1. INTRODUCTION
Media coverage of the US economy in the 1950s was
usually accompanied by footage of things like workers on assembly lines,
farmers driving harvesters, buildings under construction et cetera. The
situation today is completely different. Current media coverage of the US
economy usually includes footage of things like a herd of people making a mad
dash at a Wal-Mart sale, people dining out at the Outback Steakhouse, drivers
filling-up their tanks at the gas station et cetera. This sea-change in the
media-perception of the US economy has led to a fierce debate about its
underlying nature.
A) On one hand, we hear some economists and
journalists claim that consumption is the driver of the US Economy ('liberal
demand-siders'). This side argues that it is consumers who create jobs and not
businesses; and they claim to speak for the 'toiling masses' and against the
'handful of privileged oligarchs'. Here are a few examples of this left-tilted view from the current media coverage:
B) On the other hand, we hear some economists and
journalists insisting that it is investment that is the driver of all
economies, including the US Economy ('conservative supply-siders'). This side
argues that it is businesses that create jobs and not consumers; and they claim
to speak for the 'hard-working entrepreneurs' and against the ‘lazy welfare-queens'.
Here are a few examples of this right-tilted
view from the current media coverage:
As is evident from the above-linked survey of the
media, much discussion has been generated about the underlying nature of the US
economy and its role in the world today. This is certainly an interesting
debate with a variety of views professed by a number of worthy participants.
Michael Pettis, for one, has suggested that the global imbalances we see today
are related to the fact that different countries in the world have different
types of economies. Therefore, the investment-driven economy of China and the
net-exports driven economy of Germany, for example, tend to be counterbalanced
by the consumption-driven economy of the US. His research suggests that even
though each of the economies may be individually and separately imbalanced, the
situation has continued for as long as it has because they complement each
other’s deficiencies on a joint basis. In other words, over-production in one
economy meets over-consumption in another economy, thereby keeping prices
stable in the global markets. We will dwell no further on these global
imbalances here and readers should visit Michael's blog for additional insights into these major issues.
Source: http://mpettis.com
In this article, we will instead focus on a much
more specific question: What type of
economy does United States really have? Is it a consumption-driven economy? Or
is it an investment-driven economy? Or is it something else altogether?
2. DEFINITIONS
Before we examine the data, let us begin with some definitions:
1) Consumption-driven
economy
An economy is said to be a consumption-driven
economy when consumption-growth is faster
than GDP-growth over the period examined. In other words, consumption-share
of GDP rises in a secular (but not
necessarily monotonous) fashion over that period. In such an economy,
GDP-growth may either equal investment-growth or exceed it, implying that
investment-share of GDP either remains a constant or falls in a secular fashion
over the same period.
2) Investment-driven
economy
An economy is said to be an investment-driven
economy when investment-growth is faster
than GDP-growth over the period examined. In other words, investment-share
of GDP rises in a secular (but not
necessarily monotonous) fashion over that period. In such an economy,
GDP-growth may either equal consumption-growth or exceed it, implying that
consumption share of GDP either remains a constant or falls in a secular
fashion over the same period.
3) Mix-driven economy
Mix-driven economies are quite rare over extended
periods of time, even though most economies do have short-periods of mix-driven
growth every now and then. To define it, an economy is said to be a mix-driven
economy when either of the following two situations are present:
Type I: GDP-growth
is faster than both investment-growth and consumption-growth over
the period examined. In such an economy, investment-share of GDP and
consumption-share of GDP both fall in secular (but not necessarily monotonous) fashion during
that period. The growth actually comes from either an increase in current-account surplus share of GDP or from a reduction in the current-account deficit
share of GDP. In the case of the former, it is often called an 'export-driven'
economy and in the case of the latter it is called a 'savings-driven' economy
over the period examined.
Type II:
Investment-growth and consumption-growth are both faster than
GDP-growth over the period examined. In such an economy, investment-share of
GDP and consumption-share of GDP both rise in a secular (but not necessarily monotonous) fashion during
that period. The growth actually comes from either a decrease in current-account surplus share of GDP or from an increase in the current-account deficit
share of GDP. Such an economy is called a 'consumption & investment driven'
economy over the period examined.
