Words whose meanings were switched in the cradle

“Runaway consumption must now give way to a renewal of saving and investment. That’s the best hope for economic recovery and for America’s longer-term economic prosperity.” –Steven Roach, Morgan Stanley

The defining characteristic of America in the 20th century was optimism. That did not arise by chance and it is about to change forever.

The optimism of the past century was based in steadily rising living standards experienced in most areas of the economy. People ate better. They could see a doctor. They were able to buy time-saving conveniences. They were able to afford advanced education. This made people both more productive and confident that the future would be better than the past, if only they did their part by working hard. Such people are ideal entrepreneurs.

But things did not go so well everywhere. By looking at what happened in those areas that underwent long-run decline, we can forecast what stagnant or declining standards of living throughout the economy will mean for the national character.

Agriculture is one part of the American economy that suffered early in the 20th century, culminating in the Great Depression. From then until about 1970, it prospered, but has been in decline ever since. The result was an angry, increasingly violent rural America, where methamphetamine is one of the few ways to make a living.

Another area that has suffered a sustained decline is manufacturing. The 1980s were a period of great distress in the so-called Rustbelt. As the payoff for the game of chicken that Congress is playing with the auto industry, we may see the greatest single episode of concentrated mass unemployment and dispossession in our nation’s history. There are 465,000 unionized auto workers in Michigan. They and their dependents alone constitute something like 15% of the state’s population.

In areas of decline, as agriculture and manufacturing have been over the last century, confidence, entrepreneurialism, and productivity are not the hallmarks. People cope as they may, perhaps by adopting tribalistic behavior seen in the anti-immigrant, anti-tax, and anti-government movements or through religion.

Now, American consumption does have to decline. There’s a finite amount of oil in the world, for example. As living standards rise in foreign countries, we have to reduce our consumption. But does that mean that our standard of living has to fall? In Roach’s simplistic universe, virtuous savings and investment and profligate consumption are mortal enemies. But realistically it is the extinguishing of resources that sometimes accompanies consumption that is a problem. Spending, per se, may not be.

One well-worn game in politics is the struggle to label activities as “spending” or “investment.” But as we well know, whether one considers something to be one or the other often depends on whether one will benefit from it. Stock purchasers often confuse their activities with investment and are infuriated that educating children might be considered to be as worthwhile. In reality, the purchase and sale of stock has only a tenuous connection to actual investment, since the actual investment is conducted by the company. Stocks can rise radically or fall even to zero without affecting the solvency of a company. Stocks represent investment only to the degree that their issuance generates revenues for the company, which the company then either wastes or invests. Corporate bonds, like newly issued stocks, are therefore more intimately connected to real investment than the betting that goes on on Wall Street.

A more sensible way of looking at these concepts is to look at what effects they have on further goods production. The essence of investment is taking resources that might be consumed in the present and using them to produce new resources. When the new resources are fundamentally more efficient than the old resources, productivity has risen. Living standards can only rise sustainably to the degree that new resources are discovered or productivity increases. Here are a few examples:

Replacing cars with light rail reduces petroleum consumption, increases electricity consumption, and may create some inefficiencies if it (a) is slower or less uniformly available than cars, (b) leaves significant overlap, with some people forced to use and pay for both, or (c) disrupts city operations as it’s installed.

Educating teachers to become better teachers diverts teaching resources from training first-time collegians to continuing education. Its payoff is measured by better students who, on arriving at college, require fewer teaching resources.

People wasting their salaries on online video poker does not subtract from savings; it’s a transfer of wealth in which essentially no resources are consumed. If those same people spent their money on the stocks or bonds of defense contractors, it might actually work out to be a negative investment.

With this background, consider the question Roach raises:

A decade of excess consumption pushed consumer spending in the United States up to 72 percent of gross domestic product in 2007, a record for any large economy in the modern history of the world. With such a huge portion of the economy now shrinking, a deep and protracted recession can hardly be ruled out. Consumption growth, which averaged close to 4 percent annually over the past 14 years, could slow into the 1 percent to 2 percent range for the next three to five years.

The United States needs a very different set of policies to cope with its post-bubble economy. It would be a serious mistake to enact tax cuts aimed at increasing already excessive consumption. Americans need to save. They don’t need another flat-screen TV made in China.

The Obama administration needs to encourage the sort of saving that will put consumers on sounder financial footing and free up resources that could be directed at long overdue investments in transportation infrastructure, alternative energy, education, worker training and the like. This strategy would not only create jobs but would also cut America’s dependence on foreign saving and imports. That would help reduce the current account deficit and the heavy foreign borrowing such an imbalance entails.

We don’t need to reinvent the wheel to come up with effective saving policies. The money has to come out of Americans’ paychecks. This can be either incentive driven — expanded 401(k) and I.R.A. programs — or mandatory, like increased Social Security contributions. As long as the economy stays in recession, any tax increases associated with mandatory saving initiatives should be off the table. (When times improve, however, that may be worth reconsidering.)

Should we cut “consumption” or simply consumption of resources that need to be imported? I’d like to see much more consumption of education and, for those that lack it, healthcare.

On the other hand, I see nothing gained by the nation from enriching HMOs and their shareholders. That is truly wasteful spending.

And forcing people to “save” more for retirement by grabbing even more of their income, perhaps foregoing necessary medical care in the present?

I have a better idea: raise their wages. We need people who are willing to take chances to invent the businesses and products of the future. To get that, they need to feel that things are getting better.

When conservatives use words, one often feels that the meanings of those words have been switched in the cradle. Consumption can be good. Saving can be bad. This country needs more consumption, just not of finite resources or administrative costs or remediation of problems that should never have happened. It probably needs more spending, just not on war and corporate bailouts. And it probably wouldn’t hurt if we did away with the manic world of stock and derivative “investing,” in favor of the form of lending the rest of the world relies on: bonds.

It’s time we started to do what is good for us.