Tuesday, November 23, 2010

Don't Blame U.S. Consumers for Overspending

A senior CNN writer cooked up quite "a stew of errors, misunderstandings, and non sequiturs" (to quote Don Boudreaux referring to another recent "trade stew") about trade imbalances in an article titled "The Trouble With 'Global Imbalances'."  Don responded here to this example of the "hysteria stirred up by the incessant barrage of uninformed reporting about trade and trade deficits."

One theme of the CNN article of "global imbalances" is that Americans "overspend" and "overconsume," and this consumer profligacy allegedly contributes to the "global imbalances."  Here are some excerpts: 

"The real problem is overspending by U.S. consumers, and not enough spending by consumers in some of those other markets.

"The bottom line is we overconsume," said Diane Swonk, chief economist at Mesirow Financial. "What [rebalancing] means is fundamentally changing what we're doing. It's going to be painful."

How to reduce that overconsumption by Americans, and how to spur spending by consumers in emerging economies such as China and India is not easy, according to economists."

MP: The chart above of the U.S. personal savings rate shows that Americans have been saving between 5-6 percent of disposable personal income in every month for the last two years, and that's the highest level of savings since the mid-1990s.  With Americans now saving at the highest rates in 15 years, can there really be a problem with "overspending by U.S. consumers?"  If there is a problem in the U.S. of "overspending," it's not the millions of consumers who are to blame, it's probably gotta be that other group - the one that has 535 members. 

11 Comments:

At 11/24/2010 12:22 AM, Blogger P.K. said...

I could be wrong but there seems to be more to the whole picture here. You are looking at the savings rate today vs. 1995. What was the level of home equity then vs. now, expectation of increased income (over the next few years) then vs. now, level of debt per household then vs. now?

I don't know what the #'s are, but shouldn't they be part of the equation?

 
At 11/24/2010 3:52 AM, Blogger PeakTrader said...

Government has been competent shifting blame from itself to Wall Street and Main Street.

Americans overconsume less than many believe. When a U.S. multinational basically offshores a factory, that production isn't counted in GDP (if the factory was producing in the U.S. instead of a poor country, it would add rather than subtract from GDP). However, U.S. consumption from that factory shows up as imports or overconsumption.

Also, Americans tend to live month-to-month. When prices and interest rates fall (for goods & services, mortgages, etc.), they can consume more.

 
At 11/24/2010 4:03 AM, Blogger juandos said...

Let's blame Bernanke instead...

The Beginning Of The Ponzi End: As Of Today, The Biggest Holder Of US Debt Is Ben Bernanke

Well, folks, it's official - mark November 22, 2010 in your calendars - today is the day the Ponzi starts in earnest. With today's $8.3 billion POMO monetization, the Fed's official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion...

 
At 11/24/2010 4:37 AM, Blogger PeakTrader said...

Juandos, Bernanke is doing a great job, except for the recession in 2007 and the deeper recession in 2008.

 
At 11/24/2010 10:50 AM, Blogger Ron H. said...

"Juandos, Bernanke is doing a great job, except for the recession in 2007 and the deeper recession in 2008."

Agreed. Bernanke is doing a great job except for his work at the Federal Reserve.

 
At 11/24/2010 10:57 AM, Blogger VangelV said...

The problem is still too much consumer debt given where Americans are with respect to the demographics curve. We now see even retired people that have mortgages and many upper middle class families without the funds necessary to send their kids to college. This has been a problem created by the rational response of economically illiterate individuals to the false signals created by the Federal Reserve. Such responses can never be good for individuals or for society.

 
At 11/24/2010 7:54 PM, Blogger PeakTrader said...

VangelV, how do you know it's too much debt rather than too little income or too much unemployment?

Do you also believe Americans have too many assets and goods?

Taxes may be too high, wages may be too low, and there may be too few jobs.

Or, perhaps, most Americans will collect too little Social Security and receive too little health care, given the taxes they and their employers paid.

 
At 11/24/2010 9:19 PM, Blogger VangelV said...

VangelV, how do you know it's too much debt rather than too little income or too much unemployment?

When you borrow more than you can pay back than you have too much debt. I do not claim that you can't be saved by a depreciation that causes the purchasing power of what you own to fall substantially but that is not a path to prosperity.

Do you also believe Americans have too many assets and goods?

I have no clue. But I suspect that they do not have enough productive capital.

Taxes may be too high, wages may be too low, and there may be too few jobs.

That is what happens when you vote in people that make government bigger and bigger and get in the way of individuals trying to earn a decent living.

Or, perhaps, most Americans will collect too little Social Security and receive too little health care, given the taxes they and their employers paid.

What they paid has already been stolen by Congress and spent. So no, I do not suspect that they will get what they expect.

 
At 11/25/2010 8:54 PM, Blogger Darren said...

Your graph conveniently ends around 1990 and that's your proof that American consumers are not overspending? That just means that we've been oversuming for the past 15 years. Personal savings is at half of what it was during the post-war boom years and a fraction of what countries like China and Japan with huge trade surpluses save.

This isn't even a matter of ideology, it's economic fact. There's an imbalance between the rate of consumption between parts of the world and that's what's causing a bulk of our trade deficits. Whether or not it's a bad thing is a whole different matter. And then there's that stupid notion that a trade deficit = economic non-starter. That's not true, trade deficits can be healthy if the opportunity cost to create those imports in the US is higher than what it is in say China.

 
At 11/26/2010 6:14 PM, Blogger juandos said...

From the WSJ: There's No Escaping Hauser's Law

'Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie'...


Budget Deficit % of GDP 2010 Country Ranks, By Rank

The US comes in at #14 (compare it to China whichs comes in a #111) and considering the size of our GDP that's pretty big dificit in terms of dollars...

It could be (probably will be?) worse though...

 
At 11/26/2010 7:02 PM, Blogger Ron H. said...

Gee, juandos, do you think the Marshall Islands might be in trouble? No wonder they cry "Global Warming" and ask for bailouts.

However, I think I see what their main problem is. This from Wikipedia:

"Direct U.S. aid accounted for 60% of the Marshalls' $90 million budget."

They don't stand a chance. I believe foreign aid is also a big percentage of the GDP of Haiti.

 

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