4) Balance-driven
economy
An economy is said to be a balance-driven economy,
when investment-growth and consumption growth are both equal to the GDP-growth over the period
examined. In other words, investment-share of GDP and consumption-share
of GDP both remain constant in
a secular (but not necessarily in a monotonous) sense over that period. In such
an economy, by definition, the current-account surplus or deficit share of GDP also remains constant in a secular sense
over the same period as examined. We note that since exactness is rarely found
in nature, let alone in an economy, the theoretical
words ‘equal’ and ‘constant’ in this paragraph should really be accompanied by
the qualifier ‘approximately’ in practice.
Armed with these definitions, we are well-equipped
to take a look at the trends in the demand-side component-shares of US economy
over the last 30 years, as shown in the graph in figure 1:
 |
| FIGURE 1 |
From a quick observation of the graph, the secular
trend of investment-share of GDP over the whole period seems to be downward, even though some local
investment-driven periods can be observed as part of a cyclical (i.e. up &
down) pattern. In addition, whereas they do seem to be some short-episodes with
mix-driven growth, on the whole there is no secular trend that indicates that
it was a mix-driven economy over the entire period. The only other clear trend
that is immediately visible is that the secular trend of consumption-share
of GDP over the whole period seems to be upward.
From this, it does appear that the US has been a consumption-driven economy over
the last 30 years. Perhaps this is why many economists and journalists refer to
the US economy today as a 'consumption-driven economy'.
But is that what the US economy really is? Or does it merely appear
so on a prima facie basis, while
being something completely different upon closer examination? To find the answer to this question, we need
to separate and analyze the various internal sub-trends that compose and
constitute the overall 30-year trend in the US economy. Once we have examined
the various bits carefully, we can then put all of them back together to arrive
at a better understanding of the state of the US economy over the last
generation.
3. ANALYSIS
3.1 Background
Equations
Here are the IMF-standard equations that
describe the GDP from the demand-side:
GDP = Consumption + Savings --- (I)
Investment = Savings + Current-account Deficit ---- (II)
Using (II) in (I), we get the common form:
GDP = Consumption + Investment - Current-account
Deficit ---- (III)
We can re-write (III) symbolically as:
In addition, we can write (IV) in incremental form
for any given year as follows:
Still further, what is true on an annual increment
basis for any given year in (V) can naturally be summed up over any given
period consisting of a number of years as follows:
NOTES on
equations (IV), (V) & (VI):
(1) If CAD/GDP is constant and consumption is
growing faster than GDP (i.e. C/GDP is rising),
then it follows that I/GDP must be falling,
implying that GDP must be growing faster than Investment. This would be an
example of consumption-driven
growth.
(2) If CAD/GDP is constant and investment is growing
faster than GDP (i.e. I/GDP is rising),
then it follows that C/GDP must be falling,
implying that GDP must be growing faster than consumption. This would be an
example of investment-driven
growth.
(3) If GDP is growing faster than both
consumption & investment (i.e. C/GDP & I/GDP are both falling), then it follows that CAD/GDP must
also be falling, implying that
GDP must be growing faster than the CAD
as well. This would be an example of Type-I mix-driven growth.
(4) If consumption & investment are both
growing faster than GDP (i.e. C/GDP & I/GDP are both rising), then it follows that CAD/GDP must
also be rising, implying that CAD
must be growing faster than GDP as
well. This would be an example of Type-II mix-driven growth.
(5) If consumption & investment are both
growing at the same pace as GDP (i.e. C/GDP & I/GDP are both
constant), then it follows that CAD/GDP must also be a constant,
implying that the CAD must be growing at the same pace as GDP as well. This
would be an example of balance-driven
growth.
