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A Citizen’s Guide to the American Economy

This year the gross national product of the United States will exceed one trillion dollars, while the economy will fail to meet a great many urgent human needs. This contrast between the statistics of growth and the fact of economic deprivation in America has become more and more evident to the public during the past decade—especially in such dramatic cases as that of the medical care industry, which has received vastly higher payments from both the government and patients, while the quality of medical care itself remains unchanged or has become worse. Indeed, the quality of life is deteriorating in so many ways that the traditional statistical measurements of the “standard of living” according to personal income, housing, ownership of cars and appliances, etc., have come to sound increasingly phony.

Nevertheless the methods used to understand the economic system have remained rigid ones. The current analyses of and arguments about “national income levels,” “inflation,” and “government spending” do little to trace the precise ways in which the operations of the economy affect the life of the consumer. Nor do such analyses make political judgments or assign responsibilities so as to effectively change the consumer’s situation. We have all heard arguments about the need to change national priorities in allocating public funds for defense, health, education, welfare, pollution control, etc. But such proposals have so far failed to take account of the ways in which portions of reallocated public funds may be siphoned off or misused before any are used for the purposes originally intended.

Meanwhile, the impact on our lives of the largest economic force of all, the corporate economy, has been badly neglected. Most formal inquiries into a more just and efficient use of national wealth have failed to measure how the citizen’s dollars are being wasted and depreciated in the market place and his taxes converted into corporate property and income. Instead these studies focus mainly on “aggregate consumer spending” without asking specifically what consumers receive in return.

What are needed now are analyses of the corporate economy that will do what economists for the most part have failed to do: show how corporations, by their control of both the market and government, have been able to divert scarce resources to uses that have little human benefit or are positively harmful. Such studies will have to take account of facts that economists now tend to ignore because they find them untidy or because they cannot fit them into prevailing economic theory. But as they are carried out, they will show the folly of pouring more dollars into the sieve of an irresponsible corporate system.

To encourage more inquiry into the institutionalized abuses of unchecked corporate power, I would like to outline some of the major categories in which the abuses fall and to give a few of the many possible examples of how they work. I call these categories “sub-economies.” In each case, the consumer’s dollars are inexcusably wasted or his taxes misused. To some extent these categories have been arranged so that they overlap or converge in order to avoid isolating phenomena artificially and to emphasize the economic realities underlying policy questions. As economic measurements become more precise, new categories will evolve, and these in turn will be replaced by others.

1. The involuntary sub-economy. By this I mean the billions that consumers would not have paid if they knew or could control what they were getting, or if corporations observed elementary standards of honesty, safety, and utility in producing and selling the things that are bought. Consumers are now spending billions of dollars for products sold under false pretenses: meat and poultry that are adulterated with fat and water; patent medicines, mouthwashes, and “aids” to beauty and diet that do far less than they are said to do or nothing at all. Both the Food and Drug Administration and the National Academy of Sciences have compiled lists of drugs, patent medicines, and mouthwashes that are valueless for the purposes they advertise and often harmful as well, as in the case of certain antibiotics.

Worthless drugs alone cost consumers one billion dollars a year. The Federal Trade Commission estimates that another billion is wasted on fraudulently sold home improvements or repairs. Last February, Senator Philip Hart of Michigan had this to say about worthless auto repairs:

American consumers spend 25 to 30 billion dollars a year on auto repair. Various studies on the quality of the work were presented to us. They rated the poor, unneeded, or not done work at amounts ranging from 36 per cent to 99 per cent. Even taking the low figure, that means consumers are wasting 8 to 10 billion dollars that they lay out for auto repair yearly.

Equally flagrant is the short-weighting, short-counting, and short-measuring of consumer purchases that were the subject of a report in the Wall Street Journal last month. “The pennies add up fast enough,” the Journal said, “that estimates by state officials of the total US loss from short-weighting start at $1.5 billion a year and rise to as high as $10 billion a year.”

All these expenses—and I could list many more—were clearly involuntary: the consumers did not get what they thought they were paying for.

Quite as serious are what might be called “secondary consumer expenditures”: the consumer may get something he wants, such as a car, but its defects are such as to force him to incur more costs. The fragile recessed bumpers of most automobiles are a case in point. Collisions at under ten miles per hour have been costing $2 billion a year for damages that could easily have been avoided if these cars had had effective bumpers.

