FEWER HOMEOWNERS...MORE RENTERS

The U.S. homeownership rate has dropped sharply as a consequence of the excesses that led to the housing crash of 2004-2008. The chart to the right, taken from an earlier post in this blog ("Homeownership Rate...Back to the Future",http://econlives.blogspot.com/2015/05/homeownership-rateback-to-future.html), shows how the rate fell by almost five percentage points over the last decade, to its current level of 63.7%. A declining rate, however, does not necessarily imply that the actual number of homeowners also declines, since an increasing number of households could probably compensate for the lower rate, that has occurred in the past. But this is not the case currently, both the rate and the number of homeowner households has fallen.

House Prices Won't Fall They Said...But They Did Fall.
Back in 2004, who remembers?...Google of course, many thought it highly unlikely that prices would fall nationally. For instance, an economist at Wachovia Securities, swallowed by Wells Fargo since then and probably the quality of their forecasts was one reason, said that "housing prices could slide back somewhat...I don't think they will plummet." Also, Mark Gongloff a writer at the all-knowing, all-reliable CNN Money stated that "Home prices don't often fall nationwide. It last happened to new home prices in 1991, and things were considerably different then...the oversupply of homes, which stretched back to the late 80s helped sink prices, but no such oversupply exists today." So was the conventional thinking before the fall. An elementary understanding of economics would have told him there are other causes behind price fluctuations besides "oversupply."


It is well known that many of the houses sold in the first half of the last decade, both new and existing houses, were to consumers who couldn't afford them. Also, most consumers purchased them under the assumption that forever rising house prices would make those house purchases a solid investment. This proved to be not so. Nationally, home prices fell 25% between 2007 and 2011, with the biggest declines in 2008 and 2009.

The precipitous drop in house prices resulted, as we now know, in a huge number of homeowners who found themselves "under water" with their mortgages. Additionally, as the recession set in, many who lost their jobs couldn't meet the monthly house payments and this led to the foreclosure crisis- with the number of foreclosures reaching nearly 2.5 million in 2009. Foreclosures have declined over the last few years, although they still hover around half a million homes annually; this compares unfavorably with the figures before the recession when around 150,000 foreclosures were recorded per year.

All of these factors, falling house prices, dropping wealth, the number of foreclosures rising, etc. have impacted the dynamics of owning or renting a home.

Household Formations are Down

Last year, the total number of households in the U.S. reached 115.5 million, an increase of 792 thousand from 2013. Although this is a remarkable 51% increase over the prior year, the number of new households in 2014 is still far lower than the average maintained over the 40-year period from 1960 to 2000. Over those forty years, the number of households increased by an average of 1.3 million a year.
The chart to the left shows that, since the onset of the 2008-09 recession, the number of new households has averaged just under 600 thousand per year (shown by the red line), this is less than half the average maintained during the last four decades of the last century. And fewer new households implies, naturally, fewer new houses are needed.

More Renters, Fewer Homeowners

The net result is that since the onset of the housing crash, and the general economic recession that followed it, we have seen the actual number of homeowners fall, while the total number of renters has increased.
As the chart "Number of Homeowners & Renters" shows, we had by 2014 1.7 million fewer homeowners than in 2006. In contrast, the number of renters shot up dramatically by 6.4 million households. This, as can be surmised, is different from the pattern we were used to seeing in the past, when both the number of homeowners and renters increased.

Younger People Shying Away From Homeownership

Unlike previous generations, where young adults would try to purchase a home as soon as possible, some even before getting married, currently we see that a majority of them are opting for renting. There are many reasons why they are making that choice now. Among them must be the inability to get credit given the large education debt load they carry. Also, many of them are staying away from the labor force altogether- witness their declining participation in the labor market. Additionally, we can't dismiss the fact that the charm of owning a home may have faded, since homeowners can't accumulate as much real estate wealth as during the housing bubble years. The chart nearby shows that the number of homeowners under 55 years old has fallen, with the largest declines observed among two groups: 25 to 34 years and 35 to 44 years. It is only among those headed  by people over 55 years that we see homeowners rising more than renters. 