3.2 Data Collation
With the caveat that there are really only 2
degrees of freedom (see equations (I) & (IV)) in the data-field, here
is a basic table of IMF-data that indicates the shares (expressed as %
of GDP) of consumption, investment, CAD & savings. We note that the IMF data
in this table are identical to the IMF
data plotted in figure 1:
In addition, here is the corresponding table that
displays the cumulative annual-increments (see equation (VI)) in
the component-shares from 1984 (reference point) to 2012, expressed as
percentage-points (PP) of GDP:
We need to begin with a visualization of the data in
order to start the analysis. Therefore, we begin with a plot of the cumulative
annual-increments (see equation (VI)) of component-shares from 1984-2012,
exactly as shown in Table
II:
It is obvious from figure 2 that
there are a variety of growth-drivers during the long period from 1984 (reference year) to 2012. Clearly, we
have numerous short-spells of investment-driven growth, mix-driven growth,
balance-driven growth and consumption-driven growth, respectively. In addition,
we know that there were three Keynesian actions (1989-91, 2000-03 &
2007-09) by the US government during the whole 1984-2012 period.
 |
| FIGURE 2 |
3.3 Types of Sub-Periods
(1)
Consumption-driven growth (1984-1987)
As seen in figure 3,
consumption-share of GDP increased during this sub-period, while investment-share
of GDP fell. From the definitions provided above, we conclude that this
sub-period had consumption-driven growth. The consumption-share growth in this
sub-period was probably triggered by: (a) lowering of general income-tax rates,
(b) elimination of specific consumption-taxes that were imposed during the 70s
to contain demand & hence inflation, (c) proliferation of consumer-debt due
to the rising CAD, and (d) lowering
of real interest rates that aided the rise of this consumptive debt.
 |
| FIGURE 3 |
(2) Mix-driven growth (1987-1989)
As seen in figure 4,
consumption-share & investment-share of GDP both fell during this
sub-period, implying that GDP was growing faster than both consumption &
investment. According the definitions provided, we conclude that this
sub-period had Type I mix-driven growth. The growth in this sub-period naturally
came from a reduction in the current-account
deficit share of GDP. This implies that savings alone grew faster than GDP during this time, and hence the
economy could be said to have been 'savings-driven' over this sub-period.
 |
| FIGURE 4 |
(3) Keynesian-Estoppel (1989-1992)
This first
Keynesian-Estoppel* sub-period began with the stock-market crash of 1989 and
continued up to the recession of 1991. As seen in figures 5 (a) & (b), government-action
forcibly drove-up the
consumption-share GDP, even as the bust drove-down the investment-share of GDP.
This is a special case and cannot be considered as standard ‘consumption-driven
growth’, because natural consumption follows the decrease in investment and
tends to also decline as fearful consumers attempt to increase their savings
during the bust. It is government-action that borrows the ‘excess’ savings of
these fearful consumers and forcibly converts it into consumption in order to
prevent the economy from going into a free-fall decline. Therefore, this
sub-period was an example of a state-diktat
driven economy, in which US government action maintained consumption levels
even as investment levels actually
declined during 1989-92.
*Word-Definition: The word
'estoppel' is used here to mean an action by which the government prevents (or stops) the economy from taking a course
it would otherwise have taken, in order to prevent a socially-painful or
socially-unacceptable outcome. The word ‘stimulus’ has not been used here
because a stimulus is applied as a temporary push to a slow or stagnant
situation. On the other hand, when the economy is in free-fall and the
government wishes to stop it from collapsing further, the action
required is no longer called a ‘stimulus’, but rather more aptly described as
an ‘estoppel’.
 |
| FIGURE 5(a) |
 |
| FIGURE 5(b) |
(4) Investment-driven growth (1992-1997)
As seen in figure 6,
investment-share of GDP increased during this sub-period, while consumption-share
of GDP fell. From the definitions provided above, we conclude that this
sub-period had investment-driven growth. The investment-share growth in this
sub-period was probably triggered by a general reduction in
government-consumption levels made possible by the end of the Cold War. The additional savings made available by the
reduction of the government fiscal deficit (i.e. reverse of ‘crowding out’)
during this period was recycled into investment, thereby leading to a strong spell
of investment-led growth.
 |
| FIGURE 6 |
(5) Mix-driven growth (1997-2000)
As seen in figure 7,
consumption-share & investment-share of GDP both increased during
this sub-period, implying that consumption & investment were both growing
faster than GDP. According the definitions provided, we conclude that this
sub-period had Type II mix-driven growth. The growth in this sub-period naturally
came from an escalation in the current-account
deficit share of GDP. This implies that deficit-fueled consumer-debt must have been rising very quickly
during this time, and hence the economy could be said to have been driven by
rising ‘deficit-fueled investment & consumption’ over this sub-period.
 |
| FIGURE 7 |
(6) Keynesian-Estoppel (2000-2003)
This second
Keynesian-Estoppel sub-period began with the bursting of the internet-bubble in
2000 and continued up to the recessionary conditions of 2003. As seen in figures 8 (a) & (b), government-action
once again forcibly drove-up the
consumption-share GDP, even as the bust drove-down the investment-share of GDP.
