Inflation and Social Priorities

...The assets of noninsured pension funds are nearly always managed by the trust departments of commercial banks which invest them as they see fit...

...High interest rates naturally lower the profitability of normally low-profit investments, such as residential housing and public and quasi-public facilities with their necessarily long payoff periods...

...By their vast claims upon the reservoir of savings, the corporations and the federal government have made investments in social projects prohibitively expensive...

...It is true that the large-scale investments required to renew and expand health and educational infrastructures and to reverse the deterioration of cities and the environment can only in small part be funded through conventional financial means...

...I will dwell on the financial mechanism at somewhat greater length because of its decisive importance in allocating real resources in a modem capitalist economy...

...The key reason was the rapid increase in bond yields relative to mortgage rates, rooted in the fact, as the Commission's report states, that ". . . in an inflationary environment, corporations see prospects for profitable use of the borrowed funds far outweighing interest cost considerations...

...The total rise in those outlays amounted to $30 billion over the four-year period, and while it cannot be determined how much of that rise was stimulated or necessitated by military needs, certain indications suggest that these needs accounted for at least one-fifth of the rise...

...Inflation has been attributed by some economists to rapidly rising labor costs and by others to a "profits push...

...Resistance to such controls followed in part from popular indifference and hostility to the war...

...RECENT ANALYSES OF INFLATION in the United States have usually been either evasive about underlying causes or reactionary in their impact on official policy...

...Those who assert that there is a "trade-off" between high employment and inflation—i.e., that the price level rises at an accelerated rate as unemployment drops below 4 percent of the labor force— implicitly shift the burden of anti-inflationary policy to wage and salary workers, since raising the unemployment rate so as to weaken demand and stabilize prices means that people lose their jobs or that youngsters and women in need of jobs cannot find any...

...The guidelines were abandoned in 1965 as inefficacious in a period of rapidly rising costs and consumer prices...

...A few statistics will document the point...

...e.g., Chase Manhattan exchanged large blocks of stock from 159 pension funds for a variety of securities in an outfit called Resorts International, whose main enterprise is a gambling casino in the Bahamas...

...Perhaps a simpler alternative explanation is offered below...

...Its cutbacks in defense spending are part of this reversal...

...These financial developments effected a fundamental redirection of the flow of savings, and caused interest rates to rise to levels appropriate to the usury practiced in backward nations rather than to the capitalrichest country in the world...

...Adherence to them would in time have required some form of administrative control (they had been proposed as voluntary...

...Mortgage borrowing, however, actually declined in the latter period, accounting for but one-fifth of the total, compared with about one-third during the former period and throughout the fifties...

...According to a study by the Cabinet Committee on Price Stability (January 1969), the share of total assets in manufacturing held by the 200 largest firms increased from 48 percent in 1947 to 59 percent in 1967...

...The wage-price guidelines were a set of reasonable norms of economic behavior...

...Many of the so-called hard-core unemployed have lost new jobs in auto and farm equipment plants, and others are likely to lose their jobs in steel and other industries if industrial slowdowns continue...

...Yet, while these facts attest the market power of the big corporations, they do not represent a new development, and they do not prove that administered prices were the cause, or a major cause, of the recent inflationary upswing in prices...

...Beyond the layoffs, however, is something worse for the campaign to put the ghetto people into jobs...

...INFLATION has become the major economic problem in the U.S...

...but it would be a grave mistake to assume that if savings are channeled into the corporate sector through high interest rates, social priorities can even begin to be met...

...Unable to enlarge the fiscal base in order to pay for the war as well as for existing and proposed social programs, the Johnson administration resorted instead to inflationary finance...

...Neither the "trade-off" and "wage push" nor the "profits push" and administered prices satisfactorily explain that upswing...

...The slim gains made possible earlier by high employment levels are now being eroded...

...These economists minimize inflation and assign primacy to full employment, but they do assume the superiority of "free markets" over any form of administrative control...

...The Vietnam war was financed in the main by an enormous budgetary deficit...

...Inflation has tended to depress not only the purchasing power of those who must live on fixed payments...

...I do not intend to deal here with this conflict, but will restrict myself to an analysis of some of the causes of the recent inflationary phase...

