The Vanishing American Consumer

Scott Hoyt of Moody’s Economy.com leans toward permanent change: “You’d have to go back to the Great Depression to see a decline as severe” as the 22 percent drop in household wealth that began in 2007, “and we know what the Depression did to consumer attitudes.” (Let us pause to remember a generation that spread wet paper towels on the dish rack to dry and re-use.)

Marketing psychologist Geoffrey Miller, author of Spent: Sex, Evolution, and Consumer Behavior, doubts that consumers have changed all that much. But he says many of the companies he sees as a consultant are “truly panicked about what consumers might do in the future: How will premium brands keep making money? How can forward-looking companies overcome consumer skepticism?”

Harvard economist David Laibson does not offer much comfort to panicky marketers: “The consumer is actually right where she should be, thinking about how much money she lost and how much more she has to save if she’s going to retire comfortably. I wouldn’t call that fear. I’d call it good sense.” With past spending so dependent on home equity, consumers are making “a permanent readjustment to the new reality that houses are worth 30 percent less.”

Brookings Institution political scientist William Galston says households that have survived “a near-death financial experience” are already frantically cutting debt and building up their savings. If the savings rate stabilizes at 5 percent of income — below historic levels, but up from negative territory in 2006 — Galston figures households will have $600 billion less to spend annually. That spells the end, he says, to our unprecedented “orgy of personal consumption.”

In my own household, the “new normal” means that my wife and I now bake our own bread (Jim Lacey’s No-Knead recipe, instead of $4-a-loaf ciabatta), make our own granola (but maple syrup is a budget killer), grow some of our own vegetables, and even sometimes brew our own beer. And closing the circle of production and consumption has turned out to be a lot more therapeutic than shopping ever was. We bought a new car back in March, but only because the old one was 11 years old, and the price was right.

But I suspect that a bigger change lies ahead. Most economists agree that it will take job creation to bring American consumers back into the marketplace. And that ultimately means Americans will need to redefine themselves not primarily as consumers, but as producers. Instead of going into hock buying stuff from China, we need to get back to making stuff the Chinese and other economies want to buy.

That will require policy changes, as well as individual enterprise. Here are three likely approaches:

Deregulation: Sherle R. Schwenninger of the New America Foundation argues for attracting manufacturers to this country by stripping out needless regulation and dropping the corporate income tax to 15 to 20 percent, down from as much as 35 percent now. The federal government also needs to aim infrastructure spending more carefully at improvements that make manufacturers more productive, he says — for instance, expanding U.S. natural gas capacity to replace dirty coal and expensive imported oil.

New China strategy: Economist Peter Morici at the University of Maryland argues for getting tough with China, which he says grabs a 40 to 50 percent profit advantage — and the jobs that go with it — by keeping its currency artificially low. The Obama administration has spoken out against currency manipulation, a phrase American officials diplomatically avoided in the past. But Morici worries that “they just don’t have what it takes to deal with it. This economy cannot grow if they continue to permit the Chinese to victimize us on trade.” The major technology shift away from fossil fuels is “all going to happen in China,” Morici says, unless the Administration plays hardball now.

Government aid to manufacturers: Sue Helper, an economist at Case Western University, believes companies are already starting to recalculate the real costs of outsourcing their manufacturing to China, including the loss of key technologies. Low wages were attractive at first, but “direct labor accounts for only 10 to 20 percent of manufacturing costs, and a lot of costs rise to get that cheap labor.” She notes that General Electric chief executive Jeffrey Immelt, whose company helped lead the charge offshore, is now calling for the reindustrialization of America.

To grease the wheels of U.S. reindustrialization, Helper says the government should expand its Manufacturing Extension Partnership, which helps small- and medium-size manufacturers solve technical problems, much as the Agricultural Extension Service helps farmers. The difference, says Helper, is that agriculture accounts for less than 1 percent of gross domestic product and 2 percent of the workforce, but gets $430 million a year for its extension service. Manufacturing accounts for 14 percent of GDP and 10 percent of all jobs — but gets just $90 million. Shifting money to where it can produce the best return for the economy “could easily pay for itself in increased tax revenues.”

There is of course an irony in all this. The companies now in a panic about the vanishing American consumer are in many cases the same companies that shipped American jobs overseas. And now they worry that Americans can no longer afford their imported products? Well, gee, who would’ve thought? Maybe we should just stay missing for a little while, holding onto our pennies and letting businesses stew over that thought — until they bring back the jobs.

Meanwhile, here’s a motto for muddling through the hard times, to replace that bumper sticker about “the one who dies with the most toys.” It’s what rock musician Warren Zevon said when asked what his own imminent demise from lung cancer had taught him about life: “How much you should enjoy every sandwich.”

It turns out that you can enjoy that sandwich just fine, even if it’s only peanut butter for now, and even if you have to make it yourself.

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