Moreover, the under 25 years set has fallen for both owners and renters. This is consistent, again, with the precipitous decline in labor participation among people in this age group. They are the ones who have moved back to their parents homes, and are living in the basement playing video games.

Implications of This Trend

We've been seeing already some of the effects of this new dynamic. For instance, multi-family housing construction has recovered faster and more robustly since the recession. While single family construction rebounded by 46% since its low point in 2009, building of multi-family units has shot up by 226%. Also, while prior to the recession between one quarter and one third of the multi-family units were built as condominiums, that is not for rent, that proportion has fallen precipitously over the last four years. We find that, since 2010,  only 8% of the multi-family housing units are built for sale, the vast majority are designed to be rental units. But the average size of those rental units is under 1100 square feet- pretty much the size prevalent in the early years of the century.

More importantly, these trends also mean that the home improvement market in the future will grow less than otherwise. Rental units are remodeled less frequently than homeowned properties and, since they are smaller than owned homes, the amount spent on remodeling is going to be smaller. Thus, in general we should expect fewer remodelings and fewer funds spent on those projects. 

A TALE OF TWO (OTHER) STATES

In an earlier post I compared the economic performance of two adjacent states, Minnesota and Wisconsin. I concluded that Minnesota's employment has risen faster than Wisconsin's because of its heavier reliance on services employment, while Wisconsin's major area of employment is the manufacturing sector (http://econlives.blogspot.com/2015/03/a-tale-of-two-states.html). Employment in manufacturing, as is well known, has had a secular decline in nationally as a result of two strong forces- internally, the substitution of capital for labor that has been going on for many years and, internationally, foreign competition producing goods at lower costs. On this post I focus on the two most populous states in the nation: California and Texas. The chart above displays some basic statistics for each state. Two statistics stand out, median income where California exceeds Texas, although income is growing much faster in the latter, and the homeownership rate where Texas does better than California.
Also, we find a striking difference between both states in two key areas, employment and output- this is discussed in detail below.

Texas- More Free Market Oriented

For many years, the state of Texas has had the reputation of following economic policies that are more or less free market oriented, even though it still has some heavy regulations on specific trades. In contrast, as is well known, California has the reputation of being a heavily regulated state. In fact, if those of us who don't live in California do not like a specific regulation or restriction imposed by either a state or Federal government, we only have to thank California, it's highly likely that that regulation originated first in California. 

The tax burden of both states also differs markedly. While Texas has no income or corporate tax, California imposes a 8.84% tax on corporations, and its income tax is very "progressive" so that a family with $50,000 income pays a 9.3% rate. 

The reputation of both states is evidenced by economic data.

Texas GDP Growth Surpasses California's
While the total output of both California and Texas grew at similar rates between 1997 and 2005, we begin to see a divergence after that year, a divergence that became wider very rapidly. By 2005, the output in both states had increased similarly, California's was 62% higher than in 1997, and Texas' was 63% higher- a negligible difference in growth rates among both states. But from that year on, it appears that the states are on totally different paths. For instance, California grew by twenty percentage points between 2005 and 2008, but Texas grew by double that amount- forty points. Furthermore, even though Texas GDP fell more sharply during the 2008 recession, its recovery was both more rapid and more robust.
At their current growth rates, Texas GDP will be greater than California's in about 15 years.

Slow Employment Growth in California, Robust in Texas

Thus, total employment in Texas has exceeded that of California at least for the last 25 years. Since 1990 employment in Texas has grown by 68%, compared to California's more modest growth of 28%. Incidentally, as the chart shows, employment in California closely matches that of the U.S., even though it actually lags the national growth rate. Texas has led both California and the U.S. no matter what period we look at, as can be seen on the table below. For instance, while California took 79 months, that is 6 years and 7 months, to reach its pre-recession employment peak, it was only 39 months for Texas to do that. By the way, the U.S. took 6 years and 3 months to reach the pre-recession employment level, a modest improvement over California. 

