The Consumer’s Dilemma

iStock_000000485549XSmallFacing a personal purchase decision of import, I found myself staring down the very same consumer’s dilemma posed here by Financial Editor Joseph Lazzaro for BloggingStocks. To save or not to save? Here’s what one economist forecast.

What would make the strongest case for a large fiscal stimulus package – – upwards of $1 trillion for infrastructure, energy, education programs, and for aid to the states, for a new electric grid, for the building of hospitals, schools, for improved water and sewerage systems, for the biggest build-out in the United States since the Great Society?

Investors could probably think of dozens, but economist David H. Wang has a compelling one: the condition of the U.S. consumer himself / herself, or what Wang calls the “consumer’s dilemma.”

Has the U.S. economy changed?

Now Wang proceeds with the assumption that the U.S. consumption-based economy will largely continue. If one disagrees with that premise, then Wang’s thesis is moot, and we then also have a different U.S. economy that will require very different prescriptions to achieve sustainable growth.

But let’s, for the sake of argument, assume that the consumer-based economy – – one that historically has accounted for roughly 60-65% of U.S. GDP – – is not going the way of the Edsel. That creates Wang’s “consumer’s dilemma.” Namely, the U.S. economy requires the consumer to spend (buy things) to grow at capacity, but consumers have already consumed at too high a level for too long – – in some cases saving nothing at all — and hence many will now increase their rate of savings to begin to make up for their many years of inadequate savings.

The problem is, however, if the U.S., as a society, goes on a mass savings drive, “the economy can not achieve the GDP growth it did before, not under the old model,” Wang said. At minimum, the U.S. recovery would be delayed, and at maximum, the economy remains in recession through 2009, and most likely 2010, and may be into 2011. At the very least Wang said growth is going to be lower with higher savings.

That’s the consumer’s dilemma: U.S. consumers can’t spend at the level they’ve spent at in recent history, but it’s going to be bad news for the economy if everyone saves at a high rate for a long time.

So how will the United States resolve this dilemma? “That’s a good question,” Wang said. “Classic economics theory teaches us that there has to be another agent, some other factor, to generate demand.”

Now, historically, in the U.S. that has been the private sector – – businesses large and small – – but since the 1980s it’s been the multinational corporation. Will large corporations provide that much-needed boost? Well, don’t look for too much boost from the banks (obviously), Wang says. How about the auto sector? Oops! Another bad choice, o.k. we’ve ruled them out. Housing sector? Enough said there. The airlines? They move people around fairly well, but no, don’t look for much increased commercial activity from them. Hey, what about tech? Wang says “tech is a possibility.”

If you believe tech can deliver a new technology or device or sector that will be as transformational and as productivity-enhancing as the personal computer, the semiconductor or the Internet, that could fill the commerce gap created by the hunkered-down consumer, he said.

Absent the above, the gap will remain, and it will have to be filled by some other source in order for the U.S. economy to grow at an adequate rate with sustainable growth, Wang said.

And it doesn’t take a Harvard economist to figure out who or what that source is, Wang said.