Dissent - INFLATION IN THE WELFARE STATE

...10 Charles L. Schultze et al., Setting National Priorities: The 1973 Budget (Washington, D.C.: Brookings Institution, 1972), p. 406...

...l2 And it should be 11 Joint Economic Committee, U.S...

...By maintaining a certain level of unemployment, it is believed, wage claims and therefore price pressures can be moderated...

...It is fairly well known by now that the progressive income tax has steadily declined as a source of federal revenue, while payroll taxes, which burden lower-income recipients most, have increased...

...Credit spells an expansion of purchasing power for those receiving it, and thus translates, where it is large-scale and guvernments or large enterprises are involved, into the preemption of existing resource^.^ Parts of such resources may be recombined to create new plant and equipment which then produce goods and services more efficiently, presumably compensating for the earlier price pressures...

...Credit has undoubtedly facilitated the acquisition of foreign firms by the multinationals...

...Only a small proportion of government loan activity can be attributed to the “tide of social demands” usually associated with the expansion of the “welfare state...

...Insofar as these views premise a measure of control over a system conceived in terms of the national state, their theoretical underpinnings have been rendered progressively useless over the past decade, first, by the worldwide compass of American markets and investments, and second, by the worldwide inflation that has accompanied their rapid expansion abroad...

...But it is not known how large a portion of the international credit pool has in fact generated such recombinations, or the extent to which these have indeed raised productivity...

...but the intensity and geographic extent of worldwide inflation as it has been experienced for the past decade is without precedent, except for periods of war...

...by pushing exports...

...Thle problem is how individual nations, such as Italy, which do not stand to benefit very much from these off setting transactions, will meet their growing deficits Without imposing barriers on imports and forcing exports which, in turn, would tend to depress the economies of such countries as Japan and Germany...

...It should be noted, however, that of the roughly 55 percent of the 1975 budget estimate, which will be expended for “selected social programs,” well over half is virtually self-financing...

...Usually it is not possible to ascribe the deficit, a simple, bottom-line residual item, to any particular budget factor (except in wartime when military outlays by far outweigh civilian spending...

...Leon Keyserling, voicing the concerns of economists close to labor, deplored “the immense economic error and social crime of making the unemployed and other vulnerable groups bear an unconscionable burden of fighting inflation...

...But the bill in terms of the deterioration of standards of living and of a rapidly worsening situation in the poorer countries (exacerbated in pant by spiraling prices of manufactured as well as petroleum imports)-that bill remains to be presented...

...Mortgage loans insured by Ithe FHA or guaranteed by the VA accounted for nearly half of this total...

...space installations...

...In 1965, federal personal and corporate income taxes accounted for 64 percent of revenue...

...But in the “shorter” run, high petroleum prices will be passed on to ultimate consumers...

...Thus the cost of inflation was borne mainly by those who lost their jobs, were unable to obtain jobs, or whose opportunities were restricted because of the lack of good jobs...

...27 percent went for housing and mortgages...

...Like trade unions, only on a vaster scale, the “welfare state” is society’s defense against the predations of capital...

...Insofar as these views premise a measure of control over a system conceived in terms of the national state, their theoretical underpinnings have been rendered progressively useless over the past decade, first, by the worldwide compass of American markets and investments, and second, by the worldwide inflation that has accompanied their rapid expansion abroad...

...First of all, it is almost impossible to stop corporate managers from changing the quality content of manufactures and services so as to evade the purpose of price controls...

...and 12 percent for agriculture...

...and such periods have been brief...

...it cannot be found in the pattern of government expenditures...

...The deficits reflect consumption and investment priorities that resist taxation adequate to defray the social costs to which these priorities contribute, as well as the military and related costs that in large measure sustain them...

...The organizational scale of these structures imparts to the struggle over resources and investment opportunities altogether new dimensions, where possible financial limitations, moreover, are often overcome with the aid of governments...

...Export-Import Bank-guaranteed loans accounted for another one-sixth...

...Only a small proportion of government loan activity can be attributed to the “tide of social demands” usually associated with the expansion of the “welfare state...

...In agriculture, an elaborate system of price supports, acreage restrictions, and an aggressive, government-conducted campaign promoting farm sales abroad have been designed to prevent surpluses...

...INFLATION IN THE WELFARE STATE 17 the objective of governmental inflation-reducing policies (in relation to productivity trends) will be the stabilization or even relative reduction of the wage bill and of income security...

...rmultinationals’l V. I 5. 18 H. BRAND conflict in this decade...

...and by “promoting competition,” the market power of corporations can be curbed...

...The system’s equipoise can thus in time be restored...

...The inability of a Republican administration, despite its ideological commitment and affinity with the fiscal conservatives, to deal with immense budget deficits, vitiates the use of the tax system for ‘‘countercyclical’’ purposes...

...Neither high employment and “low” unemployment rates pressing on labor costs and hence on prices, nor the growth of corporate market power imparting an “upward bias” to, price levels, persuasively explain the persistence of inflation...

...Some economists and emlogists have attributed inflation to what they hold to be the diminishing viability of economic growth...

...Furthermore, there are many products, such as those made for the military, for which no genuine markets exist, and where costs may not be controllable for reasons inhering in the problems of the advanced technologies used and the initial inexperience of those developing them...

...It may well be that the trade union leadership, fearing that wages will be underbid by unemployed and underemployed workers (as has happened in the construction industry) will agree to a renewed wage-price control effort, which would seek to tie changes in the wage level to changes in productivity, with the understanding that prices would remain relatively stable...

...but as has been indicated, the consumer goods sector has not been an important source of persistent inflation, unless a large proportion of its products was shipped abroad, as in agriculture...

...Economic growth, they argue, is inherently wasteful of scarce materials and endangers the balance of nature...

...It has largely been associated with enormous increases in the price of primary commodities, including petroleum...

