For almost a quarter century, consumption was king. US consumers have been responsible for more than one-third of global growth since 1990, supported by greater levels of debt. Lax lending standards, coupled with a sense of increased wealth caused by rising house prices, encouraged even greater consumption. Since 2008, US consumption has dropped steeply, and the household savings rate, a marginal -1% not long ago, is back to about 5% of post-tax income. Unemployment at about 9% suggests that the incentive for higher spending will remain damped for some time. One can expect a further 12-18 months of reduced spending.
This crisis in consumption comes at an inopportune time, close to the year when baby boomers enter retirement and would anyway have reduced spending. For all their early life angst against capitalism and its excesses, boomers have been the most spendthrift generation in history. As the consumption that baby boomers fuelled since the 1980’s falls away, the implications on the world will be substantial. Economic theory will suggest that exports to countries such as India and China will pick up the slack, but this is likely to remain wishful thinking. In the 1950s when the world was less flat and the US economic power unchallenged, it was possible to use exports as a driver for growth. There was, at that time, rapid growth in Europe and Japan, being rebuilt after the war, which fuelled the need for US exports. The situation today is vastly different, with strong competitors to the US companies putting pressure on them to be more productive at lower cost.
Several years of reduced consumption can change behaviour in profound ways. One is likely to see a critical shift in the importance of manufacturing as a consequence of reduced consumerism. The US was too large an economy to be quite so dependent on services, in particular financial services. An institutionalized approach to cheap funding had diverted both human and other resources away from manufacturing. With lower consumption and fewer choices in employment, US companies will again be able to hire people at wages low enough to be competitive. Wage cuts will reignite the manufacturing sector. As the share of manufacturing in the US grows, one can expect to see significant levels of advance in areas such as nanotechnology, biotechnology and clean energy. We should see greater preparedness among venture capitalists to invest in areas outside information and technology, into which disproportionate billions have been invested with somewhat indifferent returns.
Through its history, the US has been an innovation powerhouse. Yet scientific historians have expressed concern at the lack of breakthrough innovations since the 1980s (with the possible exception of technologies in telecom and computing). This trend should change, given the focus on reviving interest in math and science among US students.
For a long time in its support of capitalism, Americans have been told that the withering away of entire industries is an important part of such an economic system. Will the US capitalism now walk the talk? As the world’s largest economy begins to see the downsides of Schumpeterian creative destruction perhaps for the first time since the Great Depression, it is likely that there will be political pressure to curb the angularities of capitalism. It seems possible that free trade, immigration and labour rights could be redefined in ways that make for a softer version of capitalism. Interestingly, the US Chamber of Commerce, which represents three million firms, in its new media campaign has chosen to not promote “capitalism” as one of its objectives. Given the recent past, it has instead chosen “free enterprise” as its campaign theme, believing that capitalism has developed negative connotations.
Historian and writer Kurt Anderson, in his recent bookReset: How This Crisis Can Restore Our Values and Renew America, suggests that just as the period after the sluggish 1970s resulted in the emergence of companies such as Microsoft Corp. and Google Inc., we could now see the emergence of a new breed of companies. As erstwhile giants such as General Motors Corp. and Chrysler Llc. face major challenges, new and smaller car companies such as Fisker Automotive Inc. and Aptera Motors Inc. could become the industry leaders of the future. For an economy the size of the US to refocus on manufacturing or to reinforce the attractiveness of the sciences can have path-breaking economic impact on the rest of the world. As a powerful nation relearns the values of moderation and delayed gratification, we may see changes to some of the less desirable effects of relentless consumption, such as obesity, which has affected millions of Americans. The preparedness to spend less on fuel may, in addition to a move towards battery cars, also inspire a resurgence of closer communities, a trend away from the impersonal sprawling suburbia visible today.
These changes are not trivial. It is usually at times of slowing growth that countries have the luxury to step back and make basic choices on issues such as the nature of democracy, the type of education they need, the benefits of clean technology, the virtues of reading and the pleasure of the arts. When a great country makes these choices, its impact on the 21st century will be profound. Indian companies should watch for the subtle social trends that emanate from such choices, wherein lies a new wave of opportunity.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes every other Friday on issues related to governance. The views expressed here are personal. Write to him at firstname.lastname@example.org