What enables the United States, for all its current troubles, to throw its weight around as much as it does is the fact that it still has by far the world’s largest consumer market—more than twice the size of China’s. Many countries depend heavily on exports to the United States to keep their own economies going.
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But there is something odd about this picture. How can a country of 340 million people consume more than twice as much as China, with its population of 1.4 billion, whose living standard is now much better than in the recent past? Could America’s “consumer market” itself be a kind of bubble? Has it been artificially inflated over the years?
With those questions in mind, I did some research, consulting ChatGPT along the way. This is what I found.
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Since the end of World War II, personal consumption in the United States has grown at a remarkably steady pace. But that consumption has been sustained in part by several bubble-like factors.
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One was the spread of credit cards in the 1970s, which were sometimes used so recklessly that personal bankruptcies surged. Another was the spread of 401(k) defined-contribution retirement plans beginning in the 1980s, which enabled a growing number of ordinary Americans to benefit from rising stock prices.
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Then there was the postwar expansion of home mortgages, which greatly increased homeownership. As housing prices continued to rise over the long term, homeowners increasingly borrowed against the value of their homes and used the money for consumption. This is one reason housing is often described as one of the backbone industries of the U.S. economy.
The 2008 Lehman crisis originated precisely in the collapse of confidence in this mortgage-based financial system.
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The United States thus built an extraordinarily fortunate economic model: borrow against the expectation of continued economic growth, use the borrowed money to consume more, thereby expand the economy, watch housing prices rise as a result, and then borrow still more against the increased value of those homes. In short, it became a model of “using economic growth to generate still more economic growth” and “getting what you want even if you have to borrow to pay for it.”
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And this model has proved surprisingly resilient. Even in 2009, immediately after the Lehman crisis, U.S. personal consumption expenditures were only about 1.5 percent below their 2007 level, before the crisis struck. What fell much more sharply were purchases of durable goods such as automobiles and, above all, residential investment.
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China’s consumption economy may in some respects be even more fragile than America’s. A major problem is the bust in its housing market, which is depressing consumption, severe unemployment of the younger generation and reinforcing deflationary pressures.
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The result is that companies, heavily supported by government subsidies, resort to dumping their products on overseas markets. China is using public money on a scale far greater than Japan ever did during its high-growth era simply to sustain—and continue expanding—its economy, which is another bubble.
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