...A possibly growing proportion of such capital goods as ships, nuclear plants, jet engines, communications satellites, computers, industrial and office lstructures are produced on the basis of specifications suited to the purchase...

...Congress), Part 2, p. 233 ff...

...and income security improved very slowly, being withheld from large strata of the working and nonworking population...

...It has not responded to direct intervention through wage-price controls...

...By maintaining a certain level of unemployment, it is believed, wage claims and therefore price pressures can be moderated...

...Until recently these measures have at least partially succeeded...

...This is not to say that competing demands for funds and for the resources they purchase do not result in inflationary pressures...

...These issues concern the mechanisms of inflation...

...bank branches overseas, whose deposits rose by a factor of ten, to nearly $60 billion, in 1965-1972 (deposits at commercial banks in the U.S...

...Joint Economic Committee, Congress of the US, on the January 1973 Economic Report of the President (Washington, D.C.: Government Printing Office, 1973), p. 66...

...It should be noted that this policy would come at a time when national output has ceased to expand significantly, and unemployment is already fairly high...

...ple of a “soaring consumer demand” that causes inflation.2 Demand for air travel has indeed soared, partly because of the decline of railroad and steamship transportation...

...Yet credit creation, and therefore resource preemption, has been at the heart of capitalist expansion, certainly for the past 125150 years...

...Rather, the “welfare state,” or the “social compact” and legislation that have given rise to the term, represents an attempt to deal with the disruptions and inequities that have arisen from the workings of industrialism and capitalist enterprise...

...26 H. BRAND...

...The terms under which the economy has been managed over the past three decades may, however, have concealed growing structural stresses and tendencies toward overproduction...

...To compel such a reordering, however, is no easy matter, and it involves much more than legislative bargaining...

...26 H. BRAND vast resource and technical requirements of military establishments...

...This is of course what many American producers of chemicals and plastics did in 1973, since export sales then offered much higher returns than price-controlled domestic markets...

...Appropriate Policies (Washington, D.C.: Conference on Economic Progress, December 1971), p. 13...

...that serious efforts in the economy of its use have only begun to be made...

...INFLATION IN THE WELFARE STATE 17 overproduction” and structural dislocations...

...According to one authoritative estimate, federal revenues in 1973 would have been $45 billion higher than they actually were, had 1963 income tax laws prevailed.1° It is true that state and local tax rates have risen, but 0 See Special Analyses, Budget of the United States Government, Fiscal Year 1975 (Washington, D.C.: Government Printing Office...

...Inflation, they hold, reflects these increasing scarcities, as well as the coslts necessary to restore the environment...

...98 and 103...

...Yet the ratio of passengers to seat miles has steadily averaged less than 60 percent of airplane capacity...

...The result, feared in some West European democracies, might be a bureaucratic command economy, heavily weighted on the side of privilege and the entrepreneurial and technocratic middle classes-as in parts of South America...

...These quesitions cannot be addressed here, nor the question whether high petroleum prices are contributing to the danger of a worldwide depression...

...the spread of multinational business under American aegis and in partnership with toreign firms does not “pay for itself” if it generates resistance increasingly costly to overcome...

...of The Conference Board who was quoted above, has also said that “. . . public deficits are a principal cause of inflation . . .,” although these deficits are understated since they exclude debt issues by federal agencies as well as “. . . (the extreme growth of government-guaranteed debt .” It is undeniable that the financing of the budget deficit and of government-sponsored and guaranteed loans compete wbth the financial needs of the private sector...

...That the Ford administration favors price increases to expand “critical” supplies is shown when it urges state public utility commissioners to allow rate hike applications...

...agriculture, with the proceeds of loans going mostly to well-to-do farmers...

...INFLATION IN THE WELFARE STATE 21 free market, is the essential first cause of inflation in this society...

...Second, the main beneficiaries of the commodities boom were the industrial countries themselves...

...High economic policy officials appear to be contemplating a much-reduced growth rate for the economy, which would very likely spell unemployment on a larger scale than has yet been experienced during the post-World War I1 era...

...It is thus possible that the world trading and payments system will adapt to the new conditions, under which a set of new guesiis have forced their way into the dining rooms of the world’s oligapolists...

...It would go too far to probe what the limits are of constantly adapting and maintaining the institutions safeguarding such access security...

...The result, feared in some West European democracies, might be a bureaucratic command economy, heavily weighted on the side of privilege and the entrepreneurial and technocratic middle classes-as in parts of South America...

...One consequence is upward pressure on interest rates, which spells devahation of equities, for dividend payments are constrained by the need to finance from “internally” generated funds, a need intensified by the great expense of raising funds in capital markets...

...During this era, inflation of course has been a central concern of economic policy, while the goal of full employment, implicit (not explicit) in the Employment Act of 1946, has generally been subordinated ito an attempt at stabilizing price levels and balancing the budget...

...LARGE-SCALE UNEMPLOYMENT in the United States, if it should be allowed to develop, would indeed cause consumer goods output to contract...

...One consequence is upward pressure on interest rates, which spells devahation of equities, for dividend payments are constrained by the need to finance from “internally” generated funds, a need intensified by the great expense of raising funds in capital markets...

...But somehow these costs must be met, and the deficits thus come to be a source, perhaps the most important source, of financial difficulties that, in turn, generate growing investment disincentives and tend to restrict consumption...

...It should be noted that this policy would come at a time when national output has ceased to expand significantly, and unemployment is already fairly high...

...On the contrary: the preservation of social privilege and, to some extent, social peace hinges on them, thereby precluding their voluntary abolition...

...High economic policy officials appear to be contemplating a much-reduced growth rate for the economy, which would very likely spell unemployment on a larger scale than has yet been experienced during the post-World War I1 era...

...The growth in the book value of the foreign assets of American corporations-from $33 billion to $86 billion between 1960 and 1970-is frequently cited as the relevant key indicator...