...The reasons for this are rooted in a deepening conflict over social priorities— a conflict relatively new to this country, but endemic to the economies of the Western world and Japan at least since the early fifties...

...Profitability is the investment criterion of the fund administrators...

...And the opposition of conservative elements in and out of Congress to the expansion of welfare-state legislation under President Johnson (which the proceeds from increased taxes would have facilitated) blended with the natural resistance of industrial and financial interests, as well as of most of the official trade union leadership, to any control over their freedom of economic action...

...The manipulations of credit availability that were misnamed "monetary policy" proved to be a fiasco, unaccompanied as they were by broad-ranging economic and fiscal measures to restrain demand and apportion supply, as had been done, however imperfectly, during previous war periods...

...Yet the weakness of the Commission's recommendations stands revealed by the implications of the example it cites of the principle actually governing the investment of these and similar pools of savings...

...After the first quarter of 1951, industrial prices declined and consumer prices stabilized, while unemployment remained near or below 3 percent of the labor force...

...The usually cited statistic indicating the relatively small proportion of the GNP that goes for defense, 8-10 percent, is thus thoroughly misleading when the impact of military outlays in a changing situation is considered...

...It is an ironic commentary on the failure of American society to cope with its problems that its presumed domestic priorities, once postponed when escalation of the Vietnam war led to inflation, again are postponed now that the "fight against inflation" reduces available resources...

...But that additional sum represents only what the federal government paid in goods and services for military purposes...

...Bond flotations by corporations, for example, doubled between 1965 and 1969—while corporations' internal financing from cash flow, generated by depreciation set-asides and retained profits, declined in relative importance from nearly three-quarters of their total financing to one-half...

...Even so, unemployment did not drop below 4 percent of the labor force until sometime in 1965, when the Vietnam war siphoned off large numbers of men and women into defense industries and the armed forces...

...The banks, moreover, easily drew upon the Eurodollar assets of their foreign subsidiaries to increase their ability to lend...

...rather, price increases were most rapid in sectors where such power was limited...

...I HAVE DWELT upon the financial aspects of the recent inflationary developments because corporate power has asserted its priorities in large measure through the mechanism of financial institutions and operations...

...COMMENTS AND OPINIONS • In order to make such huge additions to defense production possible, fixed investment outlays by private industries had to be stepped up (inventories too, which I am ignoring here...

...Undeniably, administered prices carry an inflationary bias, as the recent in crease in steel prices in the face of weakening demand has again demonstrated...

...As fiscal agent of the Treasury, the Federal Reserve was compelled to satisfy federal financial needs...

...New hiring is at a low level, and there are fewer and fewer starting jobs for those recruited from the ghetto...

...Unemployment is not likely to rise much above 5.5 percent of the labor force, although the decline in new job opportunities probably will be substantial...

...profits per dollar of sales in manufacturing have barely changed at all...

...Among the recommendations of the Commission on Mortgage Interest Rates is that of stricter regulation of private pension funds: only 5 percent of the assets of these funds, totaling $80 billion in 1968, now is invested in residential mortgages, and the Commission would have the proportion raised...

...As it must also maintain "orderly conditions" in the money markets, it could not successfully resist accommodation of the uncontrolled economic forces let loose by the Vietnam war...

...Furthermore, corporate demand on the capital markets increased enormously...

...Brimmer did not mention some equally significant war-finance facts concerning monetary policy...

...RECENT INFLATION has been the outcome of the rechanneling of manpower and material resources toward war and plant and equipment spending, under conditions in which free play was given to the market power of government and industry in commanding access to the capital markets and the commercial banks...

...These workers and soldiers consume wealth without replacing it which not only drains resources but, in an economy already running near the limits of its capacity, strains supply and pushes up prices...

...The general price level would thus remain more or less unchanged or would rise gradually...

...Thus, although the federal debt is due to decline this fiscal year, the cost of interest is expected to rise by $1.3 billion, to $15.6 billion...

...I submit that those who explain the inflation of the past three to four years as the result of a "profits push" are evading the problem, and they are perhaps doing so because of their political alliance with old-line Democratic party elements, an alliance that has prevented them from forthrightly analyzing and criticizing the deleterious effects of the Vietnam war on the economic position of workers...