Texas Leads in Virtually All Sectors

The jobs growth in Texas is a phenomenon that is driven by the majority of its economic sectors- that is, it's a widespread phenomenon and not one that is due to a single industry or sector.

For instance in Professional & Business Services, an important one because it includes many jobs that command above average wages, Texas has seen the number of jobs increase by an astounding 162%, while in California the growth is far lower although still a respectable 69%. The graph also shows that California lags the U.S. in this sector's jobs for the last 25 years. 

The manufacturing sector, a very important one because of the value of output it generates, is another case where Texas leads California. Data reveals that manufacturing employment has declined in both states but California's drop is much more severe than Texas. In fact, as can be seen in the chart, today's manufacturing employment in Texas is only 6% below the level of 1990, whereas for California we see that it's a substantial drop of more than a third (36%.)Moreover, manufacturing employment in the U.S., as I showed in a previous post (http://econlives.blogspot.com/2015/03/on-manufacturing-reshoring.html) has followed a generally downward trend for quite some time, its decline is similar to California's although slightly better.

Comparison Across Major Sectors

The chart below compares the growth rates since 1990 for all major sectors. Only in two areas does California exceed Texas- Information  and Arts & Entertainment; Texas does better in all other sectors, some of the by a substantial difference such as in Construction (97% growth for Texas versus only 10% for California); or Professional & Business Services where Texas growth is more than twice that of California's. 

What Are the Implications?

These two states are a textbook example for other states. If you want your state to grow sluggishly or not at all, simply follow on California's footsteps by imposing greater regulations and maintain a heavy tax burden on business and consumers. On the other hand, if you want to have robust growth then follow the example of Texas, by reducing unnecessary regulations and keep a minimal tax burden. 

LIVING LONGER...WHOSE BURDEN IS IT?

Living longer is a clear benefit that we enjoy from the time of the rise of the capitalist system  and the Industrial Revolution it engendered, and the liberal (in the traditional meaning of the word) thinking that gave origin and nourished the capitalist system. Prior to the modern age, around the year 1800, life expectancy across the world was roughly 30 years in virtually every country. That is, the average person could expect to leave this world after only 30 years on it.
With the advent of industrialization life expectancy began to rise in those countries that adopted it, mainly in Europe and North America, with noticeable improvements by the end of the 1800s. For instance, life expectancy in Europe rose from about 35 years in 1860 to over 50 years by 1920; similarly, in the Americas it had risen to about 45 years by 1920. The exceptions were countries in the African continent, where life expectancy remained almost at pre-industrial rates until around the middle of last century, when they finally began to show signs of improvement. But the lack of industrialization throughout the African continent meant that those countries failed to reach the life expectancy levels seen in most other regions, as can be appreciated in the table above.

But living longer also means that funds must be available to sustain people during those years when they are no longer working. For some, living comfortably in retirement is not an issue, because they were prudent and saved for a later day. For others, the availability of government or business retirement funds makes life in those years also comfortable if not enjoyable. But for many such funds are either not sufficient or even non-existent, making those years very difficult. But, critically, it's become common practice to expect governments to provide for the old age health and comfort of most citizens. And this is the looming problem for a large number of countries today.

The Burden of the Elderly Population
The percentage of people over 65 years in a given country is a good proxy for the burden they may impose on the working population, and on the country as a whole. We find many countries today that have nearly a fifth, or more, of its population in this age group. The chart shows the top 10 countries with 20% or more of their population in the "retirement" age group.
Note that, except for Japan that leads the chart with 26.6% of its population aged 65+ years, all the remaining countries are in Europe, both Western and Eastern Europe. In fact, analysis of data for all countries in the world reveals that only three (3) of the top 35 countries are not in the greater European region. That is, European countries are the ones that even today are facing a crisis. This is evident and compounded by the permanent stagnation in the economies of most of these countries.

