Consumption Cuts? Economy Couldn't Stand It
Janeway, Eliot, THE JOURNAL RECORD
"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 time.
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 own report.
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 foreclosures.
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. …