Must we be a Ponzi nation?

Carol Iannone writes:

On Tuesday morning I heard economist Robert Samuelson on William Bennett’s radio show. He was speaking in support of a government stimulus package and he insisted that it had to be spent by the government and not given to individual taxpayers to spend as they see fit. He said 70 percent of our economy is consumer spending, and, what with the financial crisis, consumer spending has gone way down. People are actually saving, they are spending less, charging less, incurring less debt, because they are feeling somewhat insecure about the economy. In order to counter that, he says, the government needs to pour money into the economy so that people will feel secure and start spending and buying again. Bennett wondered why the money shouldn’t be given to individuals to spend as they see fit. Samuelson replied that that would not be good, because, given the feeling today, many would save it rather than spend it.

So all these things that we’ve heard all these years, about how Americans should save more, charge less, not have too much debt, curb extravagance, practice thrift, all of that is evidently bad for the economy. The economy works only with huge amounts of spending, which in turns often requires huge amounts of borrowing and debt. And this is a conservative leaning economist saying this. This does not seem healthy. In fact it seems a picture of hell. When an individual hits financial straits, he lives more modestly, cuts back some, pays off his debts, saves where he can. But our country cannot do that. When a recession hits the country, circumstances would seem to demand some of the older fiscal virtues and some scaling back and some Aristotelian moderation. One would think that these would be seen as good things. But instead the experts demand that the government pour money into the economy in order to make people feel confident enough to spend more. It’s like one of the circles of Dante’s Hell where the greedy sinners are doomed to grit and groan as they try to push around big bags of weights for no particular reason.

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Miss Iannone’s culturally alarmist angle on Samuelson, as well as the title I gave this entry, may not be entirely fair to Samuelson. In an article published the day before his appearance on William Bennett’s program, Samuelson makes it clear that spurring economic activity by debt is a necessary evil, a temporary measure to get economic activity going again, not a sustainable basis for the U.S. economy:

[T]he stimulus remains a stopgap. The present crisis represents a fundamental break in the recent pattern of American economic growth. For the past quarter-century, the economy has advanced on an ever-rising tide of personal borrowing that supported expanding purchases of consumer goods—contributing to U.S. trade deficits—and a housing boom. But lending became reckless, and many households overborrowed. In its simplest terms, the “stimulus” substitutes the federal government’s superior credit for damaged private credit.

But this cannot continue indefinitely. Rapid rises in the federal debt—much faster than in recent years—would threaten a further loss of confidence that might prolong today’s financial crisis or, someday, trigger a new one. A growing federal debt burden would also compound the problem of paying the staggering retirements costs of aging baby boomers. So: neither rising household nor government debt provides a plausible foundation for future economic growth.

He goes on to say that, contrary to the impression he gave on the Bennett program, he does not see the future of the U.S. economy in ever expanded consumer spending:

What the United States needs is export-led growth. The rub is that many other countries want that too. Just as large U.S. trade deficits signified American overspending, large trade surpluses in China, Japan and other Asian countries signified their oversaving. In China, consumption spending is 35 percent of GDP, notes economist Nicholas Lardy of the Peterson Institute. That’s half the American level.

The future of the U.S. economy depends on finding new sources of productive demand. That is partly a domestic exercise, but it also requires that other societies reduce their oversaving and reliance on exports. This is a tall order. Our fate is not entirely in our hands—or Barack Obama’s.

Further, it’s not clear that the government spending Samuelson regretfully supports is aimed at increasing consumer spending per se. He writes:

The stimulus qualifies as a necessary evil, a parachute against an economic free fall. Conventionally, the economy is sliced into four sectors: consumer spending; business and housing investment; net exports; and government spending. The first three sectors are weakening. Consumer confidence is at a record low, according to a Conference Board survey conducted since 1967. Only 6 percent of Americans think jobs are plentiful; 41 percent think there will be fewer jobs in six months. Housing construction has collapsed; businesses are fearful of making new investment. Exports suffer from faltering foreign economies.

If government doesn’t prod the economy, what would?

Consumer spending is one of four sectors of the economy, government spending is another. Vast New Deal-type government outlays on domestic works projects such as Obama proposes is not consumer spending, though one of its goals is to prop up general economic activity, including consumer spending. I gather that what he meant in his answer to Bennett is that at least one of the sectors of economic activity needs to increase, and, since consumer spending is not about to increase in the immediate future, government spending must increase.

However, it seems to me that while Miss Iannone may have been incorrect on the specific point of whether Samuelson is seeking to increase consumer spending, her larger concern remains valid and thought-provoking, especially from the point of view of cultural conservatives. In a time of economic downturn, it is natural for people to retrench, and, in the process, return to virtues of thrift and investment so that they’re not living in a bubble of credit. Samuelson seems to be precluding that return to economic virtue, or, at best, he is offering no path to get there. For example, he suggests that our industrial production and our exports are too low and need to be increased; but how would vast government spending on works projects increase them? The point is that the U.S. is addicted to a model of lavish consumer consumption funded by private and public debt that is both morally bad and practically unsustainable.

Posted by Lawrence Auster at January 07, 2009 09:55 AM | Send