...and it'll get worse by 2030

Although European countries continue to remain the worst as having the largest percentage of their population among the 65+ years group, we find that fifteen years from now, that is by 2030, South Korea (with 23.9% of its population being 65 years or older) and Taiwan (with 23.1% in this age group) fall among the top 35 countries. But the top 10 remain almost the same as in 2015- except two new countries join this group: Slovenia and Malta, both also part of Europe, East Europe that is.

A Looming Problem for Most Advanced Countries
But now the crucial issue is how are these countries, most countries in fact, going to pay for the maintenance of all these retired individuals; particularly when the number of working people continues to fall.
For a country to have a large proportion of its population in the 65+ group is not problematic itself. Solid economic resources combined with good planning foresight, such as in Norway, enables a country to face this potential problem favorably. However, this age group becomes a serious problem when the government financial situation is weak, due in most cases to loose fiscal policies adopted by many of those same governments in previous times. The  eagerness with which their governments went into debt over many years, promising all kinds of benefits and prosperity to voters has resulted in huge debts accompanied with no growth.

On the chart we show the 20 countries with the highest Debt-to-GDP ratio, against the percent of their population that is 65 years and older. We are highlighting in red those countries with both very high debt-to-income ratio and a high percentage of elderly people in their population. The usual culprits show up, Greece, Italy, Spain, Ireland, etc. Curiously, France falls within this group and its numbers are very close to Spain's or Italy's, but the country does not surface on the news as a "problem" country. Why is that?

But Japan and Ireland stand out. Ireland because of its huge government debt that brings the debt ratio to over 300. And Japan because it fails in both counts- currently it has over a quarter of its population in the 65+ group and its debt ratio approximates 250. The latter is the result of a continuous string of governments over the last 20-30 years that have attempted to grow the economy via additional government spending, all to no avail.

The charts below group the countries within their corresponding continent. The charts illustrate the situation in most countries, and can be seen that the vast majority of those outside the European continent are in relatively good shape, except for Japan in Asia, and perhaps the U.S. and Canada in the Americas. These countries have huge government debt that somehow will have to be reckoned in the near future.

Please note that different scales are used in these four charts

What are the Implications?

Countries with high debt ratios, combined with an increasing percentage of elderly population, will face a tough choice in the near future. Some cases, like Greece today, are facing that situation now but can't come to grips on how to address it. Basically, these countries (including the U.S.) have a few choices:

1. Raise taxes to reduce the debt and/or maintain the level of social payments to retirees.
2. Lower the payments to retirees, or do other adjustments such as raising the retirement age. In Greece, for instance, the retirement age has been increased to 67 years, although the country still bears the huge burden of many government employees who retired as early as 50 years.
3. Default on the debt, i.e., declare bankruptcy. Argentina refused payment on its foreign debt in 2002 which, in effect, blocked access to foreign investment. 

None of the choices is politically palatable. The option that countries continue to follow, as in Japan or the U.S., is to pretend the problem is not critical and continue to issue debt to carry on- this is enabled by the central banks, the Fed in the U.S., by printing money. 

Note: the source for the life expectancy data above is "Life Expectancy" by Max Roser, available on line at www.OurWorldInData.org. All other data are from the U.S. Department of Commerce.

EMPLOYMENT IN APRIL...RECOVERY OR MORE STAGNATION?

The latest employment report from the Bureau of Labor Statistics brought forth mildly positive news about the state of the U.S. economy, following the disastrous First Quarter results. GDP in the first quarter, as we all know, was barely positive at 0.2%- the statistical margin of error is probably greater than 0.2%! The overall economy remains in a nearly dormant state, with occasional bursts signaling a recovery only to fall back into European-like economic stagnation. Moreover, employment grew an average of 184 thousand new jobs a month in the first quarter, far below the 260 thousand average posted throughout last year.


