consumer economy

Here is how the US economy works. Consumer spending accounts for seventy percent of it. Housing, health care, education, travel, restaurants and other services totaled $4.6 trillion last year. Yes, you read that right, trillion. That is a million million or a one with 12 zeros. A mere $3.6 trillion went into food, gasoline, clothing, electronics, cars, and other goods.

To keep this economic engine running, we need more consumers and more spending per consumer. The US population is growing at less than 1% a year according to the latest estimate. The exact number given by the CIA is 0.894%. There are now 301 million people here with a median age of 36.6 years. The birth rate is 14.2 per 1,000 and the net immigration 3.1 per 1,000. That means we are adding 5.19 million individuals per year. We lose 2.5 million per year. From an economic perspective this rate of growth is worrisome.

So we need to resort to the second option: spend more per consumer. And there are two good ways to do that. One is to make sure things don't last all that long and the second is called fashion. Make it so consumers will want to ditch their old stuff for fear of looking out of date. A corollary option is to add new must-have features. The latter is extensively practiced by car manufacturers who have turned cars into driving living rooms with complementary office.

Common sense would tell you that most manufacturers will quickly combine both methods. They make goods that are not meant to last so they probably skimp on quality too. Why bother if consumers will dump items within a year or two anyways. And besides, it helps profit margins. Let's take a look.

First, what do you do with durable items such as housing ? You can get some "help" from natural disasters, and the US has its fair share of those, but unless global warming really delivers on its wildest predictions, natural disasters alone won't cut it. Fortunately, the country has a high housing turnover rate. Unlike other societies, Americans are constantly on the move. They may buy their homes but they rarely stay in them longer than renters do. That is why adjustable mortgages with a short fixed interest period are so popular. Most people figure they will move before the rate adjusts. Since they rarely pay down more than a few percent of their mortgage, they are in effect renters. And government subsided renters to boot, because they get a tax break on their payments.

And every time people move, they are highly susceptible to home improvements. Most upgrade as well, that is they buy ever bigger homes and so they need to buy more goodies to fill these homes. In 2004, the market for home improvements was $271 billion according to the Home Improvement Research Institute of Tampa, Florida. It was growing at better than 6% a year at the time. Housing turnover correlates with sales of furniture, appliances, home electronics, and other home related goodies. And these have been growing rapidly too. That is what worries economists when they look at the subprime crisis. Because we have overspent a bit of late.

We need not dwell too much on cars and electronics. Everyone knows these items rarely last more than a few years. High tech is especially beneficial. With its built-in obsolescence it is an economist's dream. As for food, the trend of eating out continues in full swing. Take a look at the obesity numbers here as obesity is strongly correlated with eating out.

Health care spending is another winner and one where the US clearly excels. In 2005, it rose nearly 7% to $2 trillion, or $6,700 per person. It now represents 16% of the gross domestic product and is expected to rise to $4 trillion or 20% of GDP by 2015. Although an aging population is often blamed, a fair chunk of it goes to elective procedures. It is fashion driven. The American Society of Plastic Surgeons reports that Americans spent $15.4 billion on plastic surgery fees, facility fees, and anesthesia fees in 2006. That is almost 10% as much as the total prescription drug market.

And what may surprise you even more is that Americans spent nearly as much on pet foods, services, and medicines. And those markets are growing even faster than human healthcare. Elective procedures for pets are now commonplace in some areas of the country. And while most of it is out of pocket, pet insurance grew at 25% last year. Some employers are starting to offer pet insurance as a benefit. That while the number of uninsured Americans is at an all time high of 46.6 million.

Education is another area where Americans like to send their cash. In 2002, the US government spent $732 billion on education, directly and indirectly. That averages to nearly $7,000 for every student in elementary and secondary education. To say nothing of private money. The US joins Denmark, Iceland and South Korea in spending nearly 7% of its GDP on education.

When it comes to both healthcare and education, many would agree that despite all the money we spend, we do not seem to get very good value for it. Nearly everyone would agree our education system is lacking. When it comes to healthcare though, opinions are more divided and there is a strong feeling that we are the best in the World. Objective measures tell otherwise.

As indicated before, common sense will tell you that high turnover leads to mediocre quality. Unfortunately, it also leads to high waste and pollution. This is the price we all pay to keep our economic engine alive and well.