Daniel Driscoll
CHARLOTTESVILLE, VIRGINIA — After the 9/11 terrorist attacks, US President George W. Bush called on Americans to go shopping. While some people claimed at the time that Bush was encouraging irresponsible spending (a criticism that gained traction following the 2008 global financial crisis), he was acknowledging the reality that consumption has long powered America’s formidable economy.
Over the past 20 years, household consumption has, on average, accounted for roughly 56 percent of the United States’ annual GDP growth — reflecting an atypical economic structure that is both an unintended byproduct of dollar dominance and the result of a deliberate growth strategy.
The dollar’s position as the world’s reserve currency has inadvertently created ideal conditions for the profligate U.S. consumer. Providing dollars to the rest of the world enables the U.S. to run current-account deficits indefinitely. Moreover, high demand for dollar-denominated assets pushes up the greenback’s exchange rate, making U.S. exports relatively more expensive, boosting imports, and contributing to the decline of U.S. manufacturing.
But, for decades, American policymakers have also used various policies to fuel household consumption. In housing, for example, the U.S. government has long offered mortgage-debt relief, tax credits, and subsidies, allowing homeowners to use their property as collateral to borrow more. Similar, the government derisks lending for the financial sector through loan backstops and liquidity, which creates a kind of “finance culture” that normalizes spending beyond one’s means.