Thus, the 223 new jobs added in April are an improvement over the first quarter gains, and a particularly welcome one compared to March's measly gain of 84 thousand new jobs. Employment rose in most major economic sectors, with notable exception being Mining & Logging, where employment fell by 15.0 thousand workers. Lower oil prices, as expected, are causing an employment retrenchment in the oil extraction industry. This could be solved if the U.S. Congress fully lifted the ban on oil exports, which will take partial effect in August of this year. Also modest employment declines were observed in Wholesale Trade (-4.5 thousand) and Arts, Entertainment and Recreation (down 2.2 thousand).
On the positive side, large gains were observed in Professional & Business Services, that accounted for over a quarter of the gain with 62 thousand new jobs. Health Care & Social Services, an area whose employment we expect to increase further over the next few years as a result of government subsidies through Obamacare and the demands of aging population, rose by 55.6 thousand workers- also a quarter of April's gain.

Most Gains From Part Time Employment

But it should be noted that virtually all the new jobs created in April were part-time jobs; the number of part-time workers rose by 206 thousand in April, or 92% of the 223 thousand new jobs. The number of persons employed in part-time jobs has remained relatively unchanged since the official end of the 2008 recession, ranging between 26 and 27 million persons.
In fact, as the chart "Part Time Employment" shows, the sharp jump of 3-4 million in the number of part-time workers seen during the recession has not disappeared. It seems like a new plateau in part-time employment has been reached.The transition from part-time to full-time employment has not materialized for most people, assuming that's what many people expect when they get part-time employment.

Mixed Signals From Hours Worked Data

Another statistic that provides a glimpse into the current economic situation is the number of hours that workers put in a week. However, these data do not provide a clear signal. Overall, the number of hours worked in the private sector remained unchanged at 34. 5 a week. But there are sharp differences among the various sectors. The chart "No. of Weekly Hours- Change March to April 2015" identifies those sectors that are either rising or stable, colored in green or yellow, and those that had a decline in the hours worked, shown in red.
What this chart does not show is the fact that for several "goods producing" sectors (e.g., manufacturing, mining, construction), the number of hours worked has been declining for several months. This may help explain partially the country's economic stagnation.

Thus, from the headline numbers one is led to believe that there is a recovery underway. But digging deeper into the data shows still many weaknesses in employment. And, despite the emphasis that many people put in whether GDP is growing or not, the key driver of a robust economy is "solid" employment growth.

HOMEOWNERSHIP RATE...BACK TO THE FUTURE

The economists Carmen Reinhart and Kenneth Rogoff pointed out in their book This Time Is Different that financial crises, unlike other economic crises, tend to have bad economic effects that linger for a long time. They examined data on financial crises that occurred over the last 600 years across many countries, and concluded that booms fueled by domestic debt eventually run their course and lead to default. But their key point is that recovery from such default is slow and painful, as we have seen recently in many European countries, the most evident of which is Greece that has remained in a moribund state for several years now.

In the U.S. we are till suffering the aftereffects of the sub-prime debt boom that drove the housing expansion through the 1990s, until the implosion in 2008 that does not seem to end. One particular area that shows clearly the deleterious effects of the financial crash is the U.S. homeownership rate.
The rise in homeownership from the mid-90s, which rose from 64% in 1994 to its peak of 69.2% by 2004, was seen as a successful example of wise economic policies. For example Ben Bernanke, then Chairman of the Federal Reserve Board, said in a speech in May 2007 that

"The increase in homeownership has been broadly based, but minority households and households in lower-income census tracts have recorded some of the largest gains in percentage terms.  Not only the new homeowners but also their communities have benefited from these trends.  Studies point to various ways in which homeownership helps strengthen neighborhoods"

But it was already evident by that time that the housing boom was over. Even at that stage of the game and despite the immense amount of data and analysis available to him, Bernanke was not aware of the potential for disaster that was inherent in the subprime market segment.

