The Great Shopping Spree, R.I.P.

Transfixed by turmoil in the financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter century, Americans have gone on an unprecedented consumption binge—for cars, TVs, longer vacations and just about anything. The consequences have been profound for both the United States and the rest of the world, and the passage to something different and unknown may not be an improvement.

It was the ever-expanding stream of consumer spending that pulled the U.S. economy forward and, to a lesser extent, did the same for the global economy (the reason: imports satisfied much of Americans' frenzied buying). How big was the consumption shove? In 1980, Americans spent 63 percent of national income (gross domestic product) on consumer goods and services. For the past five years, consumer spending equaled 70 percent of GDP. At today's income levels, the difference amounts to an extra $1 trillion annually of higher spending.

To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as the reliable engine for the rest of the economy. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Americans' spending will grow only as fast as income—not faster as before—and maybe a good bit slower. The implication: without another source of growth (higher investment, exports?), the economy will slow.

Just why Americans went on such a tear is a much-studied subject. In a new book, "Going Broke," psychologist Stuart Vyse of Connecticut College argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards separate the pleasure of buying from the pain of paying. Toll-free catalog buying and Internet purchases don't even require a trip to the store. Pervasive "discounting" creates the impression of perpetual bargains.

While there's something to this, the recent consumption binge probably has more immediate causes. One was the "wealth effect." Declining inflation in the early 1980s led to lower interest rates—and they led to higher stock prices and, later, higher home values. More Americans got into stocks; the number of customer accounts at brokers went from 9.7 million in 1980 to 97.6 million in 2000. People regarded their newfound wealth as a substitute for savings, so they spent more of their income or borrowed more, especially against higher home values.

The "life cycle" (a.k.a. demographics) also promoted the shopping extravaganza. People borrow and spend more in their 30s and 40s, as they buy homes and raise children. In the 1980s and 1990s, many baby boomers were passing through their peak spending years. That reinforced the wealth effect. Finally, the "democratization of credit" supported the shopping spree. At the end of World War II, it was hard for most Americans to borrow. Since then, mortgages, auto loans and personal credit have been liberalized. By 2004, 75 percent of U.S. households had debt.

All these forces for more debt and spending are now reversing. The stock and real-estate "bubbles" have burst. Feeling poorer, people may save more; it's already much harder to borrow against higher home values. Demographics tell the same story. "Life-cycle spending drops among 55- to 64-year-olds"—they borrow less and their incomes decline—"and that's where our household growth is now," says Susan Sterne of Economic Analysis Associates. "After 2010, growth is among the 65- to 74-year-old households, where incomes are even lower."

And credit "democratization"? Well, the message of the subprime-mortgage debacle is that it went too far. Up to a point, the spread of credit was a boon. Homeownership increased; people had more flexibility in planning major purchases. But aggressive—and often abusive—marketers peddled credit to people who couldn't handle it. There are no longer large unserved markets of creditworthy consumers, and, indeed, many Americans are overextended. The resulting retrenchment of consumer spending is already being felt. Retailing chains caught in a wave of bankruptcies, headlined The New York Times recently. Even surviving retailers may cut back.

What can replace feverish consumer spending as a motor of economic growth? Health care, some say. But its expansion will simply crowd out other forms of consumer and government spending, because it will be paid for by steeper taxes or insurance premiums. Higher exports are a more plausible possibility, but they depend on how healthy the rest of the world economy remains. Another possibility: a surge of investment in new technologies.

But what if the correct answer is "nothing"? Nothing takes the place of the debt-driven consumption boom. Instead its sequel is an extended period of lackluster growth and job creation. For good or ill, the ebbing shopping spree signals that the U.S. economy has reached a crucial juncture. It will challenge the next president in ways that none of the candidates has probably yet contemplated.