...it also is at the root of deteriorating living standards of large groups of workers...

...The unemployment rate may not even rise by much if COMMENTS AND OPINIONS these so-called marginal workers become discouraged and withdraw from the job search altogether and therefore are not counted as unemployed...

...Quite aside from these interrelations, the rise in mortgage rates has in itself priced an increasing number of families out of the housing market, and it has made the attainment of national housing goals, urged by various government commissions and the Housing and Urban Development Department, virtually unattainable within any reasonable period of time...

...government securities and thus curtailing their lending capacity...

...The number of new housing starts (including apartments) has run below 1.5 million annually for years, even as the number of marriages rose from 1.6 million annually in 1961-63 to 2 million in 1967-69...

...They acknowledge the sharp rise in unit labor costs since 1966 and defend it, rightly, as a result of workers' organized efforts to maintain their gains and the purchasing power of their earnings...

...If family income has nevertheless advanced, that is because a second and third member is employed in addition to the family head...

...so are its efforts to halt the growth in vital domestic programs and its support for the repeal of the surtax...

...but rising labor costs have been merely effect not cause, and no profits push occurred at all...

...Nixon's economic policy, insofar as he can be said to have one, links up with that pursued under the Democrats who—through liberalized depreciation allowances, a generous investment tax credit, and a steep cut in personal income taxes— stimulated the growth primarily of the private sector...

...The goal of 26 million new dwelling units needed by 1978 is virtually out of reach COMMENTS AND OPINIONS given the soaring expense of home building (the average price of a home rose from $22,700 in 1965 to $29,900 in 1969) and the lack of adequate funds at low interest...

...In some cities, such as New York, the disappearance of dwelling units now exceeds additions...

...Of the $258 billion increase in the gross national product between 1965 and the third quarter of 1969, $30 billion were added to defense expenditures (which rose to $80 billion...

...In 1968, 54 percent of all American families had two or more earners, compared with 48 percent in 1965, and 43 percent in 1953...

...The effects of high interest rates and the devaluation of long-term commitments—the obverse of high rates—have been devastating in residential housing...

...They sought to limit wage gains in this high-concentration sector to improvements in productivity, and to prevent prices from increasing altogether—while permitting wages and prices in low-concentration industries, where productivity tended to lag, to "catch up...

...Congress, for its part, has passed major tax legislation which in effect also rechannels resources into the private sector...

...Strategically exerted pressure by government agencies on major private contractors, and the consent of the trade unions, would also have been necessary...

...If commercial bank holdings of government debt instruments have not declined, it is only because the banks shifted into the highly liquid, high-interest-bearing, shorterterm maturities...

...During most of the Vietnam war period, however, the Federal Reserve consistently bought such se curities, thus helping to expand lending capacity...

...According to this report, nonfinancial business and federal, state, and local governments raised total borrowing of funds from an annual average of $59 billion in 1961-65 to $86 billion in 1966-68, or by 60 percent...

...The numbers are relatively small so far, probably only in the low thousands...

...While the Federal Reserve restricted commercial bank credit at certain periods in the past four years (as in mid-1966 and in 1969), it did so not by allocating reserves to banks in accordance with some priority scheme but by conventional means, which in effect simply raised the price of money, tended to restrict credit to prime risks, and devalued investment in long-term assets as interest rates kept rising...

...Between 1965 and 1968, 85 percent of the increase in the male labor force was absorbed either by the military or by defense industries...

...Nor did prices rise most in industry sectors where market power was greatest...

...Some economists, however, including the highly competent ones who defend labor's interests, have conceived of a "profits push," in opposition to the more frequently cited "wage push," as the major cause of the current inflation...

...At estimated 1970 incomes, tax relief will bring a reduction of $13 billion in federal revenues (not including the loss due to the justified increase in tax benefits for low-income families...

...Spendable weekly earnings of the average factory worker with three dependents rose in 1969 by 4 percent, to $111, but the purchasing power of his earnings has not risen since 1965, despite steady gains in productivity...

