to get worse.
There isn’t really any appeal from these numbers, but the solons of the economy, and their media stooges, keep trying. Every month sees a new hubbub about “core” CPI or consumer confidence—updates as regular and meaningless as late-Soviet crop reports. When President Obama in 2009 let slip his famous statement “We are out of money,” he might more accurately have phrased it as “We are out of value.” Decades of economic policy focused on everything except the creation of wealth have produced the logical result.
But while policy makers respond by digging the hole deeper, the citizens have begun trying to climb out. The recent surge in credit defaults interrupted a longer-term trend in deleveraging, with credit card debt now in decline for more than two years and millions of Americans giving up on credit cards entirely.
People are also earning and saving more. According to personal income and savings data from the Bureau of Economic Analysis, monthly personal income, which remained flat at $12-$12.1 trillion through most of 2008 and 2009, rose steadily through 2010, with a total income figure of $12.7 trillion in November [pdf]. The percentage of income Americans are saving has also been hiking up by fits and starts. On a quarterly basis, personal savings (disposable personal income less personal outlays) are nearly 6 percent; over the past 12 months they averaged a bit below 5 percent. That’s still well below the rate of 8 percent or more Americans were saving in the early 1980s, but that shouldn’t be surprising given the difference between that era’s double-digit interest rates and effective negative interest rates today.
These are monkey’s-paw improvements, and there are pessimistic explanations for most of them. Much of the decline in credit card usage has come simply from maxed-out spendthrifts going broke. Ditto for the steadying of home equity, auto, and other forms of credit. Even the increases in disposable income and savings result, in some part, from personal bankruptcies and foreclosures, which have freed up dollars that would otherwise have been committed to hopeless piles of debt.
It’s also dangerous to expect large-scale philosophical shifts from short-term events. Brute-force deleveraging may be a long-overdue step, but it hardly proves Americans have experienced a mass conversion to the virtues of thrift and wealth creation.
But it does seem like one of the great dumb ideas is dying out: the belief that a bunch of unproductive slobs in “consumption partnerships” could continue indefinitely disposing of the fruits of capitalism while generating little of value beyond debt consolidations, greater-fool bailouts, and continuing education. It was the innumerates’ version of The Secret, a way of life based on wishing, and it always had detractors. Wrongheaded as the popular griping about foreign imports or outsourcing of jobs may be, it stems from a legitimate suspicion—that an economy biased so heavily toward consumption and away from value creation is unlikely to endure.
Now that the party has ended, America’s citizen-consumers are, by and large, doing the smart thing: opening penny jars, saving more, buying judiciously or not at all. This is what makes the Fed’s quantitative easing and below-inflation interest rates not just stupid but evil. By devaluing the currency, you punish people who are just starting to learn the importance of hanging on to their money. You destroy the wealth of savers. You favor non-productive over productive capital. Worst of all, you make a mockery of people who believe thrift is important and like the idea that the dollar is worth something. Those may seem like quaint old ideas, but they’re shared by the overwhelming majority of Americans and they deserve some respect.