The Price Is Right

MCDONALD'S IS ONE HUMONGOUS company. With 21,000 restaurants in 101 countries, it is everywhere--which is why the global economy is sometimes called McWorld. But back home in America, the execs who run this vast empire aren't feeling very lordly. More than ever, they find, they have to kowtow to the price demands of ordinary folks like Alonso Reyes, a 19-year-old Chicagoan who works at a local car dealership. Never mind that Chicago is Micky D's world headquarters; he splits his fast-food patronage between McDonald's and its archrival, Burger King--and counts every pennyworth of beef when deciding where to eat. So Reyes perked up when he heard last week that McDonald's had announced "an unprecedented value offering"--a 55-cent Big Mac that the company boasted was "bad news for our competition.f" "Cool," said Reyes. "Coupons, specials, sales. I'll take whatever I can get."

That's what happy consumers across the country are saying. It's not just a matter of getting more burger for the buck. U.S. consumers--which are what America's hard-up, wage-squeezed workers become in their off hours--have virtually seized control of many sectors of the economy. Food. Detergent. Clothes. Cars. Satellite dishes. All have become arenas of price wars in the past year for companies desperate to win customers. And the customers are making the most of it. Brand loyalty? No way. Show us price and quality, or beat it. "The sleeping giant called the consumer has awakened," says Jeffrey Hill, managing director of the Meridian Consulting Group, which projects $17 billion more in consumer savings over the next three years. "Consumers today are much smarter and more educated."

And they're making a profound difference. In an economy that is far more deregulated and globalized, businesses must grab ever more market share to survive-and ingratiate themselves with consumers to do it. Consumer stinginess has rippled through the entire manufacturing-supplier-and-retail chain, wringing out "inefficiencies"--high costs--like water from a towel. Much of the trend can be traced to the hawkish monetary policy of Federal Reserve Chairman Alan Greenspan. For most of the '90s the Fed chief has kept prices reasonable and created stringently low inflation expectations among consumers who, a couple of decades ago, seemed resigned to constant hikes.

A key question for the U.S. economy in the coming months will be whether Greenspan, the nation's anti-inflation czar, pays enough respect to people like Alonso Reyes--the finicky consumer class he himself helped create. Since December, the chairman has been making worried noises about rising inflation pressures and the ballooning stock market. But some critics suggest he is giving too little weight to the added "disinflation" that consumers and businesses have brought to the economy. At semiannual Senate hearings on the economy last week, Greenspan hinted he might raise interest rates soon to ward off inflation, which is projected to run at a benign 2.8 percent to 3 percent this year. The Dew promptly plunged by 160 points in three days. Many market watchers do hope the Fed chairman will edge up rates by summer. But few believe the economy will need much more than that a mild tap to roar ahead for a few more years. "I think we're in remarkably good balance," says former Fed vice chairman Alan Blinder.

The falling price of the Big Mac, in other words, ought to ease the rising anxiety of Big Al. Wall Streeters called the Dow's plunge last week "the Greenspan effect." But what is happening out in the real economy might be called the McDonald's effect: continuing waves of price cuts across many industries. They are helping to tamp down inflation, even in the face of rising incomes and consumer optimism. "What I think is going on with prices is something very new," says Harvard economist Dale Jorgensen. Industry Goliaths are finding they can no longer simply lob new price hikes out into the market; rebellious consumers are likely to fling them back in their faces. McDonald's move came after the flop of its experimental high-priced sandwich, the Arch Deluxe. Procter & Gamble learned a similar lesson last year, when it sought a 5 shoulder for its competitors found it was alone. The quickly relented and cut prices instead, by 6.5 percent.

Clothing prices have also plunged, thanks to what retailers call "cross-shopping." Jan Drummond, a Sears spokesperson, says customers no longer have loyalty to department stores, nor much snobbery about being seen in posh boutiques. "It's no longer where you shop, but what kind of deal you get," she says. Now people say, 'Do you believe I got this at a resale shop?' "The kingpin of this trend, of course, is Wal-Mart, the nation's largest retailer, which makes the American consumer an offer he can't refuse: rock-bottom prices, fast service and limitless selection. And supercheap membership warehouses like Costco and Price Club have popped up everywhere. Manufacturers, meanwhile, have used productivity gains to avoid painfully thin profit margins. During the '90s Detroit has succeeded in keeping auto-price hikes to no more than three quarters of inflation by pushing workers and suppliers hard; the average cost of a new car, adjusted for inflation and new content, is about the same today as it was 15 years ago. Computerization is also seeping into many products like tractors, machine tools and cars. That's a big bonus because computer chips fall in price by about 25 percent a year. The strong dollar also makes imports cheaper.

Some economists are as confident as consumers. "Can the expansion last to the year 2000? I'm basically saying, well, yes," says Laura D'Andrea Tyson, Clinton's first-term chairman of the Council of Economic Advisers. Adds Wayne Angell, a former Fed governor, "Greenspan's really wrong to be worried... I think we've got a wonderful new climate for business."

That kind of exuberance, to use a Greenspanian term, scares the skeptics. Some say all these new efficiencies are mainly one-time improvements. Inflation hawks also point out, accurately, that a good part of the consumer price index (CPI) consists of prices that have eased little, like housing (a notoriously inefficient market) and energy. Finally services, which make up 57 percent of the CPI, are far less affected by globalization and, therefore, intense competition. Just wait, optimists say. Once-soaring health-care costs are growing more slowly than the CPI, notes Patrick Jackman of the Bureau of Labor Statistics. The telecommunications price wars are still at full cry. And Internet buying is just taking off.

But are the optimists expecting too much of this "new" economy? No one really knows. Even Greenspan admits he can't figure out why inflation remains so tame despite superlow unemployment levels-5.4 percent currently-- which once would have triggered wage-and-price hikes. While he has taken note of the consumer revolution, the Fed chief has surmised that the main reason is worker insecurity, which has kept wage demands down. Now, he suggests, workers are getting more confident. But there is little proof of any of this.

These problems, of course, keep few of us awake at night--except for Alan Green-span. And he doesn't like the way the markets have been snubbing him. After the Fed chief first sounded his warning about "irrational exuberance" in the stock market last December, America's giddy investors went ahead and poured another record-setting amount into stock mutual funds in January-$29.89 billion. So many think Green-span will soon launch a pre-emptive strike against inflation whether it's there or not. But the real anti-inflation fighters may prove to be the rest of us, as long as we keep shopping at Wal-Mart and eating Big Macs.

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