In fact, conventional thinking was that the policies of the Federal Reserve Bank and the Federal government had been beneficial to the housing market and the economy in general. But in the six years since the market crashed in 2008, we are still suffering the aftereffects. Moreover, rising homeownership since the mid 90s, that was seen as an indicator of successful economic policies, has been in a free fall for ten years now. Currently, as can be seen in the chart nearby, the U.S. homeownership rate is back at levels last seen in the 1980s.


Who's Lost the Most in the Homeownership Game?

While overall homeownership fell by 4.6 percentage points in the decade ending in 2014, the largest drop was concentrated among 35 to 44 year olds, who saw their rate drop by 9.5 percentage points to just under 60% homeownership. And relative to the 1980s, we find that the overall U.S. rate is roughly equal to today's only because of gains in homeownership among those aged 65 years and older. Households in this age group saw their homeownership rise to nearly 80%- up five percentage points from the 1980s. People in all other age groups, under 65 years, actually saw their homeownership rate decline. The largest drop, as can be seen in the chart "Change from Early 1980s," is among the key 35 to 44 years group; this is a group that is in the family formation stage.

Government Policy Failures
So the easy money policies followed by the Fed, combined with Federal government efforts to improve homeownership have had, in fact, the opposite effect. After thirty years of policies that encourage greater homeownership, particularly among minorities and less advantaged groups, we find ourselves back where we started. Actually, these policies have made things worse as shown by the graph above, which is not surprising since most government actions and policies (all?) have detrimental effects on the economy and consumers. Government policies typically, either intentionally or not, benefit a specific group while they hurt the majority of consumers. In the home owning case, the intent was to improve homeownership across all groups, but we ended up only improving that of the elderly population, those 65 years and older, while that of all other age groups fell.

Homeownership, Savings and Consumers' Wealth.
It is often said the Americans do not save enough because owning a house, while it increases in value, is a valid way of accumulating wealth. And indeed it is so, as long as the value of the asset, i.e., the house, increases in value. But the housing crash, that in reality began in 2005, showed that house values, like those of any asset, can fall as well as rise.
The net wealth of American households stands today at nearly $83 trillion; despite the lack of economic growth since the end of the recession, coupled with housing markets that continue to be dormant, total wealth has increased by 32% since 2008, more than recovering the losses of the recession. However, the bulk of the wealth gains are in financial assets that account for 84% of the gain since 2008. And, more troublesome yet is that over half of the increase in wealth is due to equities gaining value, i.e. stock market appreciation- are we in the middle of another stock market bubble induced by the Fed?. But this is a topic for a future post in this blog!

FREE TRADE...IS IT BAD FOR THE U.S. ECONOMY?

Of course not! Contrary to public opinion, free trade is a boon to the economy and a real benefit to consumers. It gives consumers more options in the goods and services they can purchase; it expands the markets within which businesses operate; and generally, it lowers prices to consumers too. In fact, free trade is the only issue on which virtually all economists agree.

But still you find some economists who oppose free trade. They very likely represent the vested interests of a narrow group of businesses, or perhaps a labor union trying to protect its workers from lower priced and more efficient foreign competition. Usually, what gets lost in all the discussion, are the benefits to all consumers. At this moment, in fact, the Senate is discussing passing a bill to grant President Obama "fast track authority" to make trade deals and those Senators objecting to the bill are liberals who are supporting narrow business interests.

Among consumers there is a lot of misguided and confused talk about foreign trade. On the one hand, many complain about all the foreign goods that are invading our shores and stores, and of the jobs we are losing to foreign competition. Today the complaints are mostly about China, but we should recall that a few years back the complaints were about Japan. On the other hand,  many of those consumers go cheerfully to those same stores to buy imported goods that are significantly lower-priced, and perhaps higher quality, than the alternatives made at home.

That which is seen, and that which is not seen

Frederic Bastiat - 1801-1850

About 165 years ago, the French economist Frederick Bastiat cleverly explained the reasons why many people oppose free trade. Bastiat put it in terms of what is seen and not seen. Upon opening borders to foreign competition some specific businesses may be forced to close and lay off workers, because they can't match that competition either in prices,  quality or both. This is what is seen- people observe that and immediately conclude that free trade is bad. We can all point out to examples, recent or not, where businesses have closed and workers became unemployed because of foreign competition. But those foreign products, at lower prices and/or better quality, can now be enjoyed by everybody. All consumers benefit from this, and this is what is not seen.