The government borrowed the ‘excess’ savings by running fiscal deficit much
larger than the one seen during the first
Keynesian-Estoppel. It then forcibly converted this ‘excess’ savings into
consumption by massive increases in government-consumption in order to prevent
unemployment from rising. Therefore, this sub-period was another example of a state-diktat driven economy, in which US
government action maintained consumption levels even as investment levels considerably declined during 2000-2002.
(7) Investment-driven growth (2003-2007)
As seen in figure 9,
investment-share of GDP increased during this sub-period, while consumption-share
of GDP stayed approximately constant. From the definitions provided
above, we conclude that this sub-period had investment-driven growth. The
investment-share growth in this sub-period was obviously related to the growing
of the housing-bubble, which triggered a general construction-boom. Given that
consumption-share of GDP stayed approximately constant, as seen in the same
figure, it is obvious that the housing-bubble was fueled by the rising CAD-share
of GDP. In other words, investment & the CAD both grew faster than GDP,
while consumption-growth trailed GDP-growth during this sub-period. This was
clearly a deficit-fueled investment boom.
 |
| FIGURE 9 |
(8) Keynesian-Estoppel (2007-2009)
This third Keynesian-Estoppel
sub-period began with the bursting of the housing-bubble in 2007, was amplified
by the resulting financial-crisis of 2008, and continued up to the recessionary
conditions of 2009. As seen in figures 10 (a) & (b), government-action
once again forcibly drove-up the
consumption-share GDP, even as the construction-bust drove-down the
investment-share of GDP and sent unemployment sky-rocketing to levels unseen in
a generation. The government again borrowed the ‘excess’ savings by running a
fiscal deficit even larger than the one seen during the second Keynesian-Estoppel. It then
forcibly converted this ‘excess’ savings into consumption by massive increases
in government-consumption in order to prevent unemployment from rising. Therefore,
this sub-period was another example of a state-diktat
driven economy, in which US government action maintained consumption levels
even as investment levels radically
declined during 2007-2009.
 |
| FIGURE 10(a) |
 |
| FIGURE 10(b) |
(9) Investment-driven growth (2009-2012)
As seen in figure 11,
investment-share of GDP increased during this sub-period, while consumption-share
of GDP declined. The additional savings made available by the reduction
of the government fiscal deficit (i.e. reverse of ‘crowding out’) during this
period was recycled into investment, thereby leading to a spell of
investment-led growth. Given that the CAD was approximately a constant during
this period, we can conclude that this investment-driven sub-period was
structurally more similar to the one during 1992-1997 (I-1) than to the one
during 2003-2007 (I-2), and was therefore more ‘sustainable’
 |
| FIGURE 11 |
(10) Final re-assembly of all sub-periods (1984-2012)
In figures 12 (a), (b) & (c) below,
all the various sub-periods described above have been compiled together in correct sequence to indicate the
fluctuating patterns of the US economy’s growth-drivers.
 |
| FIGURE 12(a) |
 |
| FIGURE 12(b) |
 |
| FIGURE 12(c) |
In addition, Table III (a) indicates the increases in component-share seen in each of the sub-periods.
.jpg)
Finally, Table III (b) sorts
all similar growth sub-periods by type and provides increases in
component-share across that particular type of growth-driver.
.jpg)
Note: As seen in Tables III (a) & (b), the average time-proportion spent in Keynesian-Estoppels over the last generation was a high 29%. This implies that the US spent, on average, 3 years in every 10 year-period in a state of crisis, with the government desperately trying to prevent economic collapse. This is an extreme result. In addition, contrary to the common-perception, the US spent only 11% of the time over the last generation in consumption-driven growth periods, while investment-driven growth periods predominated by occurring 43% of the time.
