Globalization has made our wage rates uncompetitive with most of the world, and our current high and growing debt levels mean that we can't afford to borrow to spend as if nothing fundamentally has changed. Everything has changed.
We consume by borrowing money (indirectly at least) loaned to us by those countries whose workers produce the products we buy for consumption purposes. This shouldn't and can't go on much longer.
When future historians look back, this time may prove to have been the most challenging economic period in our nation's history. While I don't profess to have all the answers, I do know some of the questions that we need to ask ourselves.
Such as: If we are going to take on debt to consume, as opposed to invest, where will we get the money, and who will be producing the goods that we buy on credit? If it's the same company or country, such as China, how long will they be willing to do so without payment? And how and when will we repay them? At what interest rate? And what will we produce that they will choose to buy from us?
When we buy consumption goods, too often we do so with borrowed money. Even when the individual purchaser doesn't borrow the money directly, additional government borrowing occurs if that consumer's spending is enabled by government funds, meaning entitlement or other government supplied monies. We're a net borrowing country that runs $100 billion monthly deficits, remember?
What caused me to think anew about our well entrenched and bad habit of excessive consumer spending with borrowed money was a story about Wal-Mart, Sears and Toys "R" Us. Each of these retailers is reinstituting layaway programs for Christmas shoppers this season. For some reason, that made me think about who produces those goods and why they almost never are American workers.
As a reason for the layaways, Wal-Mart says it wants to provide a "worry-free" Christmas for its customers. So far, so good.
Laid Flat by Layaway describes the layaway programs this way:
"Wal-Mart’s press releases suggest that the restoration of the layaway program, which was discontinued in 2006, is meant to help its customers “budget” so that Christmas can be “worry-free.” The company is partly playing on the economic insecurity of its customers, and partly on the national nostalgia for the days before credit-card debt. But the truth is, the program is a bad deal for everyone — except Wal-Mart. . . . .
But layaway fell out of favor during the last decade as lower-income Americans gained access to credit. It was better for stores, too, since credit cards are easier to administer — most of the work is handled by the card company, not the store. Most stores, except for a few holdouts like Kmart, eliminated their programs.
At first glance, the return of layaway makes sense. Fewer lower-income shoppers have access to the sort of credit they once did, and many can’t afford big purchases outright. And there is a moral appeal as well: customers paying layaway are effectively saving toward something, a reward they will receive only if they meet their goal, rather than paying off the debt on a purchase they have already made.
Nevertheless, as a financing option, layaway is decidedly worse than most credit cards. Imagine a mother going to Wal-Mart on Oct. 17 and buying $100 worth of Christmas toys. She makes a down payment of $10 and pays a $5 service fee. Over the next two months she pays off the rest. In effect, she is paying $5 in interest for a $90 loan for two months: the equivalent of a credit card with a 44 percent annual percentage rate, a level most of us would consider predatory.
In comparison, even a card with an 18 percent A.P.R. would charge only half as much interest — and she could take those presents home the same day.
Then consider what would happen if she couldn’t finish all the payments. Wal-Mart would give her the money back, less $10. If she borrowed that $90 and paid $15 in interest for two months, she would have the equivalent of a jaw-dropping interest rate of 131 percent. . . . .
With rates like that, why would anyone participate in layaway? Retailers talk about the plans as a way to give consumers more choice, but in fact it’s the result of the opposite: the desperation arising from many Americans’ inability to borrow, save and, most important, earn.
Credit, after all, is a great deal, giving us the use of something today that we pay for tomorrow. One could also put the money that would go to layaway into a savings account, where it would earn some interest. But non-predatory credit is hard to come by these days, even for middle-class shoppers, and, according to the 2007 Survey of Consumer Finance, even before the crisis 25 percent of lower-income Americans had no bank account at all.
Indeed, rather than reminding us of the morally upright, pre-credit days we left behind, the return of layaway should remind us that in many ways we’re still stuck in that decade: since the early 1970s, the median male wage has declined. Any rise in household earnings has come from more women entering the marketplace, not from higher wages."
That caused me to reflect on the entire end-to-end layaway transaction and the reason for its existence. And the larger meaning for our American future.
First, layaway is neither necessary nor desirable for a "worry-free" Christmas. We'll worry less if we don't have overburdened households. Besides, if the prospective buyer waits to buy until he has accumulated the money to do so, he can decide at that time what he wants to buy, if anything. And if he then chooses not to buy the layaway item, he won't be out the down payment or the layaway fee. In other words, layaway programs aren't good for shoppers, credit constrained or not.
But there's an even bigger issue--much bigger-- involved with layaway programs and Christmas purchases. Here's the all too often effect of layaway programs at Wal-Mart, Sears, Toys "R" Us and similar retailers.
The items purchased are likely Chinese or other Asian manufactured products.
Perhaps the American purchaser is unemployed or otherwise funded by government money. If he's unemployed, his check generally will be much higher than the Chinese worker's pay for making the goods.
Let's follow the circle. Our government borrows money from the Chinese, which is then redistributed to the Wal-Mart shopper, who in turn pays Wal-Mart for the Chinese manufactured products.
In that case, America borrowed to buy what China produced, so our debt to the Chinese grew as a result. And we got some toys for Christmas. Our overall public debt increased, and we will now owe the Chinese more money which we will have to repay with interest.
While our debt levels increase, our unemployment levels stay high as low paid (relative to U.S. wage rates) Chinese workers produce what we import.
Perhaps most importantly, we still aren't facing the fact that jobs won't come as long as our prices are not competitive globally. And that's because of globablization and the entry of several billion new workers into the global work force.
Finally, more government "stimulus" to boost the economy won't stimulate anything other than more debt.
What has happened to render us uncompetitive globally for lots of products is actually pretty simple; a few billion people (China, India, Eastern Europe, Latin America and so forth) have entered the work force since the 1980s. The world's labor supply has increased relative to demand, so the price of labor has come down as a result of that supply-demand imbalance.
So while we say we wonder where the jobs went, we really know. They went to some of the new billions of low cost and eager workers throughout the world. As for our borrowings, we know where they originated as well.
Simply put, since we don't make what we buy, we can't pay for what we buy with our earnings, so we borrow to consume. That will soon stop because it must stop.
Somehow we have to find the guts to face this global competitiveness issue squarely. When we do, we'll come up with an answer and will no longer be subsidizing our own demise.
Thanks. Bob.
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