December 29, 2004


The Next Economy (Robert J. Samuelson, December 29, 2004, Washington Post)

We are undergoing a profound economic transformation that is barely recognized. This quiet upheaval does not originate in some breathtaking technology but rather in the fading power of forces that have shaped American prosperity for decades and, in some cases, since World War II. As their influence diminishes, the economy will depend increasingly on new patterns of spending and investment that are still only dimly apparent. It is unclear whether these will deliver superior increases in living standards and personal security. What is clear is that the old economic order is passing. [...]

Here are four decisive changes:

• The economy is bound to lose the stimulus of rising consumer debt. Household debt -- everything from home mortgages to credit cards -- now totals about $10 trillion, or roughly 115 percent of personal disposable income. In 1945, debt was about 20 percent of disposable income. For six decades, consumer debt and spending have risen faster than income. Home mortgages, auto loans and store credit all became more available. In 1940, the homeownership rate was 44 percent; now it's 69 percent. But debt can't permanently rise faster than income, and we're approaching a turning point. As aging baby boomers repay mortgages and save for retirement, debt burdens may drop. The implication: weaker consumer spending.

We're normally very deferential to Mr. Samuelson, but his point here seems confusing: In 1945, GDP was $223.2 billion and Household Net Worth was $727.6 billion--today those numbers are something like $11 trillion and $47 trillion. Given such numbers, and the fact that Household Net Worth is measured after debt is subtracted, isn't doubt far less of a problem now than then?

Posted by Orrin Judd at December 29, 2004 9:47 AM

Still, there's no getting around the fact that increased savings equal a drop in consumer spending, no? The trick for the ownership society is going to be how to avoid Japanization of the economy.

Posted by: JimGooding at December 29, 2004 12:59 PM


No. The point is you can do both fairly easily if savings increases wealth.

Posted by: oj at December 29, 2004 1:09 PM

Or if borrowing increases wealth, which is actually more likely.

Posted by: David Cohen at December 29, 2004 1:31 PM

Not necessarily; savings might make more capital available, but for what? So I can get a loan to build a auto plant, but people are buying fewer cars, so ... why build the plant? There's a point on the savings curve where benefit to the economy drops, just like the Laffler curve with tax cuts where at some point the tax cuts begin to actually equal the revenues lost.

Posted by: JimGooding at December 29, 2004 1:33 PM

Why would wealthier people buy less?

Posted by: oj at December 29, 2004 3:31 PM

A lot of that net worth is probably paper and not hard assets. All it takes is one panic and it could drop considerably. Debt is simply too high and often the worse kind: consumer debt. If OJ does not think that consumer debt is a problem, it simply signifies how detached he is from reality.

Posted by: Chris Durnell at December 29, 2004 3:45 PM

Chris: Debt equal to 115% of "personal disposable income" strikes me as absurdly low. Certainly, servicing the debt is not a strain on the system.

Posted by: David Cohen at December 29, 2004 7:14 PM


If there were a panic the debt would disappear in bankruptcy.

Posted by: oj at December 29, 2004 7:55 PM

To defend Chris's point. The Nikkei index went from 38712 in 1990 to 9915 this Dec 2004. In the interim household net worth in Japan was cut in half a one point, although it has improved.

Yeah I know OJ thinks that can't happen here, and yes David point is valid, but let's not jinx ourselves, okay.

Chris if you compare only Europe and Japan to the US, our household net worth has been increasing at a much faster rate than either for the last five years.

Posted by: h-man at December 30, 2004 8:35 AM

The biggest generation in history is transitioning to fixed incomes, the generations behind them will be extreme savers in comparison socking away money for retirement and insurance in amounts the Boomers never had to worry about. The net result is reduced consumer spending despite a growing GDP. National wealth up, domestic retail sales down.

Posted by: JimGooding at December 30, 2004 10:27 AM