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By Bruce Stokes, National Journal
© National Journal Group Inc.
Friday, Jan. 19, 2007

In a world of ants busily storing supplies for a rainy day, Americans are grasshoppers, consuming while the sun shines and ignoring the gathering storm clouds on the horizon. This might make an amusing children's fable for some modern-day Aesop, except that the dependence of the U.S. economy, and by extension the global economy, on unsustainable American consumption does not bode well for grasshoppers or ants.

American consumers have been on a binge. Consumer spending increased at an annual rate of 3.6 percent over the past decade, according to the International Monetary Fund; that's four times faster than in Japan and three times faster than in Germany. With consumption exceeding U.S. economic growth, it has been acquisitive American consumers who have fueled a stellar U.S. economic performance and contributed to the world economy's unprecedented expansion.

But there are no free lunches. Such consumption has come at the expense of savings, the rate of which has been declining for years. For the past six quarters, Americans have spent more than their incomes, accumulating record debt in the process. In the first three quarters of 2006, the household debt-service ratio -- required payments on outstanding mortgage and consumer debt as a portion of disposable personal income -- was 14.43 percent, the highest it had been in at least a generation, according to the Federal Reserve. Much of this debt reflects borrowing against rising home values. And as the air has recently rushed out of the housing bubble, the equity that backed those loans is rapidly disappearing, forcing a record number of Americans into bankruptcy.

Just as consumers have been living beyond their means, so too has the American economy. Thanks to a seemingly insatiable appetite for imports, the U.S. current-account deficit -- the nation's most complete balance sheet with the world -- probably exceeded $900 billion in 2006, or about 7 percent of the economy, an unprecedented level.

Americans can kick their addiction to consumption in only three ways: enact policies that reward savings and inhibit spending, especially on imports; weaken the dollar to make all Americans poorer; or induce a recession. These detox solutions are interrelated, and it will likely take a dose of all three to bring sustainable American consumption in line with national income.

The tax code provides all sorts of consumption incentives that could be curtailed. Reducing the cap on mortgage interest deductions would curb spending on housing, for example, although such a move would be a tough sell politically.

To be sure, past efforts to get U.S. consumers to salt away more money have failed to stem the decline in national savings. But some Democrats are touting a plan in which employers could automatically set aside a portion of each employee's paycheck in a 401(k) unless the person objects. In small-scale experiments, the scheme has dramatically improved savings. Whether the public at large would accept such a plan is unknown.

If people refuse to save for themselves, the government could always save for them by running budget surpluses, as it did in the late 1990s. Congress's recent reinstitution of the principle of "paygo," offsetting all spending increases with budget cuts or tax hikes, is a step in that direction.

On the international side, government could impose barriers to buying imports. But experience suggests that consumer behavior is slow to change. In the short run, consumers would simply pay a premium for foreign-made products, especially those no longer produced domestically. That would lead to inflation, possibly spurring the Federal Reserve to raise interest rates. Tighter money could trigger a recession, which would finally curb consumption -- assuming it was deep enough and lasted long enough -- but at a great cost to workers and family income.

Alternatively, Washington and other capitals could orchestrate a rebalancing of currency values, not unlike the 1985 Plaza Accord between Washington and Tokyo. A coordinated effort involving an appreciation of the Chinese yuan, dollar sales by the European Central Bank and the Bank of Japan, and purchases of euros, yen, and other currencies by the Federal Reserve would devalue the dollar. That would curb U.S. consumption because the money in Americans' pockets would buy less. Moreover, it would spur foreign consumption, minimizing the adverse impact that reduced U.S. consumer spending would have on global growth. But it doesn't appear that the Asians or the Europeans are willing to play ball.

The most likely outcome of this consumer spending spree is a hard landing: a recession brought on by the bursting of the housing bubble or by a precipitous, market-driven decline in the dollar triggered by a sudden loss of foreign confidence in the U.S. economy. Or maybe a little of both. It won't be a pretty picture, but America's recent consumer binge, funded by other people's money, is not sustainable. And grasshoppers always get their comeuppance. [an error occurred while processing this directive]

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