This is a subject that whole books can be and are written about but I think I can summarize our national economic policy in just a couple of sentences. Economic growth will be driven by consumer spending which will in turn be driven by expanding consumer credit.
You can break that down a little farther. Consumer spending has several components: durables and consumables, healthcare spending, education spending, housing, and so on. By far the largest of those is housing. Here’s their average annual amounts for 2012:
| Category | Average annual expenses |
| Food | $ 6,599 |
| Housing | 16,887 |
| Apparel and services | 1,736 |
| Transportation | 8,998 |
| Healthcare | 3,556 |
| Entertainment | 2,605 |
| Cash contributions | 1,913 |
| Personal insurance and pensions | 5,591 |
| Other | 3,557 |
| Total | $51,442 |
Multiply that by the 124,416,000 “consumer units” they’re counting and that’s the private personal economy.
Basically, that’s the reason so much policy is directed towards subsidizing housing. As long as you’re going to depend as heavily as we do on consumer spending it makes a certain amount of sense to subsidize home ownership and home purchasing.
Going back to my previous post on GDP, there are only a certain number of options available for boosting economic activity—consumer spending, business investment, government spending, lowering imports, increasing exports. I think the practical reality is that we need to reduce imports and increase domestic business investment. Those are my preferences but that’s not the direction of policy. Policy is geared towards housing, increased government spending, and increased exports.
Don’t get me started on how dependent state and local governments are on continuing increasing real estate values. You can straighten out most city, county, and state ledgers just by doing two things: ensure that healthcare spending grows no faster than non-healthcare costs and make real estate values go up.
Of course, when you have one big, shiny lever that’s easy to pull, you tend to pull it. That’s part of why we’ve messed with housing policy so much – subsidizing it in countless ways. Because it’s easy to do and it’s such a large component of consumer spending. We’ve had less success encouraging business investment.
And re: your comment: I’ve often wondered why, in terms of encouraging redevelopment of cities, cities don’t “invert” real estate taxes – Chicago and other cities have a large number of buildings that are uninhabited or unused, and are taxed at lower rates (especially if they need investment to render them inhabitable). By taxing them at higher rates (because they’re not being used for anything productive), you could either reduce real estate taxes on occupied buildings, raise revenues, or both. This policy works especially well when encouraging owners to rent out or sell buildings in the wake of a property bubble – it gets them off the sidelines.
Looking at your BLS data source, it’s interesting that the most growth in expenses since 2010 was transportation and cash contributions while housing increased the least of all expenses.
I agree investment is sorely needed but there’s lack of incentive for it given firms can meet demand with current levels of productivity. Why increase production when you don’t have customers for it? The foreign sector isn’t a particularly good answer as exports are a real economic cost which deprives Americans of the goods and services shipped overseas.
In other news, I thought I would check out my banks current CD rates. You can break a whopping 1% rate with a five year term….
I’m glad you chimed in, Ben. I’m open to suggestions for how we can increase business investment but I think it’s clear that it could be accomplished. We depend more on consumer spending than almost any other country, including many countries with faster growth rates than we have. Additionally, twenty years ago we were less dependent on consumer spending than we are now. That suggests that there should be ways to incentivize more business investment.
There’s more than one type of incentive. The hope of gain and the fear of loss, as Napoleon pointed out. Altering the perceived risk of doing other things with their money seems like a good start.
My personal opinion would be that we need to cease issuing Treasurys so businesses no longer have risk-free assets, and a tight labor market forcing businesses to invest in search of greater returns via productivity. We would also need a major reorganization of how finance works so industrial companies aren’t turning themselves into banks and playing speculator.
Cessation of issuing Treasuries would also present trading partners who run surpluses with us with an alternative. Either their dollar credits would sit around gathering electronic dust or they could buy the products we make, the services we provide, or our stuff, any of which would be a better alternative than the status quo.
Need business investment, eh? But our good friend steve has an issue with the capital gains tax rate……
As a slightly different riff on the expenditures table, the official inflation rate has a dominating component: housing, after the bust. Any wonder I question its validity? If you buy gas, its not 2%. If you eat food, its not 2%. If you seek health care, its not 2%. If you are a private equity partner and own companies that buy commodities, its not 2%. If you have college age kids……may the lord be with you. With our daughter, we just visited in the last two months Butler, Vanderbilt, Clemson, Indiana (for a Purdue grad, that was one to the solar plexis) and Notre Dame (ugh, I’m physically ill now)……….we are going to “do Boston” this fall. Harvard (as, also, a ‘Chicago guy’ now I need oxycontin or immediate hospitalization), BC and who knows what. Anyone who gets out of this alive will spend $60K to $80K per year all in.
No inflation my ass.
I need a Miles Davis fix…..I’m feeling “Kind of Blue.”