The New York Times > Business > Business Special > We Pledge Allegiance to the Mall

The New York Times > Business > Business Special > We Pledge Allegiance to the Mall: "December 6, 2004

December 6, 2004
We Pledge Allegiance to the Mall
By LOUIS UCHITELLE

he United States is now engaged in its greatest age of consumer spending - longer and more intense than the splurge after World War II, when Americans rushed to acquire all the merchandise denied to them during the Depression and the war.

That postwar surge in consumption, a pent-up response to years of unemployment, then rationing, subsided in the early 1950's. Not until the late-1980's did the nation - encouraged by market bubbles - once again devote three-quarters of its national income to consumer spending.

But this time, the pent-up demand has intensified rather than dissipated, and the global economy trembles from the stress.

The sequence is intricate. As consumption has risen in America, absorbing 80 percent of national income now, the production of goods and services has migrated overseas. That is the polar opposite of the post-World War II experience. Then, Americans consumed what they also produced; income from production paid for consumption.

Today, in contrast, 21 percent of what consumers purchase comes from abroad, and the figure has risen by a percentage point every two years since 1990, according to Commerce Department data. The figures do not include gasoline or fuel oil. The imports are purchased on credit - consumer credit - and therein lies the stress.

"We outsource everything except consumption, and that is not sustainable much longer," said Stephen S. Roach, chief economist for Morgan Stanley, arguing that the indebtedness involved in America's obsessive spending will soon disrupt exchange rates, damaging economies.

Foreigners are helping to make the indebtedness possible by subsidizing consumer credit through more than $600 billion a year in loans to the United States. Without that injection of borrowed money, the United States would be hard-pressed to fund both consumer credit and its huge budget deficit. Interest rates would rise, making consumption more expensive.

By all the rules of international economics, Mr. Roach's prognosis of impending crisis is accurate. Americans cannot endlessly purchase more than they can pay for, while the producing countries, particularly China, provide endless credit to cover the shortfall. That willingness to lend props up the dollar's value - until the day comes that Chinese consumers purchase more of their own country's output, and the pressure to export and to finance the exports declines.

Many experts agree with Mr. Roach that America's mounting deficit in its overseas transactions and its growing indebtedness to foreigners cannot be sustained. But much more than in the past, this way of thinking is hotly disputed. The reason is that something novel is happening to the global economy. The age-old concept of comparative advantage has taken a wry 21st-century twist.

Nations still trade the goods and services that each produces most efficiently. That is the traditional definition of comparative advantage and, to take just one example, no country is more adept at exporting the fruits of biotechnology than the United States.

But as other countries acquire the skills and efficiencies that were once this country's strengths, a new comparative advantage flourishes in the United States that no other nation has come close to matching. That advantage is America's miraculous mechanism for magnifying consumption.

The nations feeding this mechanism are mainly China, Japan, most of the rest of Asia, Canada and the European Union. Their output of goods and services exceeds the purchasing power of their own populations, so they sell the excess in the bottomless United States marketplace. That gives these other nations a stake in maintaining the new set of comparative advantages.

If consumption drops in America, production falls overseas, pulling down other economies. Rising unemployment adds to the already huge number of people without work, especially in China. But consumption in America has not fallen, not even in the 2001 recession. For the first time, it rose in the United States during a recession.

"With some relatively minor adjustments, we can maintain this system of us consuming and them producing for a long time," said Martin Regalia, chief economist at the United States Chamber of Commerce.

For him and others in his camp, a mild dollar devaluation, gradually increasing the cost of imports, is enough of an adjustment, for now, to take the edge off consumption. The dollar has indeed declined in recent weeks - significantly against the euro, but less against the currencies of the Asian countries, although even against them the pace has accelerated. The big holdout is China, whose currency is pegged to the dollar.

The resistance to devaluation draws no protest from the chamber. While Mr. Regalia calls for minor adjustments, the chamber itself espouses neither a stronger nor a weaker dollar. That is partly because one-quarter of the chamber's three million members are retailers who benefit from America's high level of consumption, much of it imported on credit.

The pressure from American manufacturers for dollar devaluation is also diluted. The rising efficiency of low-wage Asian workers draws manufacturing operations relentlessly overseas - so much so that manufacturing's share of the gross domestic product fell to 12.7 percent last year, from 15.4 percent in 1998.

The cost of the new global alignment is evident in the Commerce Department's reports and in other government data. The current account deficit, the balance sheet for all of the nation's international transactions, is approaching an astronomical $630 billion this year, most of it a result of the imbalance in merchandise trade.

Indebtedness to foreigners, mainly to pay for this imbalance, was $4.5 trillion in the third quarter, double what it was less than six years ago. The debt is rising most quickly in Asia, where the Chinese government, for example, takes the dollars that Americans spend on imports from China and lends them back to the United States so consumer spending can continue, on credit. The dollar's reputation as a particularly safe reserve currency only adds to the willingness of other countries to lend to Americans.

THE recycling comes mainly through the purchase of Treasury securities. These purchases in turn help fund the Bush administration's budget deficit, and the influx of cash is enough to hold down American interest rates. The lower rates keep down the cost of consumer credit and encourage the raising of cash through mortgage refinancing - a type of consumer credit that is rare elsewhere in the world. This borrowing sustains the spending binge, even as incomes have stagnated since the 2001 recession and jobs have disappeared.

No other nation possesses the same huge network of retail outlets, whose productivity is rising faster than any other sector of the economy, according to the Bureau of Labor Statistics. No other people are as drenched in advertising and product promotion. No other country maintains so sophisticated a warehouse and distribution system, linked to consumers not only through malls but through the Internet and call centers.

"Once you get into a mall, you are confronted with a huge array of inexpensive goods, and you have driven to the mall, so you can bring a lot home in the car," said Stephen Brobeck, the Consumer Federation's executive director. "In European cities you walk to a mall, if there is one nearby, and walking, you can't carry as much home. We have more cars per capita than Japan or Europe."

What may in the end undo the new form of comparative advantage is not current account deficits or misaligned currencies, but social forces. Tens of millions of Asians could insist on higher wages so they could consume more, too. Or, American consumers could succumb to an overload of debt and stagnant incomes. Mr. Roach, the Morgan Stanley economist, sees the former happening first.

"We are assuming that Asians, in particular, are willing to put aside their aspirations as consumers," he said, "and continue indefinitely as low-wage producers unable to consume what they produce."