4. DISCUSSION
4.1 Keynesian
Imbalances in America
During the bust, as seen in figures 13 (a), (b) & (c), when
investment collapses and panicked consumers attempt to increase saving, thereby
sending the economy into free-fall, the government borrows the excess savings
(i.e. increased savings - decreased investment) and converts it by force of
state-will into consumption. This growth in government-consumption prevents the
economy from contracting excessively and so buys time for imbalances (of debt,
overcapacity etc.) to correct themselves in an orderly fashion. This is the
Keynesian-Estoppel.
 |
| FIGURE 13(a) |
 |
| FIGURE 13(b) |
 |
| FIGURE 13(c) |
Once the panic has subsided and confidence returns,
the government must reverse this
action during the next boom. It must reduce government-consumption share of GDP
during the boom just as it has increased government-consumption share of GDP during
the bust. In other words, as seen in figure 13 (b), government-consumption
growth must significantly trail GDP-growth during the boom, in
order to compensate for its leading of GDP-growth during the bust. This is
known as the ‘Keynesian-Recharge’. If this ‘recharge’ is done correctly, total
consumption-share of GDP returns to
the level at which it was before the bust, and the system is then once again
ready to perform another Estoppel at some future crisis.
The first Keynesian-Estoppel of the bust of 1989-92 was correctly ‘recharged’ during the subsequent
investment boom of 1992-97. As seen in figure 6,
consumption-share of GDP by 1997 had returned
to the level at which it was in 1989. This implies that the first Estoppel was properly
compensated and the system adequately ‘recharged’ for next use during the
bursting of the internet-bubble in 2000.
However, the second
Estoppel of the bust of 2000-03 was not ‘recharged’ during the subsequent housing-bubble investment-boom
of 2003-06. As seen in figure
9, consumption-share of GDP by 2007 had still not returned to the level at which it was in 2000. This implies that
the second Estoppel was not
properly compensated and the system was not adequately ‘recharged’
before it was forced into use yet again in response to the bursting of the
housing-bubble in 2007.
The third Keynesian-Estoppel of the bust of 2007-09 simply added to the uncorrected imbalance left over by the second Keynesian-Estoppel and sent consumption-share of GDP to even higher levels. As seen in figure 11, consumption-share of GDP by 2012 had still not returned to the level at which it was either in 2000 or even in 2007. This implies that the last-two Keynesian Estoppels have still not been properly compensated and the system is currently out of balance.
In summary, then, consumption-share of GDP has been sent too high by repeatedly applying Keynesian-Estoppels to the system
during the busts, without implementing the corresponding Keynesian-Recharge
during the intervening boom. It is clear that these frequent and large Keynesian
Estoppels have ‘drained the batteries’ of the system. Unless it is recharged by
completing the second part of the Keynesian prescription, it is possible that
the Estoppel might fail during the next bust and send the economy into
irreversible decline.
4.2 The Problem of
the Current-account Deficit
The US current-account deficit (CAD) has been the
subject of much vigorous debate. At first glance, it appears strange that a
rich country like the US, which should ordinarily have no need to augment
domestic-savings by running a CAD, should find itself in a situation in which
it has been running a large, growing and sustained CAD over the last 30 years.
In addition, since running a CAD implies, by definition, that the US is
exporting aggregate demand, it has been argued that the CAD is damaging to the US
because it is effectively importing unemployment from the surplus countries.
So why does the US continue to run the CAD? As it
turns out, the US, as the provider of the global reserve currency, runs the CAD
as the principal mechanism by which it provides dollars to meet the genuine
reserve requirements of other countries in the world. A genuine reserve requirement for a country
is often said to be equal to 2 months of imports, or 6 months of deficits, or
100-200% of short-term external-debt of that country. Such reserves allow other
countries to dampen currency-volatility (spread out any sudden-changes over
time) and also provide 'insurance' against any sudden exogenously-triggered liquidity withdrawals, thereby enhancing market-stability in those countries.
