Loan 365

Who will wean America from its shopping addiction? Everyone is aware of the developed world’s economic problems: crushing debt in Europe and the weakened economy in the United States, which simply prints more and more money in stimulus attempts. The question is whether the different policy steps – cutbacks in Europe versus more spending in America – will bear fruit, and just as importantly, when.

Uncharted waters Washington is navigating uncharted waters in trying to stimulate its economy to create jobs, relying on newly printed money and increased deficits. It’s assuming, or rather hoping, that the price of resolving the problems these moves will create will be tolerable. Only time will tell. But to achieve its purpose, Washington has to keep the people spending. About 70% of America’s gross domestic product is based on private consumption. In Southeast Asia and China, that ratio is 40%; in Western Europe it’s 55%.

America’s dependence America’s dependence on private consumption is an inherited structural problem. So far, U.S. governments have shown no desire whatsoever to tackle that dependence. The problem is that changing the ratio between private consumption to investment and public consumption requires government to take steps that would probably cost it the throne.

Private consumption If the ticket were increasing investment and public spending while keeping private consumption intact, the government might push it through. But that can’t be done. You can’t get something from nothing. You can’t increase investment and public spending without diverting resources from something else, and that something else has to be private consumption because there isn’t anything else.

Lower taxes To understand how uncompetitive the United States has become, think of this. Americans pay much lower sales tax and VAT on consumer items than Europeans do. They certainly pay a lot less for gasoline. So they drive gas-guzzling cars while Europeans don’t. Since European governments charge more tax than the American one does, they can supply their people with more modern train systems traveling at an average of 125 mph, compared with 60 mph in the United States. The high tax in Europe, however, decreases the motivation to work. Neither method has been crowned the winner. Americans like big cars and stuff, and Europeans like fast trains. Americans will work harder and have less leisure time.

Surplus consumption But there is a huge difference. If that surplus consumption had been supplied by American companies, the equation would be balanced. But it isn’t. The stuff they buy and the excess oil consumed in America originates outside the country. The European and Chinese fast trains, for example, are domestically supplied.

Limited resources Resources are limited and the United States is already scraping the bottom of the barrel. To do the right thing, it has to warn its citizens that they have to scale back their spending today to leave a better economic base for their children and their children’s children. That’s what their parents and grandparents did for them during the 1930s, ’40s and ’50s, and that’s what the people of China are doing today. And that’s what has not been done in the United States for the last 30 years.

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