Consumption-Oriented Economic Policy

At The American Interest Oren Cass argues that for the last sixty years we’re been pursuing a “consumption-oriented economic policy”, it’s a flop, and it’s time for a change. Here’s the kernel of his argument:

What Americans increasingly see are their children struggling and their neighbors sick or dying. Half of Americans born in 1980 were earning less at age thirty than their parents had made at that age. Most Americans still do not complete even a community college degree, yet the median income of a high school graduate lifts a family of four less than 40 percent above the poverty line; in the 1970s, such an earner would have cleared that threshold by three times as much. That’s for people who are working. At the Great Recession’s end, Charles Murray reported in Coming Apart, barely half of working-class households had a full-time worker present.

And then there are the “deaths of despair.” Mortality rates have risen since the turn of the century for middle-aged white Americans, driven by higher levels of suicide, liver disease, and drug overdoses for those with only a high school degree. Such an upsurge had no precedent in American history, and nothing similar is occurring in other developed nations. The nation’s suicide rate climbed 24 percent between 1999 and 2014, with stunning increases of 43 percent and 63 percent for men and women aged 45 to 64. Opioids are now killing Americans more rapidly than HIV/AIDS ever did. Life expectancy nationwide fell in 2015, for the first time since 1993, and then again in 2016, marking the first consecutive years of decline since the early 1960s. Preliminary data indicate yet another decline in 2017.

and here’s the meat of his prescription:

Economic growth and rising material living standards are laudable goals, but they by no means guarantee the health of a labor market that will meet society’s long-term needs. If we pursue growth in ways that erode the labor market’s health, and then redistribute income from the winners to the losers, we can produce impressive-looking economic statistics—for a while. But we will not generate the genuine and sustainable prosperity we want. Growth that consumes its own prerequisites leads inevitably to stagnation.

This shift in perspective from consumer to producer conjures a vision of two constituencies vying for the same resources, but here the dynamic is more complex. Every individual is both a producer and a consumer, the economy an engine of both production and consumption. An emphasis on the consumption lens has long been a tenet of classical liberalism: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer,” wrote Adam Smith in The Wealth of Nations. Superficially, at least, consumption seems a sensible focus.

But only through production does the ability to consume exist. Production without consumption creates options; consumption without production creates dependence and debt. Most of the activities and achievements that give life purpose and meaning are, whether in the economic sphere or not, fundamentally acts of production. Yes, material living standards contribute to prosperity, but accomplishments like fulfilling traditional obligations, building strong personal relationships, succeeding at work, supporting a family, and raising children capable of doing all these things themselves are far more important to life satisfaction. What these things have in common is their productive nature not as boosts to GDP but as ways that people invest effort on behalf of others. Our social norms recognize productive activities as essential to a functioning and prosperous society, and so we award respect, dignity, and gratitude to those who perform them.

Without work—the quintessential productive activity—self-esteem declines and a sense of helplessness increases; people become depressed. Where fewer men work, fewer marriages form. Unemployment also doubles the risk of divorce, and male joblessness appears the primary culprit. These outcomes likely result from the damage to both economic prospects and individual well-being associated with being out of work, which strain existing marriages and make men less attractive as marriage partners.

His proposals include a number of things that are deeply unpalatable to many Americans accustomed to the conventional wisdom: more vocational training, tracking, more labor standards established by negotiation rather than by the federal government (that’s the case in many European countries), and wage subsidies.

Let me propose a thought experiment. Calculate the effect on per capita productivity when you import a very large number of low-skilled, poorly compensated workers. For extra credit calculate the effect on consumption of those same workers. I think you’ll find that they boost consumption far more than they do productivity.