Economy Benefits From Improved Private Sector Efficiency
February 22, 1999
Bill Clinton would like us to believe that he and his policies are primarily responsible for the good economic times we are experiencing.
The true source of the economy's strength is the private sector, which has transformed many of the ways in which business is done, to the benefit of everyone.
One of the most important ways in which the private sector has transformed itself is in the obscure area of inventories. The business cycle is, in essence, an inventory cycle. Businesses purchase or order goods in anticipation of sales. When those sales fall off, businesses are stuck with excess inventories. This causes them to cancel purchases and orders from their suppliers and to slash prices on their stocks of unsold goods. This reduces profits and production, causing a slowdown in growth.
But in recent years companies have been able to sharply reduce inventories, thereby reducing volatility in the economy as well as reducing their costs of doing business.
- The inventory-sales ratio has fallen from about 1.55 during most of the postwar period to a current level of 1.38.
- This has allowed businesses to reduce the amount of inventories they must carry by more than $100 billion.
- At current interest rates, this means that businesses have reduced their inventory costs by $8 billion annually.
Firms have been able to reduce inventories due to computers, improved communications and transportation. Computers allow firms to track inventories extremely accurately, reducing the need to carry excess supplies. Computers also increase efficiency by transmitting orders automatically into the suppliers' computers, improving both speed and accuracy.
Finally, overnight delivery services allow orders to be sent in at the close of business with the orders fulfilled by 10 a.m. the next day.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 22, 1999.
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