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.