US Consumers Can No Longer Rescue The Global Economy

Australia, Business, China, Company Strategy, Europe, Oil & Gas, US

US-incomes-Sept15

By John Richardson

WE have gone beyond a major turning point in world history when many of the certainties we used to be able to depend on simply no longer apply.

Just about everyone now accepts that the old certainties relating to China no longer apply. That’s the good news.

But the bad news is that far too few people seem to get the US demographic argument, which is reinforced by the above chart.

The chart shows US per capita income since 1967 on the vertical axis (in US$ 2014 to adjust for inflation), and US total population by year along the horizontal axis.

The data on the chart tell us this: Median US incomes rose from $18,000 in 1971 to a peak of $31,000 in 2000 as the eldest Boomer reached 54, whilst the total population rose from 205 million to 280 million.  Since then, incomes have plateaued and were still below 2000 levels in 2014.  

The Babyboomer generation was huge in size, rich relative to everybody else in America – and absolutely crucial, also, it was very rich indeed compared with the vast majority of people in the developing world.

How do we solve this problem of stagnating income levels as all the Babyboomers retire? The answer is a reduction in income inequality

Three things happened when the Bayboomers were at the peak of their earnings power:

  1. They boosted US demand for housing, for automobiles and for a whole array of consumer goods in volumes that we have never seen before in economic history. So we saw fantastic US economic growth
  2. This rising tide of demand spread overseas, enabling China to become the “workshop of the world”. Without the Babyboomers, both in the US and the West in general, hundreds of millions of migrant workers in China would not have been able to escape from poverty. And without this mass escape from poverty, China’s GDP growth would not have been anywhere near as strong.
  3. As China grew so did much of the rest of the world economy, including all the oil and other commodities exporters to China.

The argument for lifting the incomes of  minority groups, and America’s “squeezed middle class” in general, is therefore not centred on some left wing notion of fairness, but is instead purely about economic common sense – whether the common sense comes from the left, the right or the centre. Nobody should care about where the ideas comes from, as long as they get the job done.

But in America’s fractious, febrile  and quite often irrational political environment, common sense is the opposite of crude oil in that is in chronic short supply.

This means that least for the next few years we have to forget another old certainty: US consumers being always able to rescue the global economy.

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