...While this brief analysis lays no claim to being conclusive, it indicates that the “tide of social demands” is unlikely to have contributed to federal deficits, and that it had even less impact on federal loan programs not reflected in the budget...

...Air travel has been mentioned as an exam‘Space does not permit a detailed review of the evidence...

...It is conceivable that the social disorder and disorganization bred by “late” capitalism becomes so intolerable, and the defense of a degree of social balance so expensive, that the “limits tolerable to the free market” become indeed too narrow for it to operate...

...THE SUPPRESSION of the economy’s crisis tendencies by means that are essentially inflattonary has perhaps accentuated the expansionary forces also inherent in this economy...

...A recent report to the Joint Economic Committee of Congress by the General Accounting Office examines 45 selected weapons systems whose costs had risen by $37 billion over original estimates owing to both “inflation” and technical pr0b1ems.l~) Finally, the manufacturer who is hurt or feels cramped by price controls frequently has the option to move some of his operations abroad or to seek foreign outlets where his prices are under no administrative constraints...

...We have merely sketched a brief characterization of the “welfare state,” and must now focus on more limited issues...

...A unitary explanation of inflation as a historical phenomenon for the past three decades is hArd tu formulate...

...But there is an alternate possibility, namely that the “welfare state,” far from falling victim to the dynamics of incipient capitalist crisis and the uncontrollability of capitalist expansion, has in faat narrowed the scope of the “freemarket” by politicizing the allocation of resources, using deficit finance to preempt them...

...and that the high price has accelerated the development of technologically less accessible wells in the proximity of consumer countries, as well as substitutes...

...Report (Washington, D.C.: Government Printing Office, January 26, 1960), p. 3. Leon H. Keyserling, Wages, Prices, and Profifs...

...In the past, it tended to raise prices in some industries, or locally, or regionally...

...The difference between the two rates of change has led to the widespread belief that real resources are being redistributed from (the developed countries, where the great bulk of manufactures in world trade originate, to developing countries, which depend heavily upon the export of raw materials...

...l2 And it should be 11 Joint Economic Committee, U.S...

...Again, we cannot dwell upon this extreme, but historically realistic possibility...

...To compel such a reordering, however, is no easy matter, and it involves much more than legislative bargaining...

...The history of such compacts, however, iteaches that they do not come without harsh compulsions...

...At first blush, inflation seems to present aspects far less “critical...

...balance of payments deficit, dominated by American firms, and abroad virtually free from the constraints lof national monetary authorities...

...The questions that must then be faced go beyond, or at least are quite different from, such matters as collective bargaining strategies or tax equity...

...and the possible weakening of consumer goods prices, which would ‘be caused by lower demand engendered by rising unemployment, would not greatly affect inflationary tendencies...

...It demands a new “social compact,” based perhaps on a broad coalition of Left and Left-leaning forces...

...It may well be that the trade union leadership, fearing that wages will be underbid by unemployed and underemployed workers (as has happened in the construction industry) will agree to a renewed wage-price control effort, which would seek to tie changes in the wage level to changes in productivity, with the understanding that prices would remain relatively stable...

...New York: Harper & Row), especially pp...

...The problem of industrial production in modern capitalism remains one of incipient deflation, of potential surfeit rather than a shortage of goods and the capacity Po produce them...

...when it refuses to impose export controls on scarce food stuffs and materials (such controls could of course be administered to extend generous aid to needy countries...

...Only a few data can be cited to suggest an answer...

...and for the early OS, when an even higher rate of unemployment was deliberately sought...

...Historically, the commitment to “full employment without inflation” represents a kind of social compact between antagonistic national classes and interests...

...In time, they must be resolved...

...the question is, at whose expense...

...The economic position of large portions of labor, precarious already, seems likely to deteriorate, which will unquestionably arouse resistance...

...and economic development abroad, with funds probably going mostly to build up infrastructures, such as roads and utilities, which provide the “external economies” for the spread of private enterprise, including American multinationals...

...Rather, See Irving S. Friedman, Inflation: A Worldic,ide Disaster (Boston: Houghton Mifflin, 1973...

...The reasons why taxes have in fact been reduced-or, better, for the tendency to refuse increases in tax rates as well as significantly redistributive tax reformsare embedded in conservative resistance to expansion of the domestic reach of government, and the discriminating use of the ltax system to maintain consumption standards and investment incentives...

...H. BRAND22 were loans for higher education facilities, student loans, low-rent public housing loans, and loans for health programs, but these were relatively small...

...Their limits are now largely determined by forces beyond the control of national authorities...

...The system’s equipoise can thus in time be restored...

...Much of this analysis is true...

...such “investments” often serve to ensure the control of markets and raw materials, and also become costs on the books of the buyers and are then reflected in higher prices...

...The “welfare state” does not represent a new order of society...

...But see the authoritative articles byEdwin P. Reubens, “The Food Shortage is not Inevitable,” in Challenge, March-April 1974, p. 48 ff...

...but as has been indicated, the consumer goods sector has not been an important source of persistent inflation, unless a large proportion of its products was shipped abroad, as in agriculture...

...It would go too far to probe what the limits are of constantly adapting and maintaining the institutions safeguarding such access security...

...Defense and space expenditures have absorbed immense amounts of manpower and capital...

...and so forth...

...LARGE-SCALE UNEMPLOYMENT in the United States, if it should be allowed to develop, would indeed cause consumer goods output to contract...

...l1 for the OS, when the Council of Economic Advisers under Walter Heller stipulated an unemployment “target” of 4 percent in line with a roughly calculated “trade-off’ between “economic slack,” if the rate rose above the “target,” and prices rising too rapidly, if it fell below...

...Shortages of automobiles, TV sets, refrigerators have been rare...

...Thus efforts to offset the tendencies of modern capitalism toward inner crisis have in general required inflationary measures...

