With debt-to-income ratios skyrocketing, regulators may be tempted to take action
Consumers are continuing to spend at a pace greater than the increase in their disposable incomes. Common sense dictates that sooner or later people are bound to notice the red ink on their household balance sheets and cut back on purchases.
Such a spending slowdown will only happen if people can see their losses. So far, however, retailers have found ways to bridge the payment gap. By lengthening payment schedules and offering low finance charges, they're keeping consumers hooked.
But to sustain further incentives at the retail level, distribution costs - including financing - must continue to decrease. At the same time, the system must absorb these low finance charges to ensure that the total economic return on a particular item or service justifies its production.
So far, increases in productivity have enabled producers to hold the line on prices while offering improvements to their products and services. These gains have helped offset the increased cost of extending credit, as well as lengthening the economic life of products.
For current spending patterns to continue, however, several events have to take place. First of all, consumers can't exceed their critical debt-to-income ratios, although those ratios are apparently much higher than economists are comfortable with. The immediate danger is that when the market adjusts to the increasing number of debt-payment defaults, consumers will suddenly find that their credit has been restricted.
Next, there must be sufficient funds within the system to allow credit to be available at favorable terms to fund increased debt. This shouldn't be aproblem as long as the U.S. remains the dominant economy. At the same time, we must keep the cost of borrowing money in the U.S. at attractive levels; this means the Federal Reserve has to keep the discount rate near current levels, while maintaining margin requirements.
Another factor is the relationship of supply and demand. Goods and services must be more closely matched to need, which means more rapid and decisive changes in distribution patterns. As far as trucking is concerned, we don't necessarily need more vehicles or drivers, but rather increased efficiencies.
If the transportation market were more homogeneous with respect to service demands and services provided, pricing could more effectively allocate distribution resources. Instead, it is anything but homogeneous, making it very difficult to put a pricing mechanism in place.
In fact, the transportation market continues to evolve as one of the most sophisticated in the world, providing enormous flexibility and choice for the distribution community. Any attempt to constrain the evolving nature of the transportation system could quickly cause economic curtailment.
We should be wary of erecting barriers to transportation productivity at a time when consumers - the engine that powers economic growth - are facing a decrease in purchasing power.
Whether they're caused by higher fuel prices, reduced productivity or denial of access for service, current operating constraints on transportation will only serve to magnify economic disruption that results from a drop in consumer spending.
The next Administration will be faced with an immediate decision regarding the trade-off between the anticipated benefits and likely economic consequences of more regulation. I feel that the economic consequences will be very detrimental to the well-being of the majority of citizens.
