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October 10, 1980
Edu cat
Consumers
This is National Consumer Education Week.
According to the U.S. Office of Consumer
Affairs, the week's schedule will feature
numerous media events designed lito stimulate support for consumer-education programs and to assistconsuniers in dealingwith
the problems of inflation." This might thus be
a fitting time to summarize what consumers
have learned in an inflationary environment
about how to handle $2 trillion in annual
income.
On the basis of their recent behavior, households seem to have learned the laws of economics reasonably well. They have responded to specific price shocks - especially the several OPEC oil-price shocks - by
reducing their demand for higher-priced products. They have also responded to the
upward surge in the general price level in an
economically rational manner, by spending
more and more of their funds on tangible
goods rather than depreciating paper.
decade. Thus we offset a good deal of the
slowdown of output per employee by attracting more married women and teenagers into
the paid workforce.
Stein attributes this maintenance of real living
standards also to the electorate's decision to
reduce spending on national defense. In the
1949-69 period, we increased the share of
GN P devoted to defense, from 6.44 percent
to 8.84 percent, but then reduced the detense
share to 4.55 percent over the 1969-79 decade. Because of these two factors, then, the
output avai lable for private consumption rose
less than GN P in the earlier period but faster
than GN P in the most recent decade.
Another important feature of consumer
behavior during the past inflationary decade
was an ability to maintain real living standards in the face of a serious weakening of
productivity. Real disposable per capita
income - probably the best measure of consumer well-being
rose at a 2.25-percent
annual rate between 1949 and 1969, but at a
2.64-percent rate over the 1969-79 period.
(Real spending showed the same trend as real
income.) In contrast, the growth of real GN P
per employee slackened considerably over
time, with this productivity measure growing
at a 2.42-percent rate in the 1949-69 period
but atonly a 0.82-percent rate in the 1969-79
period.
The 1980's may differ considerably from the
1970's in this regard. The Administration
seems to have strong support for its plan to
boost defense spending (in real terms) by 25
percent over the next half-decade, and consumers of course will have to bear the burden
of that shift in resources. Moreover, demo-graphic factors will work against the expansion of the workforce, because of the slower
growth of the pool of potential workers
represented by teenagers and middle-aged
homemakers. But by the same token, demographic factors favor an improvement in
productivity over the coming decade,
because roughly half of the nation's population growth over the decade will be
concentrated in mature adult (25-44) age
brackets. If this mature workforce can obtain
better tools to work with (e.g., through tax
policies to encourage capital investment),
then the nation's productivity performance
should improve, and the economy could
grow fast enough to meet all the demands
placed upon it.
Herbert Stein, writing in Contemporary Economic Problems - 1979, notes that the ratio
of workers to population remained steady in
the first two postwar decades, but then
jumped from 40 to 45 percent over the past
The OPEC oil exporters will continue to be
among the most persistent claimants on U.s.
resources. But American consumers, although perhaps unfamiliar with the eco-
Higher living standards
Responseto price shocks
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nomic concept of elasticity, have deftly
illustrated that concept through their response to soaring oil prices during the past
decade.
percent during the year. In 1 979 as in earlier
years, consumers thus showed a keen appreciation of the concept of price elasticity of
demand.
According to a Council of Economic Advisers' summary of recent elasticity studies,
short-run (one-year) price elasticities of
demand for gasoline range between minus
0.2 and 004,while longer-run (five-year)
elasticities range between minus 0.6 and
minus 0.8. In other words, a 1O-percent rise
in price will lead to a 2-to-4 percent reduction in consumption in the short run, and to a
6-to-8 percent reduction in the longer run.
The data thus belie the common belief that
demand for petroleum products is price
inelastic.
Responseto inflation
Even stronger evidence of consumer education in the economic facts of life can be
gleaned from the shift of household assetsin
the inflationary environment of the past
decade and a half. Over the 1952-65 period,
as consu mer prices increased about one-fifth,
households concentrated much of their asset
holdings in financial (paper) assets,such as
deposits and s.ecurities; but over the 1965-78
period, as prices doubled, households shifted
thei r attention to tangible (real) assets,such as
housing and consumer durables. Consumers
were encouraged in this direction by the
legislative penalty imposed on saving in the
form of deposits, since Congress not only kept
bank deposit-rate ceilings intact, but even
extended them to thrift institutions at the
beginning of this inflationary period.
Even before 1979's dramatic price increase,
the rising price of energy had cut significantly
into demand. Afterthe 1973 oil embargo
(1972-78), the growth in per capita gasoline
consumption rose less than half as fast as in
the preceding six-year period, even though
real per capita income rose at roughly the
same rate during the two periods. This finding
can be partly explained by improvements in
the fuel efficiency of automobiles, although
auto usage also dropped in the post-embargo
period. Average miles traveled per car dropped slightly between 1972 and 1 978 - but
would have been 10 percent higher if the
1966-72 trend had continued over the following period. And households showed an
even better conservation record in terms of
total per capita energy usage. If the earlier
trend had continued, total energy use would
have been 16 percent higher than the 1 978
actual figure
which represents the saving
of 6 million barrels of oil a day.