...A recent report to the Joint Economic Committee of Congress by the General Accounting Office examines 45 selected weapons systems whose costs had risen by $37 billion over original estimates owing to both “inflation” and technical pr0b1ems.l~) Finally, the manufacturer who is hurt or feels cramped by price controls frequently has the option to move some of his operations abroad or to seek foreign outlets where his prices are under no administrative constraints...

...In time, they must be resolved...

...rose by only about two-thirds over the same period...

...Oversupply has to some extent been averted by oligopolistic market dominance...

...The trend in the federal government’s social outlays has markedly steepened since about 1965-among the reasons having been the fear of largescale displacement of labor resulting from automation (which caused manpower programs to be initiated) ;the intensified struggle for civil rights and urban riots (causing the rapid expansion of manpower and education budgets, and a more generous recognition of the right to family assistance payments...

...It is thus possible that the world trading and payments system will adapt to the new conditions, under which a set of new guesiis have forced their way into the dining rooms of the world’s oligapolists...

...The precedence that price stabilization attempts took over employment goals is easily documented-for the O OS, when “public policy . . . concentrated primarily on curbing inflation...

...This compact was never fully observed in the United States...

...Governmental efforts to combat inflation, essentially a policy of constraining wage claims, consistently took precedence over attaining full employment and income security...

...and so forth...

...and by earnings on such invisibles as shipping, owned mainly by the nationals lof developed countries...

...It should be noted, however, that of the roughly 55 percent of the 1975 budget estimate, which will be expended for “selected social programs,” well over half is virtually self-financing...

...The difference between the two rates of change has led to the widespread belief that real resources are being redistributed from (the developed countries, where the great bulk of manufactures in world trade originate, to developing countries, which depend heavily upon the export of raw materials...

...The United States remains in a relatively more protected position, because of its own vast resource base and the likelihood that it will be the main recipient of the investments of petroleum producer nations, as it has also been their major arms and capital goods supplier...

...Yet, this “philosophy” now faces problems...

...That is, it will be defrayed from trust funds for social security, health insurance, unemployment insurance, the railroad retirement fund, etc...

...To cite some illustrative rates of gain, the average price of all primary commodities rose by 61 percent in the year ending in the fourth quarter of 1973, while manufactured goods in export increased by 22 percent...

...But it seems unlikely that the incalculab]e decline in the which the “normal” course would entail, will in fact occur or will be permitted to occur...

...Thus, worldwide inflation -and more fundamentally, of course, the worldwide involvement of the American economy-has increasingly tended to weaken the compact upon which the “welfare state” in America has been based...

...The “fiscal philosophy” and real interests that have underlain this policy have predominated throughout the post-World War I1 era, although attitudes toward fiscal policy have become more sophisticated...

...equity and debt held abroad...

...Sommers, the chief economist 8 Albert T. Sommers, “Forum Report on Inflation,” in Monthly Business Revie\zi, June 1974 (New York: The Conference Board...

...Credit spells an expansion of purchasing power for those receiving it, and thus translates, where it is large-scale and guvernments or large enterprises are involved, into the preemption of existing resource^.^ Parts of such resources may be recombined to create new plant and equipment which then produce goods and services more efficiently, presumably compensating for the earlier price pressures...

...But it must be realized that economic growth signifies more than a particular direction of corporate and public investment...

...In telephone communioations, serious supply bottlenecks have not occurred in 25 years in the United States, nor in electric and gas utilities (except briefly in New York City), nor in freight transport, finlancial services, etc...

...and state-aided air and land transport development, which are subject to frequent costly technological accretions...

...The long-term trend toward lower agricultural prices is thus likely to reassert itself.’ A number of service industries have similarly experienced recurrent overcapacity...

...The specific economic impact of these developments could not be examined here...

...In the fiscal year 1973 (for which final data are available) the federal government committed itself to make $8.7 billion in direct loans, two-fifths of which went to agriculture, mostly for farm price supports...

...This is of course what many American producers of chemicals and plastics did in 1973, since export sales then offered much higher returns than price-controlled domestic markets...

...Air travel has been mentioned as an exam‘Space does not permit a detailed review of the evidence...

...it is not socialism, it does not harbor tendencies to socialism, although the political conditions of the “welfare state” may facilitate the development of such tendencies...

...the spread of multinational business under American aegis and in partnership with toreign firms does not “pay for itself” if it generates resistance increasingly costly to overcome...

...The dislocation of rural labor, especially in the South, has resulted in vast support outlays, i.e., in consumption without production on the part of the recipients...

...The scale of those developments and the network of interests that grows in their train result in increasing long-term inflationary pressures, although cyclical booms will intensify and recessions will moderate them, as will occasional cutbacks in costly nonproductive projects...

...I11 To a limited extent, the question can be viewed in ,the perspective of economic policy in the post-World War I1 era...

...and by “promoting competition,” the market power of corporations can be curbed...

...They entail a struggle over the political and ecommic relations underlying inflation, which the control programs will be designed to help preserve...

...These quesitions cannot be addressed here, nor the question whether high petroleum prices are contributing to the danger of a worldwide depression...

...They do...

...It is here that the conflict between private entenprise and social needs, as translated by the institutions of the “welfare state,” is most clearly reflected...

...More important, since the “New Economics” made its bow in the early 1960s, tax cuts have by far exceeded Itax hikes...

...But in time their limits are set by the world market...

...The maintenance of high farm income has entailed huge, inherently unproductive subsidies...

...Furthermore, there are many products, such as those made for the military, for which no genuine markets exist, and where costs may not be controllable for reasons inhering in the problems of the advanced technologies used and the initial inexperience of those developing them...

...It represents a modus vivendi of “late” capitalism in the context of mass democracy...

...More important, the facts cited in support of the view just outlined are scant and subject to a quite different interpretation...

...and income security improved very slowly, being withheld from large strata of the working and nonworking population...

