American capitalism is now completely dependent upon continued consumer spending, at rates of increase which are likely to prove unsustainable in the medium term.
STOCK markets in the United States staged a substantial recovery in the middle of May. "Market analysts" and other media commentators in the U.S. were ecstatic at what was universally perceived as the main cause of this recovery: the big increase in consumer spending reported for the previous month.
There is no doubt that this increase was large - nearly 1.2 per cent reported for April 2002, which was the largest monthly gain in six months, and nearly double what was expected. There is other evidence also of this revival. The largest retailing group in the U.S. economy, Walmart, has just reported nearly 20 per cent increase in profits, which is much more than anything it has experienced for many years. And other retailers also report a strong recovery in sales. Meanwhile, Internet retail commerce is booming, and is expected to increase by 44 per cent to reach $75 billion this year.
What has caused this big revival in consumer spending in the U.S. economy? Some of it is clearly related to the lagged effects of the tax cuts that President George Bush introduced last year. It is estimated that the average effect of the tax cut this year amounts to $230 (per capita) more than last year. And U.S. citizens, never known for their tendency to save, are apparently making more purchases with this increase in personal disposable income.
This is of course completely unlike Japanese citizens, who throughout the 1990s tended to put their tax cut benefits aside as savings, in anticipation of an expected recession and possible unemployment. By contrast, U.S. consumers appear remarkably bullish in their response, reacting to even limited tax cuts by increasing their spending more than proportionately.
Over the long boom of the 1990s, the U.S. economy was led by private consumer spending, which in turn was heavily debt-driven. This has now become a basic feature of the economy. Household savings turned negative around 2000, and personal debt service payments now account for nearly 15 per cent of consumer spending. The amount involved in personal bankruptcies filed last year increased to more than $1.2 billion.
While much of the household debt is tied up in mortgages for homes (reflecting low interest rates), other forms of consumer credit such as credit card dues also continue to mount. In March 2002 alone, consumer credit increased by $4.6 billion. As it happened, even this large amount reflected the slowest increase in 18 months. But it came on top of huge increases in such credit over more than a decade.
WHAT is perhaps most remarkable about the United States is the extent to which such spending is treated as evidence of public spiritedness, as an expression of patriotic loyalty. This is much more in evidence here than anywhere else in the world. Indeed, after September 11, 2002, it is almost as if the U.S. officialdom and capitalist interests are stressing this as the only real manifestation of U.S. citizens' involvement and concern for the public sphere.
This public affirmation of capitalism's "divine right and duty" is quite striking. Of course, at one level it is not surprising that business interests - that is, companies and advertisers - encourage high and growing levels of material consumption in the richest country in the world. But even to the casual visitor from another country where the spread of consumerism has been rapid, the intensity of the pressure in the U.S. to keep buying can come as a shock. The sheer bombardment of advertising, the force of the message "buy, buy, buy" being continuously interpolated at the most unlikely places and times for everything from mattresses to homes to fancy cars to holidays, all of these create a subliminal tension. And they also mean that social life in turn is defined in terms of acts of consumerism. Thus "Mother's Day", which was "celebrated" on May 12, may not necessarily have originated as the brainchild of some clever retailers or their advertising strategists, but its current manifestation is heavily determined by them. The most common mode of celebration of this rather recent festival is dominated by the notion of purchase, with love for mothers being defined or measured by the price of the gifts for them.
But it is not just business interests that push this perspective. Increasingly, the U.S. Treasury Secretary, other government officials and private market analysts, all treat consumerism as a great contribution to society. They tend to laud "the consumer" in terms such as "the backbone of the U.S. economy", "the true and resilient source of growth", in fact, even the expression of resistance to terrorism !
So U.S. consumers are not only spending more than ever before, but are feeling very good about it because it is seen as a declaration of patriotic loyalty. Of course this ability to increase consumption is not universal even within U.S. society. Income and asset inequality in the U.S. have never been more unequal. Studies point to growing poverty among certain sections of the population, with even absolute nutritional poverty being more evident, especially among children of very disadvantaged households. Meanwhile, the world economy also remains pitifully dependent upon this unequal source of expansion, because world income and asset inequality are also more than ever before.
The real question for economists is how sustainable this whole process could be. There are of course the usual questions about market saturation in an economy where almost all major consumer durable purchases are of the replacement mode, and the rate of replacement has come down from three to five years to less than two years for many items. After all, how much can people keep shifting to newer and larger homes, buy newer, more expensive cars, replace domestic consumer electronic items (including home personal computers) and so on? Japan's experience illustrates how this pattern can lead to a shift in demand towards fewer, higher value items and can actually involve expenditures that generate less economic activity in general.
Also, it must be remembered that before the 1990s, U.S. booms have always been a combination of consumer demand and government spending-led expansion. The long boom of the 1990s relied essentially on private spending, but that effect may peter out for reasons mentioned above. But the U.S. government's fiscal stance is still not all that expansionary, despite the tax cuts and the large increases in public expenditure which were "validated" by the September 2001 attacks. So there are definitely questions about the sustainability of the current expansion in the medium term.
There are signs that the financial markets may already be concerned about this. The dollar has been falling against major currencies for some months now and stock market behaviour indicates a degree of caution rather than very buoyant animal spirits. The bad news for the rest of the world economy is that there is still no other major source of potential dynamism that could take up the slack left by a less forceful expansion in the United States.