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The curse of consumerism

Guest Blogger

The American economy is off-track -- creeping along on mistaken beliefs: that free trade and gobalization are always good, that the market is always right and government regulation always wrong and that consumption rather than production should power growth. Clyde Prestowitz, former trade negotiator in the Reagan administration and founder of the Economic Strategy Institute, explores how the United States went off the rails and how to right it again in “The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era,” published by Free Press. Here he takes aim at the mantra of consumerism.

By Clyde Prestowitz

It all started after World War II when Washington, afraid of slipping back into another Great Depression as wartime production wound down, considered how to employ the fifteen million men and women coming home from war.

For much of its history America’s growth had been significantly driven by investment and exports. But with Europe and Asia in ruins and fighting off starvation, exporting wasn’t going to offer much employment for some time, and the huge wartime investment had actually created very large production capacity that now needed to be used for non-wartime purposes. In addition to saving democracy, the war had been fought to put “a steak in every frying pan,” to “take a taxi to Brooklyn,” and for “the right to have cuffs on our pants.”

Now every policy tool was used to make those dreams come true . The GI Bill, the 1946 Full Employment Act, the abolition of Blue laws, the tax deductibility of interest on installment buying, and other measures all encouraged borrowing and buying.

As a result, between 1945 and 1960, installment credit grew by a factor of 11 and household debt nearly doubled. As we now know, it worked, and America enjoyed unprecedented growth and prosperity for a quarter century after the war.

Unfortunately, this sensible post war policy morphed into an addition that has led Americas chronically to consume more than they produce and to spend more than they earn. Nor was it only consumers. The federal government also adopted a policy of stimulating the economy with extra, deficit spending during downturns. This was supposed to be compensated by surpluses during economic upturns, but in recent years, of course, the government deficits have been both chronic and large.

So it is not surprising that America now finds itself in a position where its consumption as a percent of GDP had risen from 58 percent in the 1950s to 71 percent. This compares to about 67 percent for the European Union, 60 percent for Japan, and only 40 percent for China. To look at it another way, China saves and invests over 50 percent of its GDP while America has virtually zero savings and the lowest investment rate of the major economies.

The obscene extent of the American addiction to consumption and the nonchalance with which it was regarded were expressed by the two top U.S. leaders. Whereas all previous war-time presidents had called on Americans to save more, President Bush called on them to shop more at the height of the Iraq War. But that was no doubt because Vice President Cheney had assured him that “Reagan proved that deficits don’t matter.”

Unfortunately, they do. This over consumption means that we accumulate debt at all levels, and as we have seen in the recent crisis, this ultimately has big consequences.

In particular, we are now running huge trade deficits that make it harder to create American jobs because all the stuff we consume is made abroad. The trade deficit also has to be financed by foreign loans. We are now so dependent that if China simply reduced its daily lending to the United States by two or three percent, our whole economy would go into a tailspin. This situation undercuts not only our welfare but also our global influence.

What to do?

  • Restrict the mortgage interest tax write off to only one home and to only $500,000 on that home.
  • Abolish the interest write off for home equity loans.
  • Adopt a value added tax with appropriate adjustments to avoid regressive impacts.
  • Gradually extend the age of retirement to 70.
  • Stop taxing interest and dividends while adopting an investment tax credit.
  • Most important, cut the trade deficit in half by devaluing the dollar and launching an Invest in America strategy. Each $1 billion reduction in the trade deficit creates about 15,000 jobs. It’s cheap, effective, politically a winner, and President Obama should do it now.

By Steven E. Levingston  |  June 11, 2010; 5:30 AM ET
Categories:  Guest Blogger  | Tags: fixing the U.S. economy; u.s. consumerism; consumption society; problems of globalization;  
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