In a footrace with old Double-Digit
I called on my old friends the Smiths the other day to find out how they are meeting inflation. Inflation is now at 13.3 percent a year. To the Smiths it means looking back wonderingly at old times. They can't get over their daily astonishment at the way individual goods have jumped. Chronologically it means that if you had a dollar in 1945 it was worth 67 cents in 1953; 60 cents under Eisenhower in 1961; 58 cents under Kennedy; 50 cents under LBJ; 36 cents under Richard Nixon; 30 cents when Jimmy Carter took over and now -- stop the clock, quick! -- it's down to 24 cents and sinks lower every day.
(Nuclear scentist Hans Bethe tells about hyperinflation in Germany before Hitler: Hans would dash to collect his father's salary to spend it as fast as he could grasp "that a million of today's marks were worth only five hundred thousand of yesterday's.")
The smiths received me pleasantly in their average-sized home, with an average-sized family (four). Mr. Smith has helped me out on these statistical problems before. He told me now that he had managed to keep his standard-of-living to about where it was in 1970. The family income was $13,200 then. Today it is $25,000.
"How did you manage?" I asked in surprise.
His wife, Jane, is working, he said. She has taken a part- time job, one of the millions of women who have gone into the labor market.The children are at school most of the day, he said, and can look after themselves until Jane gets home.
Both spouses now work in 40 percent of American families, and the number is growing; their salary is about 25 percent higher, on average, than for families with one worker. Fine for the present. Experience teaches, however, that in case of economic slowdown the wife's job is generally more vulnerable. She has less seniority. There is a possible weakness here if there is a real recession.
But where is that recession? My friend Smith -- let me call him Henry -- explained that he is making out by borrowing a bit. "Why not?" he asked. He is borrowing "real" dollars and will pay back "cheap" dollars.The statistics show, indeed, that total personal debt including mortgages in the United States is at the highest point in history. It has more than doubled in the last decade to about $1.2 trillion. I don't know what a trillion looks like but it's a lot of money. In Henry's case it means that he spends about 23 percent of his disposable income to pay off mortgage and other debts. He takes it out of one pocket and puts it in the other.
What the Smiths have been doing, in fact, has bothered economists a lot: They have been going into debt rather than accepting a cut in living standards. This has helped postpone the elusive recession. Figures show a sharp cut in national savings. In fact Americans are borrowing more and saving less than they have in years. The national savings rate is down to a 30-year low.
Productivity is down, too. Productivity per worker is still the highest in the world but the percentage used to rise year by year; now it's sinking. An increase requires modernized machines, new inventions, improved technical skills. These are stimulated by an infusion of new capital. Capital, in turn, is generated by mass savings. When savings fall, so does productivity: Inflation feeds on itself. Since 1973 productivity growth has declined from an annual rate of 3.2 percent to a minus figure. Ultimately there could be a fall in the Smiths' standard of living if this goes on.
The Smith family's credit is good, and they make a lot of their ordinary purchases with credit cards. It's a kind of plastic money. There are 277 million retail credit cards in use now. The publisher of a newsletter on the subject says plastic money purchased $155 billion worth of goods last year and there is $50 billion of outstanding debt at present. Bankers hope this isn't excessive. Comptroller of the currency John G. Heimann warned bank presidents last fall to review their lending and credit policies -- for example, he didn't like the idea of issuing multiple credit cards to the same person.
I said goodbye with regret to Henry Smith -- an average man in an average suburban home, with two nice average children, and Mrs. Smith getting together an average supper. There is something heroic in the average man. He does the best he can. He is going out now to fight a grim battle with a fire-snorting dragon -- old Double-Digit, who devours hopes and values.