Marketplace of Ideas Blog

First Trust Advisors’ Brian Wesbury and Robert Stein refer to a column by the New York Times’ David Brooks, which includes:

Americans aren’t borrowing the way they used to, but the accumulated debt is still there. Over the next many years, Americans will have to save more and borrow less. The American economy will have to transition from an economy based on consumption and imports to an economy with a greater balance of business investment and production. A country that has become accustomed to reasonably fast growth and frothy affluence will probably have to adjust to slower growth and less retail fizz.

Wesbury and Stein’s response:

His argument is that economic growth of the past generation was built on a mountain of unsustainable debt and consumption, fueled by the collective bad decisions of America’s households.

Unfortunately, while this description of the economy captures the pessimism and doubt many people have about capitalism and the future, the economic argument is flawed.

First, consumer demand and borrowing do not drive long-term trends in productive capacity. Debt does not generate economic growth. When someone borrows money to buy more than they produce, they must get the money from someone else who spends less than they earn. Debt is a claim on someone’s production or assets; it does not by itself make a business or a worker more or less productive. And every dollar of debt is equaled by a dollar of savings. …

Back in 1960, personal consumption, home building, and net exports combined for 69% of GDP. In 2008, these same three factors again added up to exactly 69% of GDP. Of course, the key difference is that the US had a small trade surplus in 1960 and had a large trade deficit in 2008.

But that’s the source of our opportunity, not our economy’s demise. Brooks makes the rhetorical jump that slower consumption growth must ipso facto mean slower economic growth. But then how do we explain Post-WWII Japan, or Germany, or China, India and Singapore, today? These are all countries where, for long periods of time, production growth substantially outpaced consumption growth. Savings rates were very high, but so was/is economic growth.

In other words, even if Brooks is right about a slow path for consumption ahead — which we doubt — output growth need not falter. Households would become a growing source of capital for US businesses and foreign investments, elevating the incomes of US savers and creating lower US trade deficits and perhaps even trade surpluses. It’s not the unwinding that threatens the economy, but the government’s reaction to a mistaken analysis.