American Disingenuousness: Jack Lew Goes to Europe
Why is the U.S. Treasury Secretary urging Europe to adopt the same borrow-and-spend policies that got the United States into so much fiscal trouble?
- The U.S. recovery, such as it is, is coming from extending credit to people who may very well be better off without it.
- The fundamental transatlantic difference concerns the role of credit in consumer demand.
- It seems to be a sacred national duty for the individual to borrow, in order to keep the U.S. economic engine churning.
The new U.S. treasury secretary, Jack Lew, traveled to Europe this week to win converts to the American method of generating an economic recovery. The way the Americans make their case is to point to their country’s GDP growth of a little over 2% last year (compared to the eurozone’s 0.5% slip) and falling unemployment rate (versus Europe’s rising one).
What they don’t talk about is the immense price they are paying for this “improvement.” To begin with, the United States is running a budget deficit of about 5.5% of GDP in the current fiscal year, not to mention the corrosive effects of a third round of quantitative easing (QE3) by the Federal Reserve.
Next, they say, is the jobs recovery. But is it really a recovery? True, the headline number now points to an unemployment rate of “only” 7.6%. What is left unsaid is that this improvement is far more likely rooted in the stunningly large number of people — especially older men — who have opted out of the job market.
The country’s labor force participation rate, at 63.3% in March, is the lowest it has been since 1979. There used to be a time when men were families’ sole breadwinners and women were mostly at home. Now, there seems to be a great reversal underway, with the male-dominated job markets of previous decades an increasingly faint memory.
As his predecessor Tim Geithner was wont to do, Secretary Lew likes to talk about the need to strengthen domestic demand. Again, something crucial is left unuttered. To the extent that domestic demand is increasing in the United States, it is doing so — once again — because of credit extended to people who may very well be better off not getting it.
That, of course, is a sad replay of how the U.S. economy got itself into the previous crisis — and dragged the rest of the developed world into it as well. Real incomes continue to stagnate, but every U.S. policymaker likes to talk up the need for Americans to buy their own home, in the unshakable belief that this is the American way.
However, most of those Americans who are in a financial position to do so have already bought their homes. And most of those who haven’t done so are probably better advised not to. They should wait until their incomes or savings have improved to the point that making such a long-term investment is feasible.
But it isn’t just in the field of home purchases that the old way is rearing its ugly head. Low-income people are also pushed into car loans they can’t afford and that are likely to end in debt servitude at high rates, if not repossessions.
About the only difference to the last crisis is that this time around one can find stories in the media, such as this one on the CNBC site, that raise a red flag about the perils of too much credit being doled out to vulnerable borrowers. During the last crisis, that network was a relentless booster for taking on more debt.
All of this points to a fundamental transatlantic difference: the role of credit in consumer demand. The U.S. economic style is to push credit relentlessly, no matter the cost to the individual borrower.
There is an almost insane push to have the individual overconsume, even against the backdrop of stagnating or declining real incomes. It is as if it were a sacred national duty for the individual to borrow, in order to keep the nation’s economic engine churning.
Of course, the basic idea behind QE3 is not so much for consumers to consume, but for businesses to invest. The idea is that cheap credit will get companies to expand, then hire more staff, and then for consumers — who now have jobs — to consume.
The fact of the matter, though, is that corporations aren’t investing. They continue to sit on the sidelines, leaving their mountains of cash untouched.
Businesses and Republican politicians claim it’s because of “uncertainty.” Democrats say it’s because Republicans, preferring the austerity of spending cuts, aren’t letting government prime the pump.
Political tussles aside, it is much more probable that the reason for their hesitation is that corporations can do credit analysis on the American consumer better than the Federal Reserve is willing to.
Corporations remember very well that the last great expansion was built on a credit bubble that led to unsustainable levels of economic activity. They are not eager to engage in that boom-bust scenario at home once again, all the more so as many see the true growth opportunities in overseas markets anyway.
As a result of these differing calculations, all the money the Fed is busy injecting into the U.S. economy has served only to inflate stock market assets.
In Europe, which certainly has its faults, there is not so much of a credit card and overborrowing culture. Europe operates much more on a cash-and-carry basis. That translates into consumption accounting for a lower share of GDP — but it also means fewer overextended households.
The question is in which system is the individual better off? Americans would of course instinctively if not arrogantly claim that individuals in their system are more empowered and better off.
But from an individual’s vantage point, not being oversupplied with credit is probably much better for their own autonomy, even if it means short-term self-denial of consumption desires.
None of this, though, was mentioned by Secretary Lew during his European excursion. It probably wasn’t even in his official briefing papers, although one might suspect it was somewhere on his mind.
Mr. Lew, you see, is known in Washington’s policy circles as a person who has never lost his acute sense of the budgetary and financial inequities being foisted upon lower-income Americans.
Too bad that on his inaugural visit to Brussels, Berlin, Frankfurt and Paris, his attempts to convince Europe to adopt America’s unsound fiscal practices did not allow his unquestionable domestic sensitivities to shine through.