...New commitments for guaranteed and insured loans-loans normally disbursed by banks in the private sector but in effect underwritten by ‘the federal governmentamounted to over $36 billion in 1973...

...But it is a mistake to believe that prices can somehow be controlled...

...For these have been generated by the expansionary drive of multinational corporations, in combination with the investment needs arising from changing technologies...

...Temporary conditions do not make for a permanent pattern of resource redistribution...

...space installations...

...Oversupply has to some extent been averted by oligopolistic market dominance...

...The deficits reflect consumption and investment priorities that resist taxation adequate to defray the social costs to which these priorities contribute, as well as the military and related costs that in large measure sustain them...

...Again, to avoid a lengthy analysis, illustrative data for but one year-fiscal 1975-are offered...

...But the more important consequence is sharpened rivalry over resources, which results in inflation of prices...

...Congress, Employment, Gro~c~ili,and Price Levels...

...and by consumption-inducing tax incentives, such as homeowners enjoy...

...The scale of those developments and the network of interests that grows in their train result in increasing long-term inflationary pressures, although cyclical booms will intensify and recessions will moderate them, as will occasional cutbacks in costly nonproductive projects...

...This question can only be briefly dealt with here...

...Phase I1 Guidelines vs...

...I regard these contradictions as endemic in modern capitalist society, and not the result of political tensions imposing themselves upon an otherwise sound economic system...

...This does not mean that such specific measures as those mentioned-and their beneficiaries have close ties to the center of power-will be discontinued...

...More fundamentally, there are many markets where prices are not controllable because they do not exist until contraots are concluded...

...INFLATION IN THE WELFARE STATE 23 - ised to attenuate, even if not eliminate, the commodity character lof labor...

...and for the early OS, when an even higher rate of unemployment was deliberately sought...

...Washington, D.C.: Per Jacobson Foundation, International Monetary Fund, 1973...

...rmultinationals’l V. I 5. 18 H. BRAND objective of governmental inflation-reducing policies (in relation to productivity trends) will be the stabilization or even relative reduction of the wage bill and of income security...

...Trust fund surpluses have in fact financed substantial portions of what would otherwise have been a much larger reported deficit: the deficit of $14.3 billion reported for 1973, for example, would have turned into one of $25 billion, had it not been for a trust fund surplus covering the difference...

...Historically, the commitment to “full employment without inflation” represents a kind of social compact between antagonistic national classes and interests...

...Such conditions lend impetus to the rise of international price levels.6 The particular virulence of inflation in the past 12-24 months cannot of course be ascribed directly to the expansion of multinational firms and initernational credit...

...This brilliant formulation oonceals a somewhat simple-minded view of the “welfare state,” which, after all, has never seriously challenged the economic dominance and social privileges of capitalist enterprise, although it has been compelled to share power with state bureaucracies and trade unions, as it did not prior to 1929...

...But inadequate as they are, such explanations remain important for the assumptions from which they derive-is., assumptions as to the underlying stability or self-adjusting nature of the economic system...

...by profit remittances of the oil companies to their domiciles...

...The maintenance of high farm income has entailed huge, inherently unproductive subsidies...

...balance of payments deficit, dominated by American firms, and abroad virtually free from the constraints lof national monetary authorities...

...More important, since the “New Economics” made its bow in the early 1960s, tax cuts have by far exceeded Itax hikes...

...Inflation, they hold, reflects these increasing scarcities, as well as the coslts necessary to restore the environment...

...In the past, it tended to raise prices in some industries, or locally, or regionally...

...Trust fund surpluses have in fact financed substantial portions of what would otherwise have been a much larger reported deficit: the deficit of $14.3 billion reported for 1973, for example, would have turned into one of $25 billion, had it not been for a trust fund surplus covering the difference...

...A failure of policy has been reinforced by a failure of explanation...

...The trend in the federal government’s social outlays has markedly steepened since about 1965-among the reasons having been the fear of largescale displacement of labor resulting from automation (which caused manpower programs to be initiated) ;the intensified struggle for civil rights and urban riots (causing the rapid expansion of manpower and education budgets, and a more generous recognition of the right to family assistance payments...

...The reason for the deficit must be sought in the pattern of taxation...

...and 12 percent for agriculture...

...International credit has, moreover, financed the balance of payments deficits of various countries, supporting consumption standards that native productive capabilities may not normally have warranted...

...the remainder was widely distributed, and shows no specific “welfare state” pattern...

...l1 for the OS, when the Council of Economic Advisers under Walter Heller stipulated an unemployment “target” of 4 percent in line with a roughly calculated “trade-off’ between “economic slack,” if the rate rose above the “target,” and prices rising too rapidly, if it fell below...

...Thus we are entering a period during which the disintegration of the “social compact” of 1946 will accelerate...

...in 1973 for 59 percent, with corporate tax revenues alone declining from 22 percent to 15 percent...

...Again, we cannot dwell upon this extreme, but historically realistic possibility...

...This brilliant formulation oonceals a somewhat simple-minded view of the “welfare state,” which, after all, has never seriously challenged the economic dominance and social privileges of capitalist enterprise, although it has been compelled to share power with state bureaucracies and trade unions, as it did not prior to 1929...

...A unitary explanation of inflation as a historical phenomenon for the past three decades is hArd tu formulate...

...New commitments for guaranteed and insured loans-loans normally disbursed by banks in the private sector but in effect underwritten by ‘the federal governmentamounted to over $36 billion in 1973...

...The share of trust fund receipts expanded correspondingly...

...That in fact it was inflationary seems beyond doubt, unless it merely coincided with but was not integrally related to the enormous amount of credit created over the past decade or so by an increasingly supranational banking system and its corporate clientele-a system fueled by the U.S...

...See also Otmar Emminger, “Inflation and the International Monetary System,” in Inpalion atid the International Monetary System, Otmar Emminger et al...

