Consumption

 We all know that Americans over consume.   Well, at least they did until this current recession started.  As stated in a previous post, I also think that we will return to our past consumption habits when the economy gets better.  I just hope that when we return to our past consumption levels we won’t use artificial equity in our homes or expensive credit cards debt to finance it.

American over consumption is one of the main reasons touted as the cause of our trade imbalance with China.  If you compare the percentage of gross domestic product (GDP) due to household spending of the United States verse other areas, the numbers do support American over consumption.   Currently, about 70 percent of the U.S. GDP is due to household spending.  In Europe, the number is around 57 percent.  In India it is a little less at 54 percent.  China, by stark contrast, has a relatively minimal number of 35 percent.  The numbers show us that not only does the U.S. over consume, but China greatly under consumes. 

I am not implying that Europe and India are the gold standard, but they do represent a good yardstick to compare to.  If you compare the U.S. to the European zone you get a 13 percent differential between the two areas.  Comparing China to India shows a relatively high 19 percent difference.   This does not mean that China’s under consumption is a bigger cause of the trade imbalance then American over consumption, but it is still a problem.  Other contributors like the artificial manipulation of currency have a large role in the trade imbalance.

So why is the lack of consumption in China a bad thing?  The main problem with such low levels of consumption is because that any significant growth of China’s GDP has to be export driven.  This is the underlying reason why the Chinese government can not let the renminbi appreciate naturally.  A more expensive renminbi translates into slower growth and less jobs and social unrest.  Already in this global recession the Chinese government has estimated that over 20 million jobs have been lost in the manufacturing regions of the country.  The good thing is that it seems that the Chinese government now recognizes the need to stimulate domestic consumption. 

One of the reasons that the Chinese do not consume as much as they could is that they feel they need to have money saved as a form of insurance.  If an average Chinese citizen gets sick or is hurt and needs to go to a hospital, they must first pay for the service.  To help alleviate this problem, the government now plans to provide health insurance to hundreds of millions of people over the next few years.

Another area where China is improving involves automobiles.  China recently cut the tax rate on fuel-efficient vehicles.  The tax cut led to a surge in the number of vehicles being sold in China.

As the Chinese consumer starts consuming more they will not only help China’s economy.  The world economy can no longer survive on the U.S. consumer alone.

Is A Frugal America Here To Stay?

I have to admit it; money used to burn a hole in my pocket. The more money I had in my wallet, the more likely I was to buy something I didn’t need or spend more money on something than I should have. Most of the time I would spend the money on smaller stuff like a DVD, a book, or an extra main dish at the Chinese take-out place. Sometimes it was on a bigger ticket item such as a high end snow blower even when a lower end model would easily do the job, or $300 of beer brewing equipment because I wanted to try making beer. It did not matter that I was paying for the items with a credit card because the money in my wallet made me feel richer. It is not that I was rich; I just had a relatively secure job and money in my pocket.

Recently, I seem to have overcome my excessive spending habits. I still go to the bank and take out the same amount of money, but the urge to spend just is not there. It has gotten so bad, that it affected my normal spending habits. My family has put off purchases that we probably would have already made.

To make matters worse, my new found frugal buying behavior is constantly being reinforced by the world around me. There are so many articles about people cutting back. Almost daily there is another poll or article about changes in buying habits and driving habits. Many news reports and articles, like the Retail Forward report titled, Women Limit Spending on Apparel; Shopping Behavior Likely To Endure, state with certainty that the buying habit changes are here to stay. I hope that in some cases they are correct, but I am not sure I totally agree. If I am an example of a typical consumer then I expect things to return to approximately what they were once the economy returns to “normal”.

A woman I work with is in the process of getting her house aluminum sided. One of the larger contractors in the area gave her a great deal. The homeowner is going to be spending about $4000 less then what she was quoted two years ago. It turns out that many contractors are forgoing most of their profit just so they can keep their crew busy. I almost wish that I had to replace my aluminum siding, I just know that in a couple of years when my siding really does need to be replaced the costs will be back to “normal”.

Since I am lucky enough to have a secure job, I wonder if I am doing the right thing by holding off on some purchases. Am I being frugal or is it that I am just creating more pent up demand? Would I be better off buying that new entry door or that new dining room table now? Maybe I will wake up tomorrow morning and realize that I will never get a better price on that dining room table and I will buy it. Hopefully I will not be alone in my realization.

NAFTA – A Hit with Manufacturers

I was talking to a small domestic manufacturing company owner the other night and I asked him what he thought about NAFTA. His answer surprised me in that he was neutral to slightly positive about the effect of NAFTA on his business. In fact, I was so surprised that I had to ask the question again to make sure I heard the answer correctly the first time. When I asked why he said that he had some improved access to additional markets, but in general it did not affect his business.

I started thinking back to all the bad things I remember hearing about NAFTA. One of the main complaints was that all our manufacturing jobs would migrate either south or north of the border to Mexico and Canada.

I also remember hearing that Mexico’s unions were strong supporters of NAFTA. I, like many Americans, assumed that it was because then knew that jobs would just start moving across the border almost immediately. So I asked the manufacturing company owner if he saw increase competition from other companies based in or that had relocated manufacturing to Mexico or Canada. His answer was that he has always had competition and that it was not significantly more or less after NAFTA.

Personally, I did not expect that all manufacturing jobs would be transplanted to Mexico, and to some extent Canada. What I did expect was that fifteen years later, since NAFTA went into effect in 1994, we would have seen some erosion of our manufacturing base and an overall negative view of NAFTA. I could see multinationals being positive on NAFTA, but not the smaller domestic manufacturers.

So with conflicting information I did what almost anybody would do, I started to Google for additional information. I found a report published in June ’08 by Deloitte Research titled Made in North America. That report indicated that 49% of the responding manufacturing companies felt NAFTA had a positive impact on their business. In addition, another 41% were neutral on NAFTA. To be fair, the poll taken included Canadian and Mexican manufacturers, but 45% of the poll participants were American companies.

The report and my manufacturing contact both seem to reflect similar views. NAFTA did not kill American manufacturing as feared. That is not to say that some jobs were not lost or that America is not losing manufacturing jobs at an alarming rate. It is just that we can not blame it on open trade agreements like NAFTA.

Protectionism? Maybe, but so what.

What is the purpose of the US economic stimulus package? The answer is relatively simple, to stimulate the US economy. So why would anyone question whether there is a provision in the stimulus to buy American? I support free trade and am not a fan of most protectionism, but that is not really the point since this has nothing to do with trade policy or general spending. Without focusing the stimulus on domestic industries, I am afraid that two things will happen; the stimulus will not be sufficient enough to stimulate the domestic economy due to stimulus dollars going elsewhere, and the US will be paying for failed stimulus to other nations.

The stimulus package needs to focus every dollar it can to the domestic economy. As Paul Krugman points out in his The Conscience of a Liberal post; “if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.” This is why President Obama wanted to coordinate stimulus with the G20 nations.

I have always said that I do not mind paying taxes. I was fortunate enough to be born into a middleclass family in one of the greatest countries on earth. Paying taxes is just the cost of having the privilege of living here, as it is in any country. Taxes are not for raising money to stimulate the economies of other countries, that is the job of their governments. I think it is fine when it is for humanitarian purposes or to support national interests, but not as part of a domestic stimulus package and especially when we need to get our economy going first.

In short, our government needs to focus on improving our economy and making sure the stimulus is as effective as possible for the domestic economy. Improving the US economy will provide more long term benefit to the world economy then the lost, to external countries, stimulus would provide.