The important lesson from Bastiat, one that even some economists ignore today, is that when analyzing the economic impact of some action, we must look not only at the immediate, visible effects. We must look deeper at any subsequent, delayed effects that are not immediately apparent. In most cases, those delayed effects contradict and overwhelm the "seen" impact of the immediate effects.

What do the data reveal?
But first, let's take a look at some figures. As the rest of the world inevitably has become more industrialized and economically advanced, the U.S. global dominance in all economic matters has waned, naturally- this is seen as a reason for objecting to free trade. But in reality it is not a case of us losing ground; rather other countries are becoming more advanced and are gaining. But in the end we are all better off, much better off.
We only need to look at our imports and exports. The chart "U.S. Trade as a Percent of GDP" shows that while exports and imports were about 5% of GDP in 1969, today they are 13% and 17% of GDP, respectively. And the foreign trade share of GDP has grown in tandem with U.S. GDP growth. How can trade be a bad thing then?

This level of trade represent about three trillion dollars of foreign goods that we now have access to here in the U.S. For instance, while in the 50s or 60s we had only four choices of automobile companies (Ford, GM, Chrysler and American Motors- who remembers?), many of them offering cars of perhaps low quality, today we can choose from dozens of manufacturers coming from a multitude of countries. We have a multitude of choices in terms of types, quality, prices, etc.

What about the trade deficit?
But, you will say, we are running huge trade deficits, we are losing while countries like China are winning at our expense. This is not true- we are not losing and they are not winning. We are both voluntarily exchanging one thing for another. When we import goods or services from another country, say China, we give either dollars or IOUs in exchange. We get the cars, bicycles, or whatever we imported and they get pieces of paper. Are they richer and we poorer now? No, of course not. We have things now that we wanted more than those dollars, and they have the dollars or IOUs. But they can't eat those paper documents, they have to spend them either today or sometime in the future.
So, as long as they are willing to hold those IOUs (typically U.S. government debt, shares in U.S. companies, etc.) nothing happens. They are earning a modest rate of return on the IOUs and we only pay that interest due. This is what is called the "capital account" surplus.
If at some point in the future they decide to get rid of those IOUs, we will see an impact on the dollar exchange rate.

WHY DO WE IGNORE BUSINESS INVESTMENT?

Gross Domestic Product, or GDP, is commonly thought to reflect accurately the value of all goods and services provided in an economy. In the GDP model, the economy can be viewed simply as the result of adding the dollar value of five components, typically shown in the formula given below.

GDP = Consumption Spending + Investment + Government Spending + Exports - Imports

From this formula it follows that if we want to increase GDP, we only need to maneuver or increase one of its components. This explains why during and immediately after the 2008/09 recession there was a rush to increase government spending, on the misguided assumption that this would increase automatically GDP and get us out of the recession. President Obama, working with Congress, pushed through the so-called stimulus bill (the misleadingly named "American Recovery and Reinvestment Act") that called for spending of more than $800 billion by the Federal government. It was assumed that this boost in government spending would bring the economy rapidly out of the recession. The spending bill actually included several tax provisions too.

As we now know, and a few sage economists knew before, the much anticipated boost in GDP did not happen. Average GDP growth over the last six years, that is since 2009 when the stimulus spending bill was passed, has been a measly 1.4%. In contrast, the average growth of all previous economic recoveries since the end of the Second World War has been over 4.0%.
We have multiple examples, besides the recent U.S. experience, where boosting government spending has not resulted in a much heralded economic boom. Rather, the opposite has been the case, as in Japan where continuous bursts of government spending over the last 25 years have not pulled that country out of its dormant state.

