THE "EMPEROR'S NEW PHILOSOPHY"
You all remember the old story about the emperor that supposedly had a new suit of clothes that he proudly displayed to his all of his subjects. The part that makes the story interesting is, of course, that the emperor has no clothes on at all, and his subjects, because he is the emperor, are afraid to tell him so.
I wonder if that's not what is going on now, as Fed Chairman Alan Greenspan propounds his new theories on productivity. Mr. Greenspan has earned great respect from everyone, this writer included, but with these new theories, others may be afraid to wonder--I have to wonder. Mr. Greenspan came before Congress in an attempt to further justify the Fed's fighting of the phantom inflation. He decided that in the face of almost amazingly rising productivity, that productivity now is 'bad.' Or that "too much" productivity might be bad.
Before Mr. Greenspan's utterances, most people would have told you that productivity is never bad; like being too thin or too rich, you can't have too much productivity. At least until now. Mr. Greenspan's theory goes like this: Productivity, at least, the record-breaking kind we've seen of late, leads to higher corporate earnings-the expectation of higher corporate earnings leads to higher stock prices, which leads to more of the so-called Wealth Effect, where people feel rich. The Wealth Effect leads to more consumer demand, which leads to greater consumption that will eventually exceed supply. Everyone knows that when consumption or demand exceeds supply, it puts upward pressure on the economy, which eventually results in inflation and higher prices.
Those are a lot of dots for Mr. Greenspan to connect, and quite a theory. While I respect him, this time I think he may be on the wrong road. Consumer demand is very important in this country-it provides about two-thirds of Gross Domestic Product. But we have not yet begun to challenge our supply. Capacity at the nation's factories is running at just barely 80%. Mr. Greenspan forgets that technology, which is increasing productivity, is also part of the reason you can have greater supply at higher quality and not raise prices. Even on the human side, Mr. Greenspan is afraid our nation may run out of workers, overlooking the fact that the workers in our globalized economy are now found worldwide.
The Fed, like most economists, continues frustrated at their inability to correctly predict what is going on in the economy. They've been unable to understand and accurately predict how strong this economy has been, and hopefully will continue to be. So now we come up with a new explanation, which is that productivity-- excuse me, too much productivity--is bad. I just can't buy it, and I think after a while most people will come to question it as well. In short, I think everyone ought to take a closer look at the Fed Chairman's "new suit of clothes."
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Do you own a credit card? Perhaps a better question today would be "Do you know anyone that doesn't own one?' Well, the credit card is celebrating a birthday this quarter. It was 50 years ago, during the first quarter of 1950, that credit cards first came on the scene. Today, it's estimated that 157 million Americans, more than three-quarters of our adult population, have at least one credit card. At first, all cards were really just charge cards, meaning that the balance had to be paid in full each month. Revolving credit cards, which charge interest and allow customers to make partial payments each month, were introduced in 1951. Now, there are all sorts of sophisticated variations of the one simple charge card. Individual retailers have issued cards, there are those that give frequent flyer miles, and even debit cards that can access ATM machines.
Just in case you wondered, credit cards are very profitable for banks, in part because many of them charge 18% or more on the unpaid balances outstanding. That's why we keep getting offer after offer in the mail. Visa and MasterCard, the two largest card networks, have about 75% of all transactions between them. According to the Consumer Federation of America, unpaid balances for the 80 million households with credit card accounts now average six to seven thousand dollars. However, 43% of consumers pay off their credit card balances every month. Obviously, the credit card is here to stay. It is convenient, but be careful-sometimes it's just too easy to build up big debts.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)