Robert Samuelson: The Great Forces that Are Reshaping the World's Economy (and Ours)

Robert J. Samuelson, in the WSJ (12-29-04):

America is now undergoing a profound economic transformation that is barely recognized. This quiet upheaval does not originate in some breathtaking technology but rather in the fading power of forces that have shaped American prosperity for decades and, in some cases, since World War II. As their influence diminishes, the U.S. economy will depend increasingly on new patterns of spending and investment that are now only dimly apparent. It is unclear whether these will deliver superior increases in living standards and personal security. What is clear is that the old economic order is passing.

By any historical standard, the record of these decades -- despite flaws -- is remarkable. U.S. per capita incomes (average incomes per person) are now $40,000, triple their level 60 years ago. Only a few of the 10 recessions since 1945 have been deep. In the same period, unemployment averaged 5.9%. The worst year was 9.7% in 1982. There was nothing like the 18% of the 1930s. Prosperity has become the norm. Poverty and unemployment are the exceptions.

But the old order is slowly crumbling. Here are four decisive changes:

• First, the U.S. economy is bound to lose the stimulus of rising consumer debt. Household debt -- everything from home mortgages to credit cards -- now totals about $10 trillion, or roughly 115% of personal disposable income. In 1945, debt was about 20% of disposable income. For six decades, consumer debt and spending have risen faster than income. Home mortgages, auto loans and store credit all became more available. In 1940, the home ownership rate was 44%; now it's 69%. But debt can't permanently rise faster than income, and the U.S. is approaching a turning point. As aging baby boomers repay mortgages and save for retirement, debt burdens may drop. The implication: weaker consumer spending.

• Second, the benefits from defeating double-digit inflation are fading. Remember: in 1979, inflation peaked at 13% in the U.S.; now it's 1% to 3%, depending on the measure. The steep decline led to big drops in interest rates and big increases in stock prices (as interest rates fell, money shifted to stocks). Stocks are 12 times their 1982 level. Lower interest rates and higher stock prices encouraged borrowing and spending. But these are one-time stimulants. Mortgage rates in the U.S. can't again fall from 15% (1982) to today's 5.7%. Nor will stocks soon rise 12 times. The implication: again, weaker consumer spending.

• Third, the welfare state is growing costlier. Since the 1930s, it has expanded rapidly -- for the elderly (Social Security, Medicare), the poor (Medicaid, food stamps) and students (Pell grants). In 2003, U.S. federal welfare spending totaled $1.4 trillion. But all these benefits didn't raise taxes significantly, because lower defense spending covered most costs. In 1954, defense accounted for 70% of federal spending and "human resources" (aka welfare), 19%. By 2003, defense was 19% and human resources, 66%. Aging baby boomers and higher defense spending now doom this pleasant substitution. Paying for future benefits will require higher taxes, bigger budget deficits or deep cuts in other programs. All could hurt economic growth.

• Fourth, the global trading system has become less cohesive and more threatening. Until 15 years ago, the major trading partners (the United States, Europe and Japan) were political and military allies. The end of the Cold War and the addition of China, India and the former Soviet Union to the trading system have changed that. India, China and the former Soviet bloc have also effectively doubled the global labor force, from 1.5 billion to 3 billion workers, estimates Harvard economist Richard Freeman. Global markets are more competitive; the Internet -- all modern telecommunications -- means some service jobs can be "outsourced" abroad. China and other Asian countries target the U.S. market with their exports by fixing their exchange rates....