The economist, historian, and diplomat John Kenneth Galbraith coined the phrase “private affluence and public squalor” in his 1958 book The Affluent Society to capture a paradox of contemporary American life. Throughout most periods of civilization, the greatest share of investment and adornment went into structures that served an essentially public purpose, from temples to palaces, government offices to banks, barracks to transport terminals. Most people, however, lived in considerably humbler and even squalid surroundings.
For several decades after World War II, private consumption measured as a share of gross domestic product had remained within a range of 61 to 63 percent. But in 1983 consumption began a steady rise, peaking at 70 percent in 2007. Initially, this increase was fueled by the erosion of private savings, which declined from nine percent of GDP in 1982 to nearly zero in 2005. The rate change is explained by the fact that homeowners were cashing in on the assumed increase in the value of their homes; by the end of the period, Americans were taking out some $500 billion annually in home equity loans.
But the collapse of private savings was not the only distinguishing feature of this extraordinary period. Public investment, particularly in essential infrastructure, also declined. A report by the American Society of Civil Engineers puts the deficit in infrastructure investment at $2.2 trillion this year, up from $1.7 trillion in 2007. The report assigned a grade to each of 15 essential public services, including transit, bridges, and schools. The highest was a C plus, for solid waste disposal. Eleven of the 15 services rated a D, with drinking water, roads, inland waterways, and levees the worst, each graded D minus.
One of the key questions hanging ominously over the global economy is whether Americans will permanently lower their consumption level toward the norm of other developed economies, which on average consume 60 to 63 percent of their GDP (basically, America’s pre-1983 range).
In cash terms, U.S. consumption in 2007 amounted to $9.7 trillion—70 percent of the $13.8 trillion GDP. At a rate only two percentage points lower, Americans would have spent $300 billion less that year. At a “normal” rate of 63 percent, they would have spent $1 trillion less. Enter “the paradox of thrift,” a term coined by the economist John Maynard Keynes to describe the problem that follows when many individuals reduce their consumption and increase their savings. This may be good for their personal finances, but it can be grim for the economy as a whole when millions of others do the same thing, as companies reduce output and lay off workers, which reduces demand yet further in a vicious circle. At this point, Keynes maintained, the government should step in as the spender of last resort. The Obama administration, with its $787 billion stimulus package, is following Keynes’s advice.
This year’s federal budget is expected to amount to $4 trillion, a post–World War II record 28 percent of America’s GDP. In 2000, the government spent just 18 percent. State and local expenditures will bring total government spending up to 45 percent of GDP this year, which begins to approach the levels of the European welfare state, but then the total is projected to shrink back to 40 percent of GDP. That is still several points higher than the post-1945 average.
More cars, more credit, more debt—this was part of the formula that became the target of Vance Packard’s 1960 bestseller The Waste Makers. Corporate America was engaged, Packard maintained, in “the systematic attempt of business to make us wasteful, debt-ridden, permanently discontented individuals.”
The U.S. economic system of the past 50 years has been designed to destroy the culture of thrift by promoting the culture of debt-enabled consumption.
…the shift from the old industrial system based on Big Auto to the new information economy based on Big Broadband encourages the revival of a thrift culture. It empowers individual consumers by giving them online access to price and product comparisons and the freedom to pay bills and shop from home rather than drive to bank branches and shopping malls. This makes price competition more intense, impelling retailers to find the cheapest possible wares, whether in China or Mexico. Technology and globalization enable the consumer to be thrifty, and the frugal consumer, price conscious and well informed, is becoming the new norm.
Source: The Wilson Quarterly (Summer2009)
Subjects: Articles & Links, Economics | Economy, Politics & Public Policy