...these are burdened most by high interest rates and resulting expenses, and therefore more likely to resist the increases in taxes needed to ameliorate social and physical conditions in their localities...

...A few pertinent indications, culled from the report of the Commission on Mortgage Interest Rates to Congress (August 1969), illustrate this point...

...Moreover, while during the Korean war reserve requirements of commercial banks, which determine the expandability of their credit-creating power, were raised and held at relatively high levels, during the Vietnam war period only an insignificant increase in these requirements was imposed...

...Moreover, the power of big business to set prices unconstrained by competition has been growing...

...According to Business Week of January 17, 1970 Layoffs are threatening nationwide efforts to rehabilitate people once thought unemployable...

...Thus, while a 5 percent rate spells a monthly housing expense of $195 on a $20,000 home with a 30-year mortgage (equivalent to 20 percent of the average family income of $11,800 in 1968), an 8 percent rate (the prevailing one at present) raises the monthly housing expense to $235 (thereby taking 24 percent of family income...

...The same forces that had prevented their acceptance in the earlier sixties made still more unlikely the imposition of those administrative or fiscal controls which the capital- and consumer-spending boom of the mid-sixties seemed to mandate as it merged with the escalating manpower and materiel requirements of the Vietnam war...

...In 1968, three-quarters of net profits in manufacturing (totaling $7.4 billion) were earned by 529 firms, which accounted for less than 1 percent of all manufacturing firms...

...The problem of competing claims cannot be resolved by neoclassical reliance on "market forces," implicit not only in such proposals as the wage-price guidelines but also in the gamut of economic policies formulated since World War II...

...When the direct expenditures on the Vietnam war are added to the plant and equipment spending that broadened the war production base, and when we also consider the consumption outlays of defense workers, then, on an admittedly crude estimate, up to one-quarter of the increase in gross national product went for purposes which either represented consumption of wealth that was not replaced or expansion of plants supporting such consumption...

...The demise of the guidelines in 1965 was followed by brazenly irresponsible inflationary wartime financing which Congress, abdicating its fiscal responsibilities, validated by authorizing funds without raising the revenues to cover them...

...Their level has remained virtually unchanged for the past decade...

...Chiefly affected, of course, are younger home owners (and apartment dwellers), whose incomes tend to run below average...

...In this article, inflation is seen as the result of a breakdown in economic policies based on neoclassical assumptions about the equi librium of "free markets," and of the attempt to safeguard this equilibrium by means of voluntary wage-price guidelines...

...However small the rise in joblessness may be, it is likely to intensify social strife—without contributing much toward stopping inflation...

...The Nixon administration has attempted to halt the shift in resources to the public sector, as is implied in such finance...

...Mr...

...The raising of prices has been of secondary importance as a source of new investment funds...

...While this increase in number and proportion of multiple-earner families reflects an expansion in available jobs, it also means, especially for the most recent period, that much of the increase of women in the labor COMMENTS AND OPINIONS force has occurred under pressure of economic necessity...

...But the layoffs have only begun...

...Only the UAW took an es sentially positive position on the guidelines...

...In their view, the tendency of market power to determine resource allocation could be restrained through appropriate legal devices that would not call into question the workings of a free market...

...The acceptance of the free market as the basis for both economic growth and the most equitable means of distributing economic gains also underlay the idea of wage-price guidelines, as formulated by the Council of Economic Advisers in the early sixties...

...Government policy thus has been at the root of the inflationary upswing in prices...

...However, an understanding of inflation gains in perspective if framed in terms of that conflict...

...And they show how inflation, by redistributing income into rentier pockets, hinders the realization of social priorities, of which residential housing is an ob vious instance...

...SOME INFLUENTIAL ECONOMISTS have held that a "moderate" degree of inflation, defined as an average annual increase in the price level of 2-3 percent, is an unavoidable side effect of full employment, and that the effort of the Republican administration to combat it has been inspired mainly by conservative ideology...

...In sum, the concern with freedom of economic action that led private interests to oppose wage-price guidelines in the early sixties and more drastic controls later on—thus contributing to the speedup in the price-wage spiral—now prompts the Nixon administration to brake economic growth and to neutralize the economic impact of the federal budget in order to slow inflation...