...Part of this system of “supply management” has been discarded, not because underlying conditions of potential surplus have changed, but because of the rising power of agrobusiness...

...Such self-financing is by definition noninflationary...

...A possibly growing proportion of such capital goods as ships, nuclear plants, jet engines, communications satellites, computers, industrial and office lstructures are produced on the basis of specifications suited to the purchase...

...that much of the commodity boom has been the result of the simultaneity of cyclical expansions in all major industrial countries...

...But among its fundamental objectives should be the reordering of social priorities toward humane uses, entailing not only a radical shift in federal budget funds, but one in the range of corporate investment allocations as well...

...The increment in export earnings attributable to nonpetroleum primary products was almost three times higher for the industrial countries ($29 billion) than for the developing countries ($11 billion).7 The continuing rise in the prices of manufactured goods, combined with the notorious volatility of primary product prices, and the still growing burden of petroleum costs, places the developing countries in a most critical economic position, one that cannot be renfotely characterized by the notion that real resources have been redistributed in their favor as a result of booming commodity prices...

...and the possible weakening of consumer goods prices, which would ‘be caused by lower demand engendered by rising unemployment, would not greatly affect inflationary tendencies...

...I11 To a limited extent, the question can be viewed in ,the perspective of economic policy in the post-World War I1 era...

...by profit remittances of the oil companies to their domiciles...

...Temporary conditions do not make for a permanent pattern of resource redistribution...

...They do...

...The precedence that price stabilization attempts took over employment goals is easily documented-for the O OS, when “public policy . . . concentrated primarily on curbing inflation...

...Washington, D.C.: Per Jacobson Foundation, International Monetary Fund, 1973...

...ple of a “soaring consumer demand” that causes inflation.2 Demand for air travel has indeed soared, partly because of the decline of railroad and steamship transportation...

...INFLATION IN THE WELFARE STATE 25 to attenuate, even if not eliminate, the commodity character lof labor...

...In effect, inflation spells a redistribution of income to the above interests, and no “economic policy” dabbling in the management of “aggregate demand” can come to grips with them...

...InThe 1973 Joint Economic Report...

...98 and 103...

...These developments must in time lessen dependence upon the producer countries and reduce the relative price of their output...

...This does not mean that such specific measures as those mentioned-and their beneficiaries have close ties to the center of power-will be discontinued...

...Except during war years, the jobless rate remained above the socially acceptable minimum of at most, perhaps, 3 percent...

...That in fact it was inflationary seems beyond doubt, unless it merely coincided with but was not integrally related to the enormous amount of credit created over the past decade or so by an increasingly supranational banking system and its corporate clientele-a system fueled by the U.S...

...of The Conference Board who was quoted above, has also said that “. . . public deficits are a principal cause of inflation . . .,” although these deficits are understated since they exclude debt issues by federal agencies as well as “. . . (the extreme growth of government-guaranteed debt .” It is undeniable that the financing of the budget deficit and of government-sponsored and guaranteed loans compete wbth the financial needs of the private sector...

...The Vietnam war was the only major military ,Iextensive local borrowing...

...But the consequences of the transfer remains in question, for the trade deficits resulting from 0 United Nations, Problems of Raw Materials and Development, Note by the Secretary General of UNCTAD (New York: UNCTAD/OSG/52, April 4, 1974), pp...

...It seems unlikely...

...This is not a matter one can be “fcr” or “against”it will have to be done if chaotic situations are to be avoided...

...This is not to say that competing demands for funds and for the resources they purchase do not result in inflationary pressures...

...27 percent went for housing and mortgages...

...To the extent that trading countries or (trading partners prove unable either to absorb or to pass on the higher costs, they are likely tu be given large-scale credits (as Witness the $3 billion credit extended by Germany to Italy...

...bank branches overseas, whose deposits rose by a factor of ten, to nearly $60 billion, in 1965-1972 (deposits at commercial banks in the U.S...

...This compact-the term is legitimated by the Employment Act of 1946 and analogous legislation elsewhere-has committed the state to full (or high) employ16 ment and the expansion of income security...

...It is fairly well known by now that the progressive income tax has steadily declined as a source of federal revenue, while payroll taxes, which burden lower-income recipients most, have increased...

...Again, to avoid a lengthy analysis, illustrative data for but one year-fiscal 1975-are offered...

...This is not a matter one can be “fcr” or “against”it will have to be done if chaotic situations are to be avoided...

...and when it fails to deal seriously with conservation measures...

...Congress, Employment, Gro~c~ili,and Price Levels...

...This question can only be briefly dealt with here...

...But somehow these costs must be met, and the deficits thus come to be a source, perhaps the most important source, of financial difficulties that, in turn, generate growing investment disincentives and tend to restrict consumption...

...The end-or, in the United States with its vastly greater natural wealth the constriction-of the modus vivendi means that sooner or later control programs, covering prices, wages, fuel, and material uses, even credit, will be introduced afresh, and implemented more resolutely than before...

...But the bill in terms of the deterioration of standards of living and of a rapidly worsening situation in the poorer countries (exacerbated in pant by spiraling prices of manufactured as well as petroleum imports)-that bill remains to be presented...

...Sommers, the chief economist 8 Albert T. Sommers, “Forum Report on Inflation,” in Monthly Business Revie\zi, June 1974 (New York: The Conference Board...

...in 1973 for 59 percent, with corporate tax revenues alone declining from 22 percent to 15 percent...

...Defense and space expenditures have absorbed immense amounts of manpower and capital...

...Usually it is not possible to ascribe the deficit, a simple, bottom-line residual item, to any particular budget factor (except in wartime when military outlays by far outweigh civilian spending...

...INFLATION IN THE WELFARE STATE 25 the vast resource and technical requirements of military establishments...

...Style changes, heavy advertisement, and “discount” sales have been consistently used to spur demand...

...Over the same period, personal income rose by 74 percent, and corporate profits by 20 percent...