Increased Government and Consumer Spending do not Lead to Growth

Given all this evidence disproving the presumably beneficial effect of government spending, it is mystifying why this approach continues to grab the attention of so many economists and businessmen.  Two plausible reasons appear to be self-interest and the burden of knowledge. Self-interest because of the benefit, direct or indirect, to those propounding government spending (the crony capitalism syndrome). Burden of knowledge because of the intellectual investment they may have in those theories and their reluctance to accept an alternative explanation of how a market economy works, thereby discarding their belief in incorrect theories.

As far as government spending goes, it's easily seen that what the government spends are funds not spent by consumers. When governments engage on additional spending, they are taking funds away from the public; either immediately in the form of taxes or in the long-run because of the new debt incurred to sustain that spending. Similarly, consumer spending does not lead to growth- at best it simply maintains the same level of goods flowing into the economy.

The Key to Growth: Savings and Business Investment

But the one element of the simplistic GDP formula above that is often neglected, investment, is the key to economic growth. It is only through investment, obtained from the savings of individuals and businesses, that real economic growth results. Most of us remember the example of Robinson Crusoe discussed in our first economics course. The purpose of bringing Crusoe to class was to explain how one day Crusoe decides not to consume all the berries he harvests (or whatever it was), and save some for a future day when the saved berries will allow him to spend his time developing a tool; a tool that will make it easier and more efficient for him to harvest berries in the future. This is the act of saving and investing that is so crucial for economic growth. But also this is the act that seems to have been forgotten in the efforts to generate growth without any effort.

There are many examples of the role investment plays in economic growth and development. We need to look no further than the Chinese economy to appreciate fully the value and impact of investment for economic growth. The phenomenal growth in the Chinese economy over the last 30 years did not result from spending by the Chinese government.  Yes, freeing up markets (to some extent) and allowing for investment to take place. This investment in capital good (facilities, machinery, etc.) is what trigger such spectacular growth. The savings came initially mostly from the Chinese diaspora in places such as Hong Kong, Singapore and Taiwan; most recently it's been from savings by Chinese nationals.

And in the U.S. investment has also historically been key in producing high economic growth. However, it also helps explain the slowdown in economic growth we have had since the beginning of the century. Although the chart "Gross Private Investment" shows what appears to be large and rising business investment in the country, except for the large dip around the 2008-09 recession, disaggregating it into its two main components helps explain that slowdown in growth, as shown below.

The two components are shown on the chart "Non-Residential Business Investment." They are investment for Replacement and Maintenance of the existing stock of capital goods, the ever rising line in red, and investment for New capital goods shown by the blue line on the top chart. At the bottom we display the ratio of New to Total investment where we can see that while in the sixties and seventies the proportion dedicated to New investment was roughly around a third of total investment, the ratio has been on a falling trend since the 1980s.

Naturally a question to ask is what is the significance of this declining trend?

Investment and GDP Growth
By plotting this ratio against GDP growth we can get a clear idea of the relationship, and the impact that New investment has on economic growth in general. To simplify the analysis, we have plotted on the chart "New Investment Ratio & GDP Growth" the five-year averages for both of these variables- GDP growth and the New Investment ratio. This averaging was done to smooth the data and get to the essence of the relationship.

We can see that up until the mid-1990s the New investment ratio was relatively flat, and also GDP growth was fairly robust. However, afterwards the investment ratio began to decline sharply, and so did GDP growth.

What does it all mean?
The emphasis on spending, whether it's government or consumer spending, has resulted in a neglect of business investment. Further, recent economic policies have tended to be adverse to investment, or even to discourage investment. At best, we have seen that the government officials give investment lip service, but they typically prefer direct spending since their effects are presumably more visible and immediate.
But one reason that despite these policies the U.S. economy still maintains some modicum of positive growth, is because the main alternative to investors is focus on one of the European countries. And we all know that the majority of those countries operate in an environment that is yet more punitive towards businesses than the U.S., making investments in those countries a not very attractive and more risky proposition.