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Spendthrift Americans   (Michael Goodfellow, February 4, 2008)

I'm not as hard on Americans as you seem to be. When I was a teenager, I expected some kind of rationality, and had complete contempt for people who repeated nonsense. Later, I thought that most people were so intellectually lazy that it never occurs to them to think things through. But as I've watched these bubbles come and go, I realize that people just get caught up in whatever emotional/intellectual fads are going around, from Global Warming to the housing bubble to Obama mania. I suppose it could just be peer pressure, and that afterwards people will admit to having doubts all along. It doesn't seem that way though. People aren't admitting to doubts -- on the contrary, they don't see why the fad ever has to end.

The low savings rate was partly due to the housing bubble. Why save more money if you think your house is throwing off tens of thousands in appreciation every year? I don't know what the savings rate would look like if you included housing, but it would be higher than the negative number that's reported.

I also think the spending decisions are related to the baby boomers. My parents had a lifestyle that included a big house on a big lot, two cars, and a vacation home with a boat. All on Dad's IBM engineer salary. Mom never had to work. None of us kids ever managed to match that. I think that may be true more generally, and the post-boomers are trying to imitate the lifestyle of their parents. The lifetime job at a big company doesn't exist anymore though, and both housing and health insurance have eaten into paychecks. So they can't save and live the life they expect from what they remember as kids. Plus there's no stigma attached to bankruptcy or high levels of debt. If you fall behind, just hit reset and start over. No one is going to jail.

As for overseas investors, the standard economist story on that says that if we buy a lot of stuff from China, they have to do something with their dollars. You would wish they'd buy stuff from us, but if there's nothing they want, they buy shares or bonds or treasuries. There's not much you can do about that really. The end result is supposed to be either a drop in the dollar, a drop in interest rates or a transfer of ownership of companies to the Chinese (or all of those.) We are paying for electronics and toys with pieces of our strongest companies, or with government debt. What surprises me is how much China and Japan invest in the U.S. economy when it doesn't produce much of anything they want. Like buying the cow when you hate milk. Weird.

You could also just say that when China decided to enter the world economy in a big way, there were going to be disruptions. Hundreds of millions of people jumped on board, so it's no surprise the boat is rocking a bit. Eventually, the story goes, the Chinese would get rich enough to buy their own stuff, or the dollar would drop enough to make our products competitive there, and trade would level out. As the saying goes, "if something can't continue forever, it won't." Trade deficits can't continue forever.

You also can't really claim that all the jobs are being outsourced, leaving us with nothing, since unemployment is still low. I know some people disagree with the government number (the "not seeking work" problem), but I've also seen the "labor participation" numbers, and they don't show any precipitous decline. Women have moved into the workforce, and to some extent, men have moved out of it.

People continually talk about lost factory jobs, but I've read that even the Chinese are starting to push people out of factories as they automate. Things like microprocessors require so much precision that people simply cannot do those jobs, no matter how cheap they are. In other areas, the defect rate drops so much when you use robots that it doesn't pay to use people. It was years ago that I read that Honda in Japan had some plants so completely automated that they didn't even turn on the lights.

The place where we do have the most control is government deficits. Given the entitlement mess staring us in the face, it really is stupid to be expanding government programs or spending so much on Iraq. I could blame that on widespread financial illiteracy or our short-term viewpoint. However from an emotional perspective, it could just be that most Americans can't really believe that Social Security or Medicare could break the bank. We're a rich country, and now you are telling me we can't keep Grandma in her house, taking a few pills? Get out of here!

It seems bizarre to assume the country thinks like that, but that's the way they act. When polls ask people about what percentage of the budget goes to Medicare or Social Security, they give ridiculously low numbers (and ridiculously high numbers for things like NASA or foreign aid, which are tiny.) You could call it ignorance, but there are plenty of articles about these subjects in every news outlet. It just doesn't sink in. So I have to assume that many people have their minds made up, and the facts just bounce off.

Of course you can't wander through life completely deluded without suffering some consequences. Unfortunately, if things do fall apart, I doubt anyone will stop and consider, learn some lessons and decide to pay more attention in the future. Instead, they will probably latch on to some other emotionally satisfying explanation and lurch off in some other direction. I hope it's not too destructive when they do that.

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