Given the importance of the dollar to lubricate global trade, as well as the
genuine need of other countries to hold modest levels of reserves, therefore,
the US cannot eliminate its CAD or
try to run a surplus. Such an action on part of the US would damage the world
by enhancing market-uncertainty and increasing friction ('de-lubricate') in
international trade settlements. Obviously, damaging the world would
automatically damage the United States itself.
So then is the US, as the provider of the de facto international reserve currency,
doomed to suffer from loss of demand and possibly higher-unemployment because it has no choice
but to run a CAD for the sake of the world?
Before we mount our crosses in martyrdom, let us use
equation (VI) to examine whether it is really the CAD itself that is harmful, or whether it is the temporal derivative of the CAD-share (i.e. the rising of the CAD as
% of GDP) that represents the real danger to the US. Let us examine the two
cases separately as follows:
CASE I: Constant CAD-share
of GDP
As seen in equation (VI), if the CAD-share
of GDP were a constant, then any increase in I/GDP would automatically lead to a decrease in C/GDP. The decrease in C/GDP
would gradually lead to evolving excess-capacity and hence puts a lid on any excessive investment-overhang.
Conversely, any increase in C/GDP would automatically
lead to a decrease in I/GDP. The decrease in I/GDP would gradually lead to
inflation by virtue of evolving under-capacity and hence put a cap on any excessive consumption-overhang via
raising of interest rates. An economy in a state like this would see normal business-cycles
with small progressions, small recessions and small Keynesian Estoppels. In
other words, a small, steady CAD would get 'adjusted' into the US economy and
would cause no special damage, either in terms of unemployment or in terms of
imbalance-formation & instability-magnification.
Case II: Rising CAD-share
of GDP
A rising CAD-share of GDP, on the other hand, tends
to amplify the underlying business cycles and thus leads to massive boom & bust phenomena. For
example, as seen in equation
(VI), if I/GDP is rising, a rising CAD/GDP may allow C/GDP
to also rise simultaneously
(see sub-period M-2 during 1997-2000 in figure 7).
Alternately, it could prevent the C/GDP from falling, even as it simultaneously
adds more fuel to the rise of I/GDP
(see sub-period I-2 during 2003-2006 in figure 9). The
natural constraint of over-capacity that was seen in Case-I would be severely
weakened. Therefore, the resulting boom proceeds much farther (i.e. the
imbalance grows much larger) than would have been otherwise possible, leading
to the creation of a massive
investment-bubble. In the end, the unwinding of this super-charged
investment-cycle leads to a serious and painful bust.
Similarly, if C/GDP is rising, a rising CAD/GDP may
allow I/GDP to also rise
simultaneously (see sub-period M-2 during 1997-2000 in figure 7).
Alternately, it could prevent I/GDP from falling, even as it simultaneously adds more fuel to the rise of C/GDP. The
natural constraint from inflation (and hence raising of interest rates) due to
evolving under-capacity that was seen in Case-I would be severely weakened.
Therefore, once again, the resulting boom proceeds much farther (i.e. the
imbalance grows much larger) than would have been possible, leading to the
creation of a massive consumption-bubble. In the end, the unwinding of this super-charged
consumption-cycle also leads to a serious and painful bust.
Clearly, it was the rising of CAD/GDP in the US (from 2% in 1997 to 6% in 2006) that was
responsible for amplifying the internet-bubble (1997-2000) and the housing-bubble (2003-2006) into super-massive boom &
bust phenomena. This is clearly evident in sub-periods M-1 (1997-2000) and I-2
(2003-2006) indicated in the graphs. In light of this, researchers should move
their focus away from the CAD itself
and instead examine the large-amplitude cycles
of the CAD, which tend to magnify the boom and the bust phases of the US
Economy and hence require ever-larger and ever more-frequent Keynesian Estoppels.
QUESTION: What
would the US economy have been like, had it hypothetically
managed to maintain a constant CAD/GDP
during 1984-2012?
