Monday, May 3, 2010

Those Overspending Americans

Data released by the Commerce Department today showed that, once again, American consumers are spending more and saving less. As reported in The Financial Times, a JPMorgan analyst interpreted the numbers thus in a note to his clients:
Speculation that consumers are reforming, repenting and rebalancing now looks premature or overstated.
So, we are back to the narrative of irresponsible consumers bringing the U.S. economy to its knees by spending beyond their means. The fault, dear Brutus, is not in stars.

In several places on this blog, I have explained the material basis of this seemingly moral weakness. This time, I will let the vice president of the U.S. explain, as quoted in the same paper (April 21, p. 3)
Mr Biden, who is in charge of Barack Obama’s “middle class task force” said the last US economic cycle, which began in 2001 and ended in 2007, was the first in history that left median incomes where they were at the start.

Yet, over the same period, the growth in productivity, which had traditionally fed through into wage growth, hit record levels ... Economists say that the gap between productivity and wages has turned into a chasm since the last recession began in 2007. Real wage growth between the lat quarter of 2008 and the last quarter of 2009 was negative while productivity rose by 5 per cent.

That is the story in a nutshell. People are spending and not saving because they cannot save, because their income is not sufficient to cover their needs. End of story.

Or not. The truth is that the Morgan analyst is technically right by virtue of the definition of over-spending. If you earn $100 and spend $105, you are spending beyond your means, no matter what the explanation.

That narrow technical point is precisely what is being driven home. No one can spend beyond their means. One must cut down the spending or face bankruptcy and pauperism. Sure, cutting down the spending means less vacation, less meat, less discretionary income and therefore, an overall poorer work force, but so what? You have heard of regulatory arbitrage where the companies shop for the most forgiving regulator and tax arbitrage, when they shop for the most favorable tax treatment. Why not put in place a nice little labor arbitrage?

If you are good with Google, you can find a Bush administration official on the record saying that Americans must “tread water” until the Chinese work force materially catches up with them.