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The End of Shopping

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By Robert J. Samuelson
Wednesday, April 23, 2008

Transfixed by unruly financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter-century, Americans have been on an unprecedented consumption binge -- for cars, TVs, longer vacations. The consequences have been profound, and the passage to something different may not be an improvement.

It was the ever-expanding stream of consumer spending that pulled the U.S. economy and, to a lesser extent, the global economy forward (imports satisfied much of Americans' frenzied buying). How big was the consumption pull? In 1980, Americans spent 63 percent of national income (gross domestic product) on consumer goods and services. For the past five years, consumer spending equaled 70 percent of GDP. At today's income levels, the difference amounts to an extra $1 trillion annually of spending.

To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as a reliable engine of growth. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Without another source of growth (higher investment, exports?), the economy will slow.

Why did Americans embark on such a tear? In his book "Going Broke," psychologist Stuart Vyse of Connecticut College argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards (1.4 billion at last count) separate the pleasure of buying from the pain of paying. Toll-free catalogue buying, cable shopping channels and Internet purchases don't require even entering a store.

There's something to this. But the recent consumption binge probably has more immediate causes. One was the "wealth effect." Declining inflation in the early 1980s (in 1979, prices rose 13 percent) led to lower interest rates -- and they led to higher stock prices and, later, higher home values. People regarded their newfound wealth as a substitute for annual savings, so they spent more of their annual income or borrowed more, especially against higher home values.

The "life cycle" (a.k.a. demographics) also promoted the shopping extravaganza. People borrow and spend more in their 30s and 40s as they buy homes and raise children. In the 1980s and 1990s, many baby boomers were passing through their peak spending years. That reinforced the wealth effect. Finally, the "democratization of credit" supported the shopping spree. At the end of World War II, it was hard for most Americans to borrow. Since then, mortgages, auto loans and personal credit have been liberalized. By 2004, three-quarters of U.S. households had debt.

All these forces for more debt and spending are now reversing. The stock and real estate "bubbles" have burst. Feeling poorer, people may save more; it's already much harder to borrow against higher home values. Demographics tell the same story. "Life-cycle spending drops among 55- to 64-year-olds" -- they borrow less and their incomes decline -- "and that's where our household growth is now," says Susan Sterne of Economic Analysis Associates.

And credit "democratization"? Well, the message of the subprime-mortgage debacle is that it went too far. Up to a point, the spread of credit was a boon. Homeownership increased; people had more flexibility in planning major purchases. But aggressive -- and often abusive -- marketers peddled credit to people who couldn't handle it. There are no longer large unserved markets of creditworthy consumers. Indeed, many Americans are overextended. In 2007, household debt (including mortgages) totaled $14.4 trillion, or 139 percent of personal disposable income. As recently as 2000, those figures were $7.4 trillion and 103 percent of income.

The resulting retrenchment of consumer spending is already being felt. "Retailing Chains Caught in a Wave of Bankruptcies," said a New York Times headline last week.

What can replace feverish consumer spending as a motor of economic growth? Health care, some say. Health spending will surely increase. But its expansion will simply crowd out other forms of consumer and government spending, because it will be paid for with steeper taxes or insurance premiums. Both erode purchasing power. Higher exports are a more plausible possibility; they, however, depend on how healthy the rest of the world economy remains without the crutch of exporting more to the United States.

But what if nothing takes the place of the debt-driven consumption boom? Its sequel is an extended period of lackluster growth and job creation. Somber thought. The ebbing shopping spree may challenge the next president in ways that none of the candidates has yet contemplated.


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