What might be called the “accident-injury industry,” composed of companies and professionals providing insurance and medical, legal, and repair services, is now being paid about $12 billion a year. When emergencies occur these services are of course needed; but in fact many of them would not have to be paid for at all if cars were sensibly and safely designed, as could be done without increasing the over-all cost of making cars. Nor would a large proportion of auto repair costs be as expensive or even necessary if key parts were not so inaccessible and fragile, or so constructed that a small defect requires replacement of an entire large unit of the car.

By now some of these involuntary expenditures imposed by the auto industry have become fairly familiar. Less well understood is the way in which many different products, including packaged food, soft drinks, and gasoline, are sold through incredibly expensive advertising of their brand names for which the consumer must bear the cost, but for which he receives nothing of additional value. The staff of Senator Hart’s anti-trust committee estimates, moreover, that deceptive packaging and promotion in the food industry alone are causing consumers to lose $14 billion a year, for example, by pushing the large “economy” sized boxes of food that in fact cost more per unit than medium sized boxes. Of course such expenses would not be involuntary for consumers who could set up their own experimental kitchens and prowl the supermarkets with scales and slide rules. But most families are simply duped.

Until recently the involuntary sub-economy I have been describing has been the main concern of the consumer movement. The movement has had some limited success in improving regulatory action against deceptive sales practices and the safety standards of some products, notably cars, and in encouraging private litigation. Its main achievement has been to create an awareness among consumers that they are being gypped and endangered. But it has yet to devise the economic and political machinery that will counter-balance or deplete the power of corporations to impose involuntary expenditures. Meanwhile, however, the drive for consumer justice is extending its emphasis to less visible parts of the corporate economy where political influence, corporate backscratching, and the structure of industry itself all work to victimize the public, as we shall see by examining other sub-economies.

2. It is in the transfer sub-economy, for example, that the prices for goods and services may rise unconscionably as they move from the supplier of raw materials to the manufacturer, and then to the wholesaler, the retailer, and the consumer. The announcement of a price increase by the steel, aluminum, and copper industries concerns the White House economists far more than would a sudden increase in retail prices. It is not simply that a rise in the price of steel will cause a rise in the price of steel products. The economists know that such increases will escalate sharply as they pass from one shared monopoly or oligopoly of steel buyers and sellers to another, until they reach the consumer who may well have to buy his car or stove from an “exclusive dealer.” To the extent that such price rises are unchecked by effective competition, consumer bargaining, public exposure, or government anti-trust standards at each stage of the economic process, it becomes easier to transfer costs all along the line.

At the moment, to take another example, air, rail, and truck cargo thefts are rising to epidemic proportions, causing losses of hundreds of millions of dollars each year. Most of these losses are being passed on to consumers who do not realize that they are paying for the cost of such pilferage and yet would be unable to challenge it in the courts or anywhere else if they did. Thus there is little pressure on the corporations to increase efforts to stop pilferage, instead of transferring the costs to the consumer.

Sometimes pressures can be mounted to stop transfers of costs to the consumer. For years the insurance industry failed to encourage programs for fire and auto safety, preventive medicine, and pollution control, which would have helped to prevent huge losses from taking place. It preferred to pass on these costs to its unorganized and generally uncomplaining policy holders in the form of higher premiums.

Recently, however, premiums for car insurance have become so high that many people cannot pay them, and those who can are becoming angry. At the same time, the public generally has been made more aware of auto safety. The insurance companies, more eager now to lower the damage claims for minor crashes, have decided at last to change their policies. They have lately been sharply critical of the auto industry for making overpowered engines and useless bumpers—and the auto manufactures are beginning to respond. It now looks as if more functional bumpers may soon be replacing the ones I mentioned earlier; and by adding a surcharge to the insurance rates for high-powered “muscle cars,” the insurance companies are driving down the sales of these absurd machines.

The lesson of this story is that we can no longer depend, as classical market theory held, on consumer response alone to encourage efficiency and competition that will result in higher quality. In a complex multilayered economy it is necessary that countervailing economic power be brought to bear at each level of the buying and selling process, however remote from the consumer. This is the only way to prevent excessive transfers of costs and to encourage efficiency and innovation.

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