US starting to pay the price for living beyond its means

LIVING standards in the United States have begun a period of stagnation or decline. That's a fairly common assumption among economists. They aren't talking about a recession, though that is also possible. What they are referring to is lower per person domestic spending on consumer goods and services - cars, sheets, toys, permanents, and so on.

For example, Michael W. Keran, chief economist of the Prudential Insurance Company of America, figures five years of consumer spending plenty ended in 1986 and five years of consumer spending famine (or at least stagnation) began last year.

That's because the US has been living beyond its means, enjoying massive imports, and now has started to pay the price.

``For the vast majority, the most important event in 1987 was the start of a five-year decline in the US standard of living,'' says Dr. Keran. The major economic event wasn't the October stock market bust.

Last year real domestic consumer spending rose less than 1 percent and population probably rose about 1 percent. So, on a per capita basis, the average person spent the same or slightly less on the goods and services that make up his or her living standard.

Over the last three decades, consumer spending has averaged 62 percent of ``potential'' gross national product (GNP), or the total output of goods and services. GNP includes plant, equipment, and other items bought by business as well as consumer-bought items. Consumer spending declined only slightly below that 62 percent level in the 1981-82 recession, the worst in several decades. Subsequently, consumer spending rose to 67 percent of potential GNP (a Commerce Department measure Keran uses to avoid the impact of the business cycle on consumer spending). That was the highest level in history.

The Reagan tax cuts added hundreds of billions of dollars to consumer purchasing power. They also swelled the federal deficit, helping hike interest rates. Many of the newly-issued Treasury bonds and other American debts were bought by foreigners. That drove up the exchange value of the dollar. This enabled Americans to buy oodles of imports at relatively cheap prices. So imports rose from about 10 percent of potential GNP in 1982 to more than 15 percent in 1986, again a historic record.

``No wonder Ronald Reagan's approval rating remains so high,'' says Keran. ``No other president has provided such a bonus to consumers.''

Now the dollar has plunged in value. Americans must pay more for imports. Further, they must service the foreign debts piled up to pay for imports and finance the government deficit.

``This has made the foreign investor an important participant in the US economy for the first time since the 19th century,'' says Keran.

With a weaker dollar, US exports started rising rapidly last year, and this will continue. Those exports are consumed abroad, of course, not in the US. Imports could also weaken.

Whether or not US living standards actually decline or merely stagnate depends on how fast the nation makes the switch from domestic consumption to exports and on how rapidly the economy grows. The increase in exports and stronger business investment can prevent a recession. Last week's drop in the unemployment rate to 5.7 percent suggests no slump is imminent. But Keran is forecasting a slight real drop in living standards.