Obama and the 'B' Ark economy

The remarkable thing about the "wildly popular" scheme to encourage American consumers to purchase more automobiles is not, as a few conservative commentators have wryly remarked, that the mainstream media finds it surprising that people enjoy federal largesse. It is, rather, that so many commentators have recognized that the program is merely designed to encourage tomorrow's consumption today.

This is remarkable because most of them had not hitherto been able to recognize a similar pattern that has been at work in the American economy since 1983. For you see, in media coverage of economic matters, one frequently hears that consumer spending accounts for 70 percent of the American economy, or as the economists put it, personal consumption expenditures make up 70 percent of U.S. Gross Domestic Product, or GDP. And while this is true, it is not the historical norm. From 1950 to 1983, consumer spending averaged around 62.5 percent, always remaining well within a four-point range between 60 and 64 percent. From 1983 onward, that percentage increased gradually until it reached 70 percent in 2002, which is roughly where it has remained since. (It appears to have peaked in real terms at 71.2 percent in the first quarter of 2009.)

The problem is that this increase in consumer spending correlates with the increase in household sector debt to GDP, which rose from its long-time average of 45 percent to 97 percent in the first quarter of 2009. So, the increase in consumer spending over the last two decades has been funded by borrowed money, very much like the "Cash for Clunkers" program. But regardless of whether one looks at the short-term auto sales program or the intermediate term rise in consumer spending, it is clear that what is at work is nothing more than a debt-funded shifting outward of the demand curve that will inevitably run up against the limits of demand in time.

That we are rapidly approaching these limits should be readily apparent to even the casual observer. As David Rosenberg has pointed out, nine years ago "0 percent financing" drove auto sales to a rate of 21 million vehicles per year. Four years ago, "employee discount for everyone" increased the annual sales rate to 20 million vehicles. Now, even with direct government involvement, "Cash for Clunkers" has only managed to inflate the rate to 11 million and has had to rely upon increasing both consumer debt and government debt to do so. This is significant because if the inability to further increase consumer debt causes consumer spending to fall back to its long-time historical levels, the decline would reduce real GDP by an additional $1,231 billion, or 8.7 percent. This reduction, on top of the 4 percent decline in real GDP that has already occurred, means that a mere return to historical consumption patterns will be a depression-sized event.

A debt-driven expectation of a collapse in consumer spending may explain the Obama administration's desperate attempt to quickly push through some form of radical health care restructuring. The percentage of GDP spent on health care has risen almost as fast as the increase in household sector debt, from 8.8 percent in 1980 to 15.3 percent in 2009. So, unless the government can exert enough control to force down the amount consumers choose to spend on health care, through rationing, cost-cutting or other means, an increasing percentage of declining consumer spending will be directed toward the health care services sector rather than toward more productive sectors capable of generating future economic growth. And a service economy that increasingly consists of doctors providing health care to other medical workers and health care bureaucrats is no more sustainable than Douglas Adams's 'B' Ark economy of hairdressers and telephone sanitizers.

Those who decry Obama as a socialist are more accurate than they know. The U.S. government is now engaged in central planning to an extent that few Americans are capable of comprehending, as the administration's planners attempt to effect major adjustments to entire sectors of the economy as they try to prevent the financial infrastructure from collapsing. Now that Fed Chairman Ben Bernanke's comparatively subtle finance first approach has failed, one can expect more ham-fisted attempts by the legislative and executive branches to incentivize debt spending in some sectors while blocking it in others. The "success" of the automotive scheme suggests that we will eventually see some sort of "Cash for Casas" program and perhaps even a "Dollars for Debt" offer wherein the federal government provides dollar-for-dollar matching contributions for federally approved purchases financed with consumer loans.