Archive for June 22nd, 2010

When economists cheerlead GDP figures, they do so based on the supposedly positive judgment that growth implies consumption gains, which means that people are better off. There’s good reason to be skeptical of this claim, even leaving aside distributional concerns. Robert Reich, in discussing China’s currency announcement, speaks well to the issue of a production versus consumption economy:

Here’s the awkward truth that’s not openly discussed on either side of the Pacific: Both the United States and China are capable of producing far more than their own consumers are capable of buying. In the United States, the root of the problem is a growing share of total income going to the richest Americans.

Inequality is also widening in China, but the root of the problem there is a declining share of fruits of economy growth going to average Chinese and increasing share going to capital investment.

Both our societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the United States, it is a prolonged jobs and earnings recession which, when combined with widening inequality, could create a political backlash.

Unfortunately, political divisions tend to obscure the real class divisions here in the US. Absent some key distractions, I think the working class would prefer a society in which production implies consumption, while the capitalist class prefers a society in which production implies profit. Political bickering gets in the way of exposing this key difference, and seems to make consumption less virtuous than production. Worry not, though- consumption is happening, just not for the masses. Will China prove to be different, as citizens demand a higher level of consumption still far below what we have in the US?

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