The overall wealth-income ratio of house.,.
holds increased about 9 percent between
1 952 and 1965, butthen declined about 13
percent over the inflationary 1 965-78 period,
with net financial wealth plus tangible wealth
equalling 4.1 9 times disposable income in
1 978. Between 1965 and 1978, the tangible
wealth/income ratio actually increased
slightly, but in contrast, the financial wealth/
income ratio dropped sharply from 2.15 to
1 .26 (see chart).
Financial and tangible assets
All types of financial assetswere handicapped during the recent inflationary period.
Household investment in corporate stock suffered because of the increasing uncertainty
attached to stocks in an inflationary environment, according to William Fellner in
Contemporary Economic Problems - 7979.
Moreover, because of the absence of inflation
adjustments in taxes on dividends and capital
gains, the tax burden on securities owners
rose in relation to real yields as the inflation
rate increased. Otherfinancial assets,such as
Households responded in the same fashion to
the 1979 price hikes. Demand for all petroleum products declined more than 4 percent
between the fourth quarter of 1 978 and the
fourth quarter of 1979, and gasoline demand
fell more than 9 percent over that period.
Also, drivers responded to higher prices by
reducing their average
per car by 5
2
claims on money payments fixed in current
dollars, involved substantial risk for pre-tax
returns, and even greater risk for after-tax
returns levied on current-dollar income.
Well-developed mortgage markets, combined with the favorable tax treatment of
interest expense, encouraged individuals to
leverage thei r savings sufficiently to pu rchase
homes or investment real estate. Not surprisingly, then, home mortgages accounted for a
growing share of total credit demands, rising
from 19 percent of total net credit in the
1960's to 20% percent in the 1970's.
Tangible assets,such as housing and consumerdurables, were not handicapped in this
fashion by the recent inflation. Instead, their
prices rose in current-dollar terms, and the
prices of some indeed increased in inflationcorrected dollars. And as Fellner notes, the
expected real yield of these assetsdepended
not on risky market prospects, but rather on
the untaxed use value accruing to the households themselves. Moreover, such yields
were not limited by price controls - by the
statutory regulation of interest rates affecting
certain financial assets.
Entering the 1980's, many consumers have
shown considerable ingenuity in handling
inflation. In fact, some have learned to cope
too well, and may become somewhat reluctant allies in the fight against inflation. Butthe
right policy mix - including the continued
dismantling of deposit interest-rate ceilings
and (above all) winning the fight against inflation - could persuade rational consumers to
take a renewed interest in paper assetsrather
than continue their flight into real assets.
To buy real property, the average saver
assumed an unprecedented amount of additional debt in the recent inflationary period.
wmoam
Burke
Ratio
3.0
\JVeaBth/income Ratios
Tangible
Financial
\
2.0
to
0.0&....---1952
1 965 1978
1952
3
1965 1978
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BANKINGDATA-TWELfTH fEDIERAlRESERVE
DISTRDCT
(Dollar amounts in millions)
SelectedAssetsand liabilities
large CommercialBanks
Loans (gross,adjusted) and investments*
Loans (gross,adjusted) - total#
Commercial and industrial
Real estate
Loans to individuals
Securities loans
U.S. Treasurysecurities'"
Other securities*
Demand deposits - total #
Demand deposits - adjusted
Savingsdeposits - total
Time deposits - total#
Individuals, part. & corp.
(Large negotiable CD's)
WeeklyAverages
of Daily figures
MemberBankReserve
Position
ExcessReserves( + )/Deficiency (- )
Borrowings
Net free reserves( +)/Net borrowed (- )
Amount
Outstanding
9/24/80
Change
from
9/17/80
140,094
118,220
34,346
47,939
23,787
1,037
6,477
15,397
42,876
32,277
29,353
65,131
56,562
25,103
214
193
47
181
36
91
12
9
-3,561
-1,189
- 247
1,288
1,184
743
Weekended
9/24/80
-
57
136
194
Change from
year ago
Dollar
Percent
-
Weekended
9/17/80
-
19
166
186
5,891
7,284
2,563
7,025
425
1,133
1,196
197
58
1,950
835
10,255
10,034
4,562
4.4
6.6
8.1
17.2
1.8
- 52.2
- 15.6
1.3
0.1
6.4
2.8
18.7
21.6
22.2
Comparable
year-ago period
2
1.5
17
* Excludes trading account securities.
# Includes items not shown separately.
Editorialcommentsmaybeaddressed
to the editor(William Burke)or to the author.... Freecopiesof this
andotherFederalReserve
publicationscanbeobtainedby callingor writingthe PublicInfonnationSection,
ReserveBankof SanFrancisco,P.O.Box7702,SanFrancisco94120.Phone(415)544-2184.
@FedFRASER