...And inflation vitiates whatever gains they may score, unless they build the political base and a coherent program of economic planning with which to challenge that power...

...In the first nine months of 1969, for example, their Eurodollar borrowings totaled $15 billion, equivalent to about one-fifth of total business loans outstanding at the time, and nearly doubling COMMENTS AND OPINIONS the rate of growth of the money supply (including currency and demand deposits...

...In fact, fully one-half of the public debt currently matures within one year, compared with less than one-third shortly after World War II and during the Korean war—a striking manifestation of inflationary war finance...

...this represented a ratio that was nearly as high as that of World War II, and that contrasted sharply with the budget surplus achieved during the Korean war (when Leon Keyserling was chairman of the Council of Economic Advisers...

...For the power of corporate business and finance, allied with government agencies and part of the trade union leadership, stacks the cards against the poor, the blacks, the aged, and the younger workers...

...Its inflationary effects, as has been pointed out, were mitigated neither by controls over wages and prices nor by appropriate fiscal and credit restraints...

...Instead, they find a more convenient target in the administered price policies of the big corporations...

...There is no likelihood inflation will be slowed except by permitting cyclical forces to generate unemployment and halt the growth in incomes...

...Each one percentage point rise in the interest rate on a 30-year mortgage increases the monthly payment for principal and interest by an eighth," writes the Commission...

...These guidelines assumed that the main source of inflationary COMMENTS AND OPINIONS pressure arose from the excessive market power of the major industries and the bargaining power of organized labor in these industries...

...and inflation shifts profitability criteria in the direction of great economic power...

...IN THE MONTHS AHEAD, the rise in price levels is generally expected to become more moderate, but the problem of competing claims upon the product of society will not subside in urgency: the reduction in defense expenditures, beyond doubt a good in itself, is nevertheless a conservative measure, designed to safeguard the viability of corporate business...

...Both Keyserling and the spokesmen for the unions ignore the fact that over the past four years of strongly rising prices, corporate profits after taxes rose only about 10 percent and declined in proportion to the gross national product...

...The old-fashioned business cycle, characterized by a phase of overexpansion and a subsequent phase of retrenchment, is here replaced by a new, political kind of cycle, in which a phase of rapid expansion of the public sector and the industries linked with it is superseded by a reassertion of private-sector dominance...

...in addition, the after-tax cost of borrowing at a given interest rate is less for corporations than for most other borrowers...

...For at $111 a week, the factory worker's pay will not begin to meet the $9,600 a year it costs (after taxes) to maintain a "normal" standard of living in metropolitan areas for a family of four...

...As Andrew Brimmer, a member of the Federal Reserve Board, has shown, twothirds of expenditures related to the Vietnam war were financed by a federal budget deficit that came to nearly $38 billion over the 196568 fiscal-year period...

...The "fight against inflation" mounted by the Nixon administration is of necessity conducted at the expense of the working poor, much of organized labor, and younger breadwinners with wages and salaries near starting levels...

...Moreover, nearly all of the advance in profits referred to by Keyserling occurred between 1961 and 1965, a period of relative price stability but of steady growth in the rate of capacity utilization, and therefore of declining unit labor costs...

...During World War II and the Korean war, the Federal Reserve absorbed much of the excess liquidity created by the federal deficit, by compelling the commercial banks to buy U.S...

...Yet, when a man of the stature of Leon Keyserling speaks of a "profit inflation" (as he did in his statement before the Joint Economic Committee of Congress a year ago), and contrasts the 112 percent climb in corporate profits between 1960 and 1968 with a 7.5 percent increase in industrial prices, one is baffled as to how so huge a rise in profits can leave so minor a mark on price levels and still be considered a cause of inflation...

...The official statements of the AFL-CIO and the UAW before the Joint Economic Committee do not breathe a word about these consequences...

...Basically, the process of inflation has involved the appropriation of savings by powerful corporate interests through the agency of financial institutions and high interest rates, and this appropriation, together with deficit financing of the Vietnam war, has been the main cause of the scarcity of resources for socially needful purposes and for their rising cost...