How Real Was the Prosperity?

Posted by: Michael Mandel on January 24

My latest cover story, How Real Was the Prosperity?:

But the underlying problems that ail the markets and the economy cannot be waved away by the Fed’s magic wand. In truth, we’re at the beginning of a long, arduous process of figuring out how much of the post-tech bubble prosperity was real and how much was the result of a credit-induced frenzy.

and

That pattern changed in the 1990s. As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GDP growth for the same period of 2.9%. This difference represents an enormous gap. If consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.

$3 trillion is a lot of money.

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Reader Comments

James Sagner

January 28, 2008 04:06 PM

Accounting 101: consumers, like businesses, can either use debt or equity (their ownership of money) to finance their activities. Economics 101: as interest rates fall, businesses and consumers will borrow more to sustain/improve their living standards. The past several years of consumer credit are real, not a $3 trillion mirage. As an economist and journalist, what you should be addressing is long-term economic strategy. Among the Presidential contenders, only Mike Huckabee has commented on the absurdity of “fixing” the current slowdown/recession by a $150 billion rebate to Americans (about 1% of our GDP). What he suggests is a Roosevelt-era WPA program to rebuild our decaying infrastructure, which, incidentally would keep the money largely invested in the U.S. But no one is talking about long-term economic problems, like business regulations that strangle American companies.

James Sagner, author, Is U.S. Business Overregulated? How Government Destroys Our Ability to Compete in the Global Economy (York House Press, 2008)

Brandon W

January 29, 2008 02:13 PM

James,
Finance 101: You only use debt to finance activities if the return on the activities exceeds the cost of the debt. The last time I checked, iPods, cars, dinner at a fine restaraunt, clothes, and HDTVs were NOT appreciating assets and have a negative return. Even real estate isn't a postive-return environment right now for most people. Money saved and invested in appreciating, income-producing assets is capitalism. Money borrowed at 5% and invested in assets returning 8% is capitalism. Going into debt at 7% to buy things that don't produce income and are depreciating assets is just dumb; it isn't capitalism, it's consumerism.

Joe Cushing

January 29, 2008 11:32 PM

Brandon W.

I always enjoy your comments. They always offer food for thought. I have to say though, I think both you and James are right here. Didn't Michael say that a large part of our negative savings rate was due to business finance?

James Sagner

January 30, 2008 05:28 PM

Brandon: There is no generally accepted methodology to determine the return on consumer goods. So check again.
James (the Accounting & Economics 101 guy)

Brandon W

January 31, 2008 03:42 PM

I would think that "generally accepted" common sense says that consumer goods do not appreciate and do not generate income. If they are doing neither, then they obviously are not generating returns in excess of the cost of the debt. There's really no room for semantics here, if you're going to talk about reality.

Mike Mandel

January 31, 2008 04:26 PM

In theory I could treat the LCD screen in my family room as an asset, which is generating a return (the value to me of the TV watching, or actually the value to my kids). This is exactly the way that housing is handled in the national income accounts (it shows up as an asset to the "household production unit" and then as implicit consumer spending on housing services.

Having said that, there's no doubt those LCD purchases are consumption. The TVs cannot be resold, they do not have external value as liquid assets. So if there is a credit crunch on consumers, the investment in TVs cannot be converted into cash to substitute for the reduced credit.

lee

February 1, 2008 05:47 PM

Enough for a war.

Kartik

February 4, 2008 07:23 PM

"So if there is a credit crunch on consumers, the investment in TVs cannot be converted into cash to substitute for the reduced credit. "

Why? You can sell the TV at a discount, thus making it liquid (albeit with some depreciation loss).

Brandon W

February 5, 2008 10:43 PM

If I buy a $2000 TV, and it'll actually cost me $2500 by the time I pay it off with interest, then even if I get $1200 for it I've thrown away $1300. It's a money pit just like most everything else Americans spend all their money - and then some - on. It's consuming more than you produce. In my opinion, if you consume more than you produce you're not a capitalist. As a whole Americans are consuming more than they produce. We're a nation of moochers and now we're whining to the government for a bailout to rescue us, when the government has spent itself into oblivion as well.

Most of the growth in our economy has been consumption-based instead of based in creation of productive capital. We have reached a point where we have no choice but to stop consuming - and in fact, pull back on our consumption - and let the economy fall into recession. Growth will be stagnant for years to come. If Americans, as a whole, don't re-learn how to save and invest in productive capital then this country is done. Those who produce more than they consume are taking all their marbles and going home... to Asia.

Kurt Brouwer

February 22, 2008 07:04 PM

I don't think it is true that consumers always or predominately used debt to buy IPods, televisions etc. Some do, but I suspect most do not. An additional point on consumer debt is that the cost of debt service has gone down as interest rates have gone down. The same of course applies to our national debt.

The growth in household net worth has been going on steadily for decades. Certainly, the upward trend takes a breather now and then -- it is probably doing so now as real estate and stocks have fallen. Nonetheless, I am confident the upward trend will get back on track soon.

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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