...see also D. Gale Johnson, “Are High Farm Prices Here to Stay?,” in The Morgan Guaranty Survey, August 1974, p. 9 ff...

...International credit has, moreover, financed the balance of payments deficits of various countries, supporting consumption standards that native productive capabilities may not normally have warranted...

...Neither high employment and “low” unemployment rates pressing on labor costs and hence on prices, nor the growth of corporate market power imparting an “upward bias” to, price levels, persuasively explain the persistence of inflation...

...It has largely been associated with enormous increases in the price of primary commodities, including petroleum...

...and when it fails to deal seriously with conservation measures...

...The Vietnam war was the only major military ,Iextensive local borrowing...

...That the Ford administration favors price increases to expand “critical” supplies is shown when it urges state public utility commissioners to allow rate hike applications...

...by pushing exports...

...Until recently these measures have at least partially succeeded...

...But in time their limits are set by the world market...

...This compact was never fully observed in the United States...

...Thus we are entering a period during which the disintegration of the “social compact” of 1946 will accelerate...

...But the evident threat posed by inflation to social stability and to the viability of core economic institutions imposes upon national authorities the need to attempt to contain it...

...Thus the basic cause of inflation may lie outside the econofnic system itself...

...But inadequate as they are, such explanations remain important for the assumptions from which they derive-is., assumptions as to the underlying stability or self-adjusting nature of the economic system...

...Virtually all lof it in effect supported the private ~ector.~ THE “TIDE OF SOCIAL DEMANDS” is motre strongly reflected in the federal budget itself, and here the question that concerns us is whether the immense budget deficits of the past several years are ascribable to that “tide...

...It is possible that the seemingly increasing obstacles to economic growth and the evident uncontrollability of inflation, together with the rapid erosion of living standards it has brought, spell an end to this modus vivendi...

...The concern with inflation must be viewed against the more usual perspective of capitalist crises as periods of depression, unemployment, and falling wage and price levels, resulting from “overproduction” and structural dislocations...

...It was a compact also supposed to leave the direction of capital investment, as well as the volume of funds any firm or individual would invest, to private enterprise-with deficits from required full-employment levels to be compensated by means of appropriate fiscal and credit policies...

...On the contrary: the preservation of social privilege and, to some extent, social peace hinges on them, thereby precluding their voluntary abolition...

...Limits were nevertheless observed, which prevented the unemployment rate from exceeding certain bounds, except temporarily...

...But there is an alternate possibility, namely that the “welfare state,” far from falling victim to the dynamics of incipient capitalist crisis and the uncontrollability of capitalist expansion, has in faat narrowed the scope of the “freemarket” by politicizing the allocation of resources, using deficit finance to preempt them...

...It represents a modus vivendi of “late” capitalism in the context of mass democracy...

...Thus the basic cause of inflation may lie outside the econofnic system itself...

...H. BRAND22 it is doubtful that the overall income tax burden has increased...

...Only a few data can be cited to suggest an answer...

...First of all, it is almost impossible to stop corporate managers from changing the quality content of manufactures and services so as to evade the purpose of price controls...

...To cite some illustrative rates of gain, the average price of all primary commodities rose by 61 percent in the year ending in the fourth quarter of 1973, while manufactured goods in export increased by 22 percent...

...but the intensity and geographic extent of worldwide inflation as it has been experienced for the past decade is without precedent, except for periods of war...

...This has happened all the more so since the state has borne much of the cost of the research and development required for technological advance, and ‘since it has borne all of the cost iof securing access, politically and mililtarily, to world markets and investment opportunities...

...The controls did not survive, but Itheir central conception did, and is bound to become a prominent feature in any future controls program.le What the struggle over economic and political relations means concretely cannot be spelled out in detail...

...that serious efforts in the economy of its use have only begun to be made...

...But it must be realized that economic growth signifies more than a particular direction of corporate and public investment...

...The controls did not survive, but Itheir central conception did, and is bound to become a prominent feature in any future controls program.le What the struggle over economic and political relations means concretely cannot be spelled out in detail...

...The “fiscal philosophy” and real interests that have underlain this policy have predominated throughout the post-World War I1 era, although attitudes toward fiscal policy have become more sophisticated...

...The enormous problem of accommodating a hisof demands, and the failure of our political system to contain the growth of social demands within limits tolerable to product restricts its markets...

...The rise of supranational banking and of the multinational corporation, together with the decay of a centralizing credit control mechanism (a function that the Bretton Woods agreement was intended to serve after World War 11, and that the Bank of England exercised for the 50-75 years prior to World War I) represent new structural features in the world econlomy...

...The terms under which the economy has been managed over the past three decades may, however, have concealed growing structural stresses and tendencies toward overproduction...

...Report (Washington, D.C.: Government Printing Office, January 26, 1960), p. 3. Leon H. Keyserling, Wages, Prices, and Profifs...

...The rise in costs is bound in part to countries’ Output and torically market-oriented economy to a tide 20 H. BRAND increased prices will partially be offset by the investment of earnings in the assets of importing countries (involving merely the exchange of property titles...

...Appropriate Policies (Washington, D.C.: Conference on Economic Progress, December 1971), p. 13...

...of wages (as public services compete for manpower...

...Economic growth, they argue, is inherently wasteful of scarce materials and endangers the balance of nature...

...3 Such loaal borrowings have largely been financed by U.S...

...Third, however, there can be no doubt that the rise in petroleum prices, effecting roughly a tenfold increase in the real value of all trading countries’ petroleum imports, does represent a massive transfer of real resources to the producer nations...

...Over the same period, personal income rose by 74 percent, and corporate profits by 20 percent...

...But among its fundamental objectives should be the reordering of social priorities toward humane uses, entailing not only a radical shift in federal budget funds, but one in the range of corporate investment allocations as well...

...It is hard to see how a price control effort can effectively encompass them...

