Even Cassandra Needs to Disaggregate

The Ferraro and Xu essay on the difference in the personal savings rate between China and the United States and the role played by personal and cultural narcissism in causing that difference is interesting and provocative. However, the fact that the essay is also something of a jeremiad raises problems. I believe that the authors are correct in their argument that the culture of narcissism encourages higher levels of consumption and debt than would be the case under other cultural regimes, but they overstate the overall negative economic consequences of that fact. In the interest of clarity I have separated my comments into two broad categories: the economic and the psycho-cultural.

Debt as an Economic Issue

The authors oversimplify economic issues that in the real world defy easy analysis. It is indeed true that the American personal savings rate is at a historical low not seen since the worst years of the Great Depression. But it is also true that the U.S. economy is by far the strongest in the world. China’s current higher rate of economic growth is partly due to the lower baseline from which the Chinese economy moves. Spectacular annual growth rates like those achieved in recent years by China (and India) are found in developing economies, not mature ones. For an economy as large and as mature as that of the United States to be as vibrant as it is also constitutes a particularly impressive achievement. The American penchant for consumption and debt is longstanding, yet it clearly has been less than fatal. It may be that collapse is just around the comer, but that forecast is getting long in the tooth.

In theory, America’s low savings rate ought to have serious consequences not least, a failure to invest and thus improve technology and increase productivity but in fact the low savings rate does not seem to have had, and does not seem to be having at present, the dire consequences some have feared. The U.S. economy has for several decades enjoyed healthy productivity growth (although it did slow noticeably last year, perhaps in part because the labor market tightened and presumably less productive workers were absorbed into the labor force); home ownership stands at a record level; both unemployment and inflation are low; and the nation has enjoyed a quarter-century boom broken only by two short and shallow (by historical standards) recessions. There are, to be sure, troubling economic problems, most notably growing inequality, but in my opinion the authors’ dark portrait of the U.S. economy is far too pessimistic.

It is one thing to say a higher savings rate would be salutary and quite another to say it is absolutely necessary. In one of his last interviews, Milton Friedman, love-him-or-hate-him, the most important economic thinker of the second half of the twentieth century, observed, “The right saving rate is whatever

Page 212

satisfies the tastes and preferences of the public in a free and unbiased capital market. [The] Market can adjust to any rate. This is a very complicated question.” Furthermore, “present estimates probably understate actual savings because of treatment of capital gains. In any event, the present situation does not raise any problems for the economy” (“Milton Friedman @ Rest,” posted January 22, 2007, The Wall Street Journal Online, online.wsj.com).

Some economists think the current near negative personal savings rate actually reflects, at least in part, elements of economic strength Americans are willing to spend beyond their income because they feel comfortable tapping the capital gains derived from their investments and the run-up in housing values, capital gains that represent the essential robustness of the U.S. economy.

I would also point out that the Chinese penchant for saving has some unfavorable results. Over savings has stunted the development of a domestic market and thus has contributed to a concomitant heavy dependence on exports. This mercantilist imbalance, in turn, compromises the Chinese standard of living in the short term and threatens to place a ceiling on China’s long-term economic growth. (They don’t call economics the dismal science for nothing.)

The Narcissism Hypothesis

Despite my argument regarding debt, it is difficult to dismiss entirely the idea that America’s culture of narcissism contributes in some significant fashion to the nation’s high levels of consumption and debt. The evidence is strong that the cultural and psychological tendencies Christopher Lasch identified at the end of the 1970s have gained strength over time. (See, for example, Christine Rosen’s discussion of how well Lasch’s argument has held up over time in “The Overpraised American,” Policy Review, October & November 2005, 27-43; one might also note TIME Magazine’s choice of “You” as the Person of the Year for 2006.)

Ferraro and Xu seem uncertain as to the source of this dynamic. Do the roots lie deeply buried within American history and culture, or do identifiable villains somehow impose this narcissistic overspending? At some points the essay seems to suggest the former deep-culture explanation: “…the shame of being seen as poor is unbearable. Americans have no cultural resources to bolster self-esteem: as a nation we resort to spending money we do not have in order to save face and avoid embarrassment.” But at other points the authors adopt a rather more conspiratorial perspective: “Americans have been targeted by the combined genius of marketing, media, and financing for fifty years, and the result is a nation of eager consumers…. The remarkable success of advertising, media, and credit has produced nothing more than an exhausted nation of workaholics who have expensive lifestyles and owe too much, but who have little in the way of savings, security, or self-pride.” The authors need to choose one mode of explanation or the other, or tell us how the two actually fit together in some more complex psycho-cultural model.

As jeremiads go, the essay needs a closer specification of the problems it addresses. At times the authors conflate materialism, consumption, extravagance, and debt into a single constellation of dysfunction. Even Cassandra can benefit from occasional disaggregation.

Page 213