THE CONSUMPTION ECONOMY

The conventional wisdom says that consumption drives our economy. We are heading into the Holiday season and several department stores and box stores are now opening up on Thanksgiving Day. Is that extra shopping day so important that we are willing to sacrifice the sanctity of one of only few remaining true American Holidays? Then it will be a race to Christmas and see if we can break the spending records of previous years. If Holiday spending is not up this year by at least a couple of percentage points then it will be interpreted as a bad sign for the economy. But is it?

Do we really benefit from importing more Chinese consumption goods that will soon be broken, tossed out or put out on E-Bay or in a garage sale?

We have become a throw away consumption society. We produce more garbage (literally and figuratively) per capita than any nation in the world and – in the process – we consume a lot more energy per capita than the rest of the developed world with the exception of Canada (where the climate and the distance between population centers are drivers of high energy consumption).

We are so focused on consumption that we put the cart before the horse. We are hell-bent on reducing unemployment not so much because we are concerned about the (lack of) quality of life of the unemployed but because we want to swell the ranks of active consumers.

Our economic policy is all about stimulating consumption as the primary means of stimulating economic growth. But how healthy is economic growth if it is primarily consumption driven? We are spending beyond our means at just about every level. Our National Debt has exploded to $17 Trillion and household debt adds over $11 Trillion to the debt burden we have to carry. It needs to be noted though that while the National Debt has continued to rise steeply, household debt has come down from its peak of $12.7 Trillion in the third quarter of 2008. There is a further significant difference between the Federal Debt and household debt when we look at what the debt has bought us. Almost 78 % of household debt is incurred in the form of home mortgages and car loans. In other words it is spent on investments in our basic needs. Another 8.6 % is incurred as student loans, which represent an investment in our future. The Federal Government, on the other hand, has just incurred it $17 Trillion in debt, without making any measurable investment in our infrastructure (roads, water, power, (air)ports, bridges, broadband) or our future (education, healthcare, research & development, environmental protection).  It has just consumed without investing.

The bottom line is that together we have spent $28 Trillion more than we had in the bank. So, do we really need more consumption? I will argue that we should be focused on getting unemployed back into the production economy rather than the consumption economy.

I cringe every year when I see what people –also the ones around me – spend on Christmas presents that nobody needs, that are getting returned or traded or just put away until the next garage sale. We are just adding to our credit card debt of $ 679 billion and will be thoughtlessly paying 18% interest on that debt.

The whole debate about government spending is misdirected. It should not be so much about the level of spending as well it should be about what we are spending it on. If, as a nation, we don’t invest in keeping our people and infrastructure competitive with the best in the world we will soon have no more money or credit to feed our consumptive addiction. We will have to invest in education (and continuing education) of all of our people; and in technology; and in research and development. We will have to do a better job of protecting our environment and we have to make up for decades of neglect of our roads, tunnels, bridges, water supply, railroad system, power grid, ports and airports. It would be nice if we started rebuilding our urban and suburban systems to stimulate and facilitate walking and biking as a safe and healthier alternative to commuting by car.

If the government would just give priority to stimulating, supporting and subsidizing the production economy rather than the consumption economy, and to promoting healthy behavior it would help create value and wealth and that, in turn, would create all the consumptive power the economy needs. We may then be spending on bikes, biking- and hiking-trails rather than automobiles and roads. We may then be spending on gyms and vacations rather than on video games and professional sports paraphernalia. But we will have more money to spend than we ever had before, without going into debt. We need to get to the point that consumption is no longer a goal in itself but the natural outcome of productive behavior in a growth economy. In other words we need to put the horse back before the cart.

I know it is heresy, but if this means that, to make up for lost time, we will have to increase taxes for a while, so be it. After all, people have no compunction about spending fortunes in the lotteries and in casinos, for which – with very few exceptions - they get nothing in return. However, we should not accept a higher tax burden without a complete tax reform that should include simplification, elimination of tax expenditures and a rethinking how tax policy can support productive economic behavior and healthy behavior of its tax payers. Maybe it is time to replace to some degree taxation of income by taxation of consumption.