‘Production Economy’ vs ‘Consumption Economy’

In a recent post, I said that the U.S. should be a production economy, not a consumption economy. Matt Yglesias notes that “I have really no idea what that’s supposed to mean, since presumably the idea is to produce goods and services that people want to consume.”

Let me explain: I believe that the U.S. has come to a fork in the road. The direction we’ve been going leads to the  the consumption economy, putting more resources into consumption and distribution rather than production. It hasn’t been working for us.

The U.S. needs to change course to a production economy:  put more emphasis on investment in physical, human, and knowledge capital, and less on consumption as the yardstick of success.  We need to take up our fair share of the global productive burden.   

To see one indicator of the consumption economy  take a look at this chart.

It tracks the buildings used for manufacturing (production) versus buildings used for retail, wholesale, and warehouses (distribution). Around 2001 the lines crossed, a sign that distribution was becoming more important than production in the U.S. economy.

The goal of a consumption economy is to provide consumers with low prices and wide variety, with less concern about jobs and wages.

In a consumption economy, successful corporations are the ones who can best manage their global networks of suppliers to obtain the lowest costs. Offshoring is a mark of pride,  showing that companies can meet the desire of their customers for lower prices.

In theory, a consumption economy can be a great thing.  Low prices can presumably bring higher living standards for households, as real wages rise.  In theory, production is not an essential component for economic prosperity if you can create the product and organize the production and distribution process.

The great success story for the consumption economy is Apple. Apple is a spectacularly profitable creator of innovative  products and ecosystems, and a successful retailer to boot.  However, the company does not manufacture the  iPads, iPhones, iPods, and so forth that  it creates and sells.  Creation and distribution, but no production. [Edited for clarity. See below*]

However, Apple is Apple. For the rest of us, the consumption economy isn’t working  so well.

I promised myself I would stop writing excessively  long posts, so I’m going to stop here for now.

*Added:  The exact language from Apple’s  annual report

Substantially all of the Company’s Macs, iPhones, iPads, iPods, logic boards and other assembled products are manufactured by outsourcing partners, primarily in various parts of Asia

Obviously this does not include software.

Falling Housing Market is Not Bad News

The drop in housing prices in October has almost uniformly been interpreted as a bad sign for the economy in 2011.  I’d like to offer an alternative viewpoint: I think the drop in housing prices may be a tough but necessary step in the healing process.

Consider this. The false boom of the 2000’s was built on rising home values. Americans borrowed against those high home values, which enabled them to maintain a higher standard of living than they could really afford.  The borrowing flowed into mortgage-backed securities, which were in turn bought by overseas investors, effectively lending America the money to finance the trade deficit.  On a country level, we maintained a higher living standard than we could afford.

We’re still doing it, though now housing, consumption and imports are being propped up by federal government borrowing.  We still haven’t made the big jump to investing in our future–knowledge capital and productive physical capital.

From this perspective, a rise in housing prices is a signal that the “bad money pump” has started again. It means we are falling back into the same bad habits of borrowing money from overseas to finance housing, which in turn is used as collateral for debt to buy imports. We don’t want that!

I’d welcome anyone who would explain to me why  housing prices  are a good signal of the underlying long-term strength of the U.S. economy.

American Exceptionalism: Why?

Lee Drutman of PPI takes a close look at American Exceptionalism (I like it capitalized). He writes:

 These days, only 20 percent of Americans think the U.S. has the strongest economy in the world, and only 34 percent expect Americans can get back to the world’s top economy in 20 years. Only 17 percent of Americans are satisfied with the way things are going in the United States.

And yet, despite all this, 80 percent of Americans still believe in America’s unique greatness (73 percent of Democrats, 91 percent of Republicans).

There is a gap here. American exceptionalism is part of our cultural heritage our self-identification. We believe there is something special about our nation. And yet, something is preventing us from achieving its full potential. What is it? No wonder there is so much anxiety.

I’d be interested in a poll that asks people what, in particular, they think makes America uniquely great. Has anyone done something like that?