EDITOR'S NOTE: Eliot Janeway is the publisher of the Janeway Letter.
Currently he is completing a book entitled ``The Economics of
Chaos: Revitalizing America's Economy.''
"Let's cut consumption'' has taken on the sound of an idea whose
time has come, although its practicality has yet to be examined.
This catch phrase has jelled into the consensus for remedial
action to fix all that's gone wrong with the economy. Professor
Paul Kennedy, in his New York Times response to complaints that his
best-selling book, ``The Rise and Fall of the Great Powers,''
expressed a passivity toward America's decline, replied that we
could always cut consumption.
The country has been living beyond its means for years. What's
new is a sense of uneasiness about it that has grown as private
borrowing outruns private income.
Economists of all persuasions admit confusion over the failure
of debt increases, governmental as well as private, to generate
increases in incomes and in spending, as they always have in the
past. This reversal of form has gradually squeezed people and is
beginning to scare them.
These frustrations have found a cure-all in the call to cut
consumption. Puritanism - gain through pain - has deep roots in our
culture and dies hard. So the idea has taken hold that inflicting
cuts on consumption will push buttons in orderly sequence:
- First, a rise in savings will roll back imports.
- Then, immediately afterward, these cuts will activate a flow
of money into new, productive, domestic investment.
If only life were so simple.
America has been down the low-consumption road before. Gov.
Mario M. Cuomo, inspired by a move President Franklin D. Roosevelt
made when the economy failed in the late 1930s, appointed a blue
ribbon commission to examine what's gone wrong the economy this
The report of Cuomo's commission, called the Commission on Trade
and Competitiveness, advocates a value added tax that would cut
consumption. But the governor was wise enough to dissent from his
The Temporary National Economic Commission, as FDR called his
exploratory vehicle, ran into a stone wall by urging industry to
invest in modernization while existing capacity lay idle.
Today, American industry is investing hand over fist in new
plants in cheap labor areas abroad but not at home. But cutting
consumption will neither increase investment at home nor reduce
imports from low-cost American-owned plants abroad. Overall imports
from high labor cost areas, like Germany, have increased steadily
even as domestic consumption has slipped.
Because consumption is outrunning income, admittedly, it is
weakening the economy. But precisely because of the
over-indebtedness created by overconsumption, cutting back on
spending now would explode a time bomb of debt delinquencies and
The parallel with oil is clear. Oil's explosive price rise
weakened the economy by inviting overborrowing on overpriced assets.
Subsequently, oil's abrupt fall compounded the damage by devastating
that flimsy debt structure.
Consumption has been falling for months, sounding shrill signals
of distress for the economy. Drastic price cutting has been needed
to limit declines in retail sales, further proof that the economy is
in need of support, not restraint. …