Cut Inflation with Wiser Consumers

White House inflation fighter Alfred Kahn is having a very frustrating time. Instead of declining, inflation is increasing, especially in the four economic sectors that affect consumers most: health, energy, food and housing.

As a former Cornell University economics professor, his analysis, like that of most economists, of how best to combat inflation proceeds from the production side of the economy. Whether it is through price-wage self-restraint, competition, productivity, regulation, money supply, subsidies or even price controls, the emphasis either is on what the selling side of the economy should be doing or what the government should be doing to or for the sellers.

Another approach–one that favors buyers or consumers–could be more directly fruitful. It could, moreover, help break the logjam of intransigent power that shapes the imperfect markets and politics which fuel inflation. Unfortunately, the economics profession has spent far more time researching production economics than consumption economics.

It is not surprising, then, that Kahn is quietly desperate. He may sympathize with former White House economist Barry Bosworth, who recently exclaimed about the inflation fight: “We seemed to have run out of ideas.” However, a little courage in the present corporate climate around the White House can liberate some workable ideas. In the final year of his tour of duty, Kahn can start advocating the empowerment of consumers.

He need go no further for this platform than the much forgotten consumer platform of candidate Jimmy Carter. In several statements, Carter pushed consumer empowerment with some urgency in his voice. He wanted stronger consumer class action rights, a consumer advocacy agency and better consumer information. Later, the likes of GM’s Thomas Murphy and Dupont’s Irving Shapiro began visiting the White House with their agendas. The consumer got the back burner.

But now another election is coming up, an event Kahn should use to the advantage of his anti-inflation mission.

A new study by several Stanford University professors provides Kahn with some ideas about the anti-inflationary consequences of consumer information services (CIS). They estimate that a variety of CIS in areas such as real estate, auto repair, medical services, plumbing, furniture, clothing and appliance service could conservatively save consumers $100 billion a year. Fraudulent and unnecessary auto repair alone costs consumers about $20 billion a year.

Professors Donald Dunn and Michael Ray note studies showing wide variations in the cost, honesty and competence of retail services in the same locale. They also point out that only a small fraction of consumers has to use comparative information about these services to lower prices or improve quality for the remaining vast majority of consumers who do not receive these ratings or facts.

Since Americans already are paying for some of this information–e.g., real estate commissions–non-profit consumer groups, they suggest, could begin to provide information systematically at a cost that would be a small fraction of the benefits.

For example, they suggest a CIS in the housing market to undercut drastically the standard 6 percent commission that brokers now charge. CIS in medical services can contribute, they say, to “the adoption of payment systems and organizational forms with proper incentives” to cut costs and increase quality. These consumer information services should be financially independent, impartial and responsive to consumers, Dunn and Ray advise.

Trustworthy information by a consumer-owned information service about plumbers, electricians, painters, physicians, dentists, lawyers, auto repair shops and many other businesses can stimulate competition over value. New computer, cable and other technologies can bring this information to people’s homes faster and clearer than ever before. CIS can stimulate new ways for sellers to meet consumer needs or else risk losing business.

The Stanford report (which was funded by the National Science Foundation) concludes that “the consumer information service concept provides a way of increasing competition and innovation in markets that will not be affected by any of the approaches proposed for enhancing productivity in the manufacturing sector…”

Improving productivity through improved information in the local services market puts into practice the classical economic theory of more perfect consumer knowledge.

The authors recommend that the only role government should play is to assist private groups in developing the suitable models and technology for such information facilities and networks. The cost will be far, far less than the huge government subsidies now being extended to business and the benefits far, far greater.

So Mr. Kahn, consumers need your backing in these empowerment matters. Then informed, strengthened consumers will make the market work for them, year after year.

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