What Drives Growth: Consumer Debt or Corporate Investment?

Is consumer thrift the enemy of economic growth?

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Here's an economic thesis to make your hair stand on end:

I'm going to let you in on the best-kept secret of the last century: private investment—that is, using business profits to increase productivity and output—doesn't actually drive economic growth. Consumer debt and government spending do. Private investment isn't even necessary to promote growth.

So argues economic historian James Livingston in the New York Times.

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Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What's more, in 1900 almost all investment came from the private sector—from companies, not from government—whereas in 2000, most investment was either from government spending (out of tax revenues) or "residential investment," which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

I'd certainly count myself among those who haven't been in on the secret.

As I understand it, America pivoted into a consumer-driven economy following World War II and the near-term destruction of the European market. With the prospect of export-driven growth seeming so grim, the only thing to do was spend at home. Policymakers responded accordingly.

Clyde Prestowitz:

[T]he GI Bill provided veterans with grants for college or other education and training; it also made mortgages available with no down payment and low interest rates. Between 1945 and 1966, 26 percent of all new houses were financed by the GI Bill. In addition, the 1946 Full Employment Act committed the federal government not only to maximizing production and employment but also to maximizing purchasing power. All these measures and others led to the widespread adoption of the philosophy articulated by the journalist and New Jersey urban planner Ernest Erber that "the prosperity of this nation is built on spending, not saving."

Yet if Livingston is right, what accounted for American growth before World War II?

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For that matter, what accounted for the postwar growth of the famously stingy Japanese?

How do the Chinese manage such stunning double-digit annual growth while suppressing domestic consumption?

I'd love to see someone more qualified than I am chew on this.

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