Here are the approximate counter-factual trends that would have been seen had
the US managed (hypothetically) to maintain a constant CAD of 2% of GDP over
the last 30 years:
 |
| FIGURE 14(a) |
 |
| FIGURE 14(b) |
As seen in figures 14 (a) & (b), the
C/GDP & I/GDP would have had no obvious
secular-trend as both would have been largely cyclical. Sometimes we would have seen investment-driven growth,
sometimes consumption-driven growth, and balance-driven growth would have occurred
for the rest of the time. We note that 'mix-driven growth’, by definition, is
not possible in an economy with a constant CAD/GDP ratio. As also seen in the
graph, we would still have seen the usual business-cycles, but the high
consumption-levels that we see today would not have developed, because the
Keynesian-Estoppels would have been much smaller in magnitude and more easily
recharged in each cycle.
This leads us to an astonishing conclusion: A steady
CAD of 2% of GDP would cause less harm than a cyclical variation of the CAD
between 0% and 4% of GDP, even if the
average CAD across the cycles were to
be at the same at 2% of GDP level. This is because the former would get
'absorbed' into the natural ebb & flow on the US economy, while the latter
would naturally tend to magnify or amplify its internal boom & bust cycles.
4.3 The Leaking-Demand
Problem
During the bust, the Government props up demand by
borrowing the excess savings (i.e. difference between savings
and the falling investment) and spending it to prevent consumption-growth from
collapsing along with investment-growth. Given that the CAD is merely an
expression of inadequate savings (i.e. a CAD implies that
investment needs are greater than domestic savings present), it follows that
the CAD should ideally vanish during
the bust. In practice, of course, the CAD does not completely disappear, but the
CAD-share of GDP usually decreases during the bust, as seen in figures 5 and 10.
Since the decrease
in the CAD-share of GDP ‘assists’ the government in propping-up domestic-demand,
we can perform a comparative study of ‘load-sharing’ to determine how much of
demand increase came from additional government-spending and how much from the
reduction of the CAD-share, as shown in Charts 1 (a) & 1 (b):
.jpg) |
| CHART 1(a) |
.jpg) |
| CHART 1(b) |
From Chart 1(b), it appears that during the first Keynesian Estoppel (1989-92), government spending did ~62%
of the work and the reduction in the CAD-share did ~38% of the work of
increasing domestic demand to offset the falling investment during the bust.
Similarly, during the third Keynesian Estoppel (2007-09), government spending did ~54% of the work and the reduction in the CAD-share did
~46% of the work, implying that it was slightly more efficient than the first
case in which more of the demand ‘leaked out’.
The same chart indicates, however, that during the second Keynesian Estoppel (2000-03), the government spending did
~125% of the work and the reduction in the CAD did ~ -25% of the work of
increasing domestic demand to offset the falling investment of the bust. This
is a shocking and disturbing result.
As seen in figure 8, even as
the government was desperately trying to shore-up demand during the 2000-03
bust, the CAD was actually increasing
over that period. This makes no sense whatsoever; it is almost schizophrenic
in character. While on one hand increased government deficit-spending is
indicating that an excess of domestic
savings exists in the economy, on the other hand the CAD-share is increasing, indicating
a deficiency of domestic savings in
the economy. This leaves the observer confused; it cannot simultaneously be both, so which is it? Clearly, we can see that the rising CAD once again made a bad situation much worse.
5. CONCLUSIONS
5.1 Managed
Moderation
The US must set a deficit-target within a range of 2-3%. If the world needs US Dollars for use outside of US trade, the world can
certainly have US Dollars via a reasonable, manageable and managed deficit. A discussion
& consensus will be needed between the US and the East-Asian and Germanic
countries so that this target can be maintained. For example, if the US deficit
rises above 3%, the East-Asian and Germanic countries will have to agree to
take action (reduce wage-repression, financial-repression, adjust currency-pegs
etc.) to reduce their surpluses. Conversely, if the US deficit falls below 2%
and a global-shortage of dollars appears for genuine reserve needs, the
resulting dollar-demand would naturally strengthen the dollar and move the
deficit back into the targeted range. Once the US CAD is stabilized, the business cycles within the US will stabilize and
the extraordinary magnitude of the amplified boom and bust sequences we have
seen over the last 20 years will become a thing of the past.
