The Price of Scarcity

At first glance, it looked like a turning point. The Labor Department reported last week that the cost of living, having gone up during the previous four months, had finally flattened out in January. The main reason was that excise taxes on auto purchases and telephone calls had been briefly rescinded. But they will be reimposed within the next month or so, and by every expectation the cost-of-living index will head higher again. In any event, last week's flattened figure is of small solace to the U.S. housewife, who is already complaining about having to pay 59-c- for a bunch of broccoli in Boston or $1.09 for a pound of bacon in Atlanta.

The fact is that, whatever official statistics may say, the Administration expects the cost of living to go up at least another 2% before year's end. The cost of doing business is also climbing. Manufacturers are paying big premiums for many nonferrous metals and other essential materials. The demands being put on the U.S. economy have caused scarcities unknown since the Korean War. Acute shortages continue to grow in the economy's three basic resources: men, materials and money.

Costlier Mortgages. The Johnson Administration has nearly achieved its goal of full employment, but is baffled by the new set of problems that it has brought. Now that unemployment has edged below 4%, Labor Secretary Willard Wirtz warned last week that the U.S. "is about to face a quite serious manpower problem." That has its good side: Negroes now find it much easier to land production-line jobs in the South, and unemployment has ceased to be the headache it was for all kinds of workers just a few months ago in Los Angeles, Seattle and Boston. Now, on the other side of the coin, the labor shortage poses major problems for businessmen who are struggling to keep costs down and production up. The factory work week has jumped to a postwar high of 41.1 hours, and the average U.S. worker is pulling down 3.6 hours of overtime a week. Employers are hiring younger and older job applicants and taking more women and high school dropouts than they were a year ago.

Even more pronounced is the shortage of money. Largely because bankers cannot keep pace with industry's demands for capital-expansion financing (see following story), interest rates continued to advance last week. Manhattan's First National City Bank raised from 4 1/2% to 5% the interest paid on certificates of deposit--that is, deposits of $2,500 or more pledged for at least nine months--and other large banks quickly followed suit. Sales finance companies also increased their interest charges to 5%. The Veterans Administration hiked its interest on G.I. mortgages from 5 1/4% to 5 1/2% . Tax-free municipal bond yields rose to a postwar high of 3.83%, causing dozens of cities, counties and school districts to postpone or cancel millions of dollars worth of bond issues. Another effect of the credit pinch: auto finance companies have become tougher in risking loans, which is one reason why auto sales so far in 1966 are slightly off last year's record rate.

The Federal Reserve Board, meanwhile, went on squeezing the money supply by reducing the amount of its member banks' net free reserves. Many experts began to complain that such anti-inflation cores might be worse than the disease. Said Banker Robert Roosa, a former Treasury Under Secretary, who prefers higher taxes to tighter money as a brake on inflation: "If interest rates go much higher, they will be dangerously disruptive."

Cheaper Stocks. They are already disrupting the stock market. More and more investors are selling the blue chips in the Dow-Jones industrial index, which pay dividends averaging only 3.06%, in order to buy higher-yielding bonds and certificates of deposit. On the day after the certificates of deposit jumped to 5%, the Dow-Jones index plunged 13.59 points--its sharpest loss since last June. In all, the index dropped 21 points during the week, reaching a five-month low of 932. But while the blue chips were battered, many lower-priced electronics and other glamour stocks held firm--primarily because their owners have more appetite for growth than dividends. Standard & Poor's index of 20 low-priced issues has risen 50% since last June. As for the Dow-Jones index, Wall Streeters generally believe that it may slide close to 900 but will then rebound.

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