...I1 All this means that inflation has been inherent in the post-World War I1 economic system, as an offset to crisis tendencies and as a result of a coincident worldwide economic expansion under conditions of largescale structural changes...

...These issues concern the mechanisms of inflation...

...The economic position of large portions of labor, precarious already, seems likely to deteriorate, which will unquestionably arouse resistance...

...In 1965, federal personal and corporate income taxes accounted for 64 percent of revenue...

...and economic development abroad, with funds probably going mostly to build up infrastructures, such as roads and utilities, which provide the “external economies” for the spread of private enterprise, including American multinationals...

...According to one authoritative estimate, federal revenues in 1973 would have been $45 billion higher than they actually were, had 1963 income tax laws prevailed.1° It is true that state and local tax rates have risen, but 0 See Special Analyses, Budget of the United States Government, Fiscal Year 1975 (Washington, D.C.: Government Printing Office...

...The rise of supranational banking and of the multinational corporation, together with the decay of a centralizing credit control mechanism (a function that the Bretton Woods agreement was intended to serve after World War 11, and that the Bank of England exercised for the 50-75 years prior to World War I) represent new structural features in the world econlomy...

...that much of the commodity boom has been the result of the simultaneity of cyclical expansions in all major industrial countries...

...The organizational scale of these structures imparts to the struggle over resources and investment opportunities altogether new dimensions, where possible financial limitations, moreover, are often overcome with the aid of governments...

...and of the prices of goods and services in general...

...We have merely offered the argument that they conceal the crisis tendencies of modern capitalism...

...Style changes, heavy advertisement, and “discount” sales have been consistently used to spur demand...

...Export-Import Bank-guaranteed loans accounted for another one-sixth...

...by creating vast infrastructures, such as the federal highway system, which intensified automotive consumption...

...The dislocation of rural labor, especially in the South, has resulted in vast support outlays, i.e., in consumption without production on the part of the recipients...

...In this respect it is significant that the short-lived price control program introduced under President Nixon was carefully structured so as to increase “critical” supplies by encouraging selective increases in prices and profits...

...The specific economic impact of these developments could not be examined here...

...Third, however, there can be no doubt that the rise in petroleum prices, effecting roughly a tenfold increase in the real value of all trading countries’ petroleum imports, does represent a massive transfer of real resources to the producer nations...

...To those like the London Economist, who insist on adopting a “longer term” view, it must be conceded that petroleum is a highly specialized colmmodity, exposing its producers to the vulnerabilities of specialization...

...In effect, inflation spells a redistribution of income to the above interests, and no “economic policy” dabbling in the management of “aggregate demand” can come to grips with them...

...the question is, at whose expense...

...But the fiscal and monetary policies that made this possible can no longer be so freely applied...

...Their limits are now largely determined by forces beyond the control of national authorities...

...16 See the statement by John T. Dunlop, Director, Cost of Living Council, in The 1974 Economic Report of the President, Hearings before the Joint Economic Committee (Washington, D.C.: US...

...INFLATION IN THE WELFARE STATE 21 There were loans for higher education facilities, student loans, low-rent public housing loans, and loans for health programs, but these were relatively small...

...Rather, See Irving S. Friedman, Inflation: A Worldic,ide Disaster (Boston: Houghton Mifflin, 1973...

...More fundamentally, there are many markets where prices are not controllable because they do not exist until contraots are concluded...

...Relaitive costs cannot for long be allowed to get much out of line with those of rival eoonomies...

...The rise in costs is bound in part to countries’ Output and torically market-oriented economy to a tide 20 H. BRAND the free market, is the essential first cause of inflation in this society...

...its inflationary impact remained temporary, and was spent by 1968 or 1969...

...it is not socialism, it does not harbor tendencies to socialism, although the political conditions of the “welfare state” may facilitate the development of such tendencies...

...Thus, worldwide inflation -and more fundamentally, of course, the worldwide involvement of the American economy-has increasingly tended to weaken the compact upon which the “welfare state” in America has been based...

...The decline of such industries as railroads, steel, and textiles has been partially offset by substantial investment credits, and by import quotas, raising the true price of their products...

...They entail a struggle over the political and ecommic relations underlying inflation, which the control programs will be designed to help preserve...

...But it seems unlikely that the incalculab]e decline in the which the “normal” course would entail, will in fact occur or will be permitted to occur...

...Rather, the “welfare state,” or the “social compact” and legislation that have given rise to the term, represents an attempt to deal with the disruptions and inequities that have arisen from the workings of industrialism and capitalist enterprise...

...Mortgage loans insured by Ithe FHA or guaranteed by the VA accounted for nearly half of this total...

...It is here that the conflict between private entenprise and social needs, as translated by the institutions of the “welfare state,” is most clearly reflected...

...see also D. Gale Johnson, “Are High Farm Prices Here to Stay?,” in The Morgan Guaranty Survey, August 1974, p. 9 ff...

...Exports from developed market economy countries in 1973 benefited particularly from the price increases for grains, meat, and textile fibers,” state the United Nations...

...Thus there have been only a few periods of cyclical upswing during the post-World War I1 era when, for example, the demand for consumer goods exceeded the industrial capacity to deliver them...

...This is certainly indicated by developments in certain European countries...

...The concern with inflation must be viewed against the more usual perspective of capitalist crises as periods of depression, unemployment, and falling wage and price levels, resulting from Brand Inflation inthe Welfare State Inflation has presented an intractable problem for post-Keynesian aggregate demand management...

...It is conceivable that the social disorder and disorganization bred by “late” capitalism becomes so intolerable, and the defense of a degree of social balance so expensive, that the “limits tolerable to the free market” become indeed too narrow for it to operate...

...To those like the London Economist, who insist on adopting a “longer term” view, it must be conceded that petroleum is a highly specialized colmmodity, exposing its producers to the vulnerabilities of specialization...

...A failure of