A cure for consumption
AS GOOD economic news finally begins to surface, there’s a temptation to assume that the United States can revert to business as usual. A dash of financial regulation, a pinch of cash for state and local governments and the unemployed, and we’ll be back on track with our debt-driven consumer economy. Many assume that a debt and consumption-led process is the only way to create jobs, incomes, and well-being — even if household balance sheets are already stretched.
But that’s not what builds wealth, and it’s not how economies work. Another solution is emerging as hard economic times have dovetailed with the sustainability movement. People are thinking beyond the big-box stores, inventing low-impact, do-it-yourself lifestyles that may hold the model for a 21st-century economy. While the shift away from debt-fueled consumption represents a major change for the US economy, it doesn’t need to be wrenching for American households.
It is true that consumers became the engine of economic growth in the United States. Until the recent economic crisis, the fraction of total output dedicated to consumption of goods and services was rising significantly, from 63 percent in 1960 to 70 percent in 2008. In recent decades, much of that consumption was made possible by credit. In the 1980s and ’90s, debt payments represented about 10 percent of disposable income — but soared to just under 14 percent in the run-up to the crash. There are a number of reasons why households took on so much debt, but declining real wages and rising home prices were key. People needed to borrow to buy a home — or just to keep consumption from falling.
But since the autumn of 2008, household indebtedness has reversed sharply. Total credit outstanding and the debt service ratio declined, while personal saving has risen sharply. People wisely took action to limit financial liabilities in an environment of high unemployment and uncertainty.
Will it last? One side points to the revival of GDP growth, rising consumer confidence, and the uptick in consumer spending. But demand has been dominated by luxuries purchased by high-income households, and there are too few to sustain the recovery.
The other view is supported by a number of surveys showing that people have been permanently affected by the downturn. In April, the Gallup Poll found that 57 percent of Americans were spending less, and this fraction has been growing over the past year. Thirty-eight percent of this group reports that their habits will be permanent. The same poll found that after years of near-parity, more people enjoy saving than spending. In addition, the traumas of unemployment, bankruptcy, and foreclosure experienced by tens of millions will affect willingness to spend and borrow for decades.
If frugality is the “new normal,’’ what are the consequences for the economy? Don’t we need robust growth in spending to create jobs and prosperity? This view has been overly represented in the popular media, which relies heavily on economists with close ties to the retail sector. These are the folks who anxiously read the tea leaves on Black Friday, during the August back-to-school sales, and when retail sales reports are released.
But not all spending is the same. Do Americans need more cellphones, cheap air travel, and junk food?
A growing number of people are answering that question in the negative, pioneering a lifestyle that is less focused on buying. They’re devotees of “economies of re-use and re-cycling,’’ and frequent sites such as Craigslist and freecycle.org, which organizes free exchanges of unwanted goods. They’re also going beyond re-sale to Web-facilitated sharing of durable goods such as tools, appliances, and even vehicles. And they’re starting “time banks’’ in which people trade services locally, rather than purchasing them from professionals. One of my graduate students is getting her data analyzed in exchange for preparing meals.
What people are losing in consumer goods they are making up in creative activity and social connection. Vegetable gardening has exploded since the recession began. Urban poultry is all the rage. Do-it-yourself activity is also extending to small-scale electricity generation and home construction using eco-friendly materials. People are coming together to help each other with their projects, consciously building social capital and interdependence. These cultural pioneers often work limited hours in the market, replacing lost income with home-produced goods and services.
Of course, there have been similar movements since the 19th century, and none has stopped the creep of consumer culture. But today, with more than 26 million Americans currently under or unemployed, the basic economic landscape has changed: cash is scarce and time is plentiful. Ecological constraints point in the same direction. Growth will re-ignite increases in food and energy prices, which in turn enhance the appeal of this lower-impact, lower-cost lifestyle.
If we’re turning away from McMansions and designer handbags, what should we be turning toward? Our long-term economic well-being depends centrally on productivity performance, which is closely tied to investment. Investment, whether it’s in machinery, education, or natural resources, increases future wealth by building assets and enhancing productivity. Unfortunately, gross domestic investment has been falling since 2006, and has barely risen since 2002.
Can a shift toward investment — especially toward education, alternative energy, and ecological restoration — generate enough employment and consumption for the bottom 40 percent of the population who don’t yet have enough? Not alone. But then, the trickle-down growth approach can’t either. Combining new lifestyles at the household level with new priorities at the national scale is emerging as the smart way to move forward. To make that happen, our economic conversation should not just be about how much, but also, what, for whom, and how?
Juliet Schor is the author of “Plenitude: The New Economics of True Wealth,’’ and a professor of sociology at Boston College.