October 26, 2011
I’m not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption.
While part of the story sounds very good — reverse the upward redistribution from wages to profits — some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer, which means that investment will be a very high share of GDP.
In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. However, as China moves from a rapidly developing country into being a wealthy country, its consumption share of income will almost certainly rise, as was the case with the U.S. and other wealthy countries. This doesn’t change the fact that it is investment, not consumption, that provides the basis for productivity gains which will make the country wealthier in the future.
Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S.-owned companies. I understand how this helps the shareholders in these companies, but I can’t see what this does for the rest of us.
The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.
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