With the rapid-rise of Asian economies, it is reasonable to assume that the US economy will keep becoming an ever-smaller share of the
global economy. If the US then implements bounds on its CAD, then it will naturally reduce the ability of fast-growing large-countries like
China to keep running large surpluses. The only solution to this problem is for large, planned-deficit countries
like India to also grow fast and so provide additional sinks for the global surpluses.
http://alturl.com/ye25u
http://alturl.com/ye25u
5.2 Uncle Sam's Meddling
It is true that government meddling in trade and/or
in the economy generally leads to inefficiency, and is hence usually
undesirable and sometimes even dangerous. However, we note that the term
'government-meddling in the US economy’ is often incorrectly used to imply only the interference of the US
government. Even if the US government does not meddle in the US economy, it is
obvious that the German, Chinese and Saudi governments, for example, are already meddling with it. In a
globalized, free-trade system, the meddling of foreign governments in their own
economies automatically affects the
US economy via trade-imbalancing and capital-distortions. Therefore,
interventionist foreign-governments effectively end-up meddling in the US
economy, regardless of whether that is their intention or not. In light of
this, the ideological opposition to US government interference in trade (or the
economy) -- while historically and rationally valid-- is no longer justified in
the context of the global trade system we have today. The ideologues of this
anti-government variety, who often refer to Keynesian-Estoppels as 'Voodoo
Economics', and who have so far been insisting that the US Government stays out
of the economy, will have to choose between following three options in the near
future:
(a) Get all foreign governments to stop meddling
with their own economies, or,
(b) Stop trading with the world and turn the US into
an isolationist country, or,
(c) Accept that the US government with have to take counter-actions as needed.
5.3 The Nature of the
US Economy
Even though the US Economy appeared to be consumption-driven from a quick inspection of figure 1 at the top of this article, a more
detailed analysis (see Table III (b)) has now revealed that:
(a) The US economy spent only 11% of the time
during the last 28 years in consumption-driven growth mode, with
consumption-share of GDP rising.
(b) Mix-driven growth occurred 18% of the time, with
the increasing consumption-share sub-type (i.e. Type II mix-driven growth) occurring
only 10% of the time.
(c) Investment-driven growth, with consumption-share
of GDP falling, predominated during
the last 28 years by occurring 43% of the time.
(d) The economy spent 28% of the time over the last
28 years in Keynesian-Estoppel mode, with government-diktat
guiding the economy in order to prevent collapse.
PART 1) As seen in the last 4-rows of Table III (a), an
increase in consumption-share of 3.2 percentage-points of GDP over the last
12-14 years is directly attributable to the two un-recharged Keynesian
Estoppels. Once they are adequately compensated, this increase will simply vanish
and the US economy will rebalance. In fact, as it turns out, this is
exactly what the IMF projects will happen over the next few
years, as seen in figures 15 (a) & (b).
 |
| FIGURE 15(a) |
 |
| FIGURE 15(b) |
PART 2) An increase in consumption-share of ~ 2.8 percentage-points of GDP over the last 28 years may be simply attributed to the
increase in the old-age dependency ratio in America. Even though the US may not be
aging as fast as Japan & Germany, the baby-boomer retirement wave implies
that a larger section of the population has been retiring to consume without
producing. This automatically leads to a slowly-rising consumption-share of GDP
and is a natural phenomenon unconnected to deliberate consumer-behavior.
PART 3) This finally leaves a tiny and almost
statistically-irrelevant increase in consumption-share of ~ 0.5 percentage-points
of GDP over the last 28 years to be attributed to the ‘frivolous, bling-loving, shopaholic’ American Consumer.
In final summary, therefore, the US economy is not naturally the 'consumption-driven'
economy that it appears to be on prima facie examination. In its natural
state, it is a balanced economy that simply alternates between investment-driven and consumption-driven
cycles, with some pure balance-driven periods and Keynesian-Estoppels thrown in. The
primary reason why it superficially appears
to be a consumer-driven economy is because of the imbalances created by uncompensated large Keynesian-Estoppels, which were themselves the consequence of a large & rising CAD. The secondary reason why it
superficially appears to be a
consumer-driven economy is because the retirement-pattern naturally
causes consumption to rise slightly faster than production as part of a
classical aging-demographic pattern. Once we correctly account for these two factors,
the myth of cultural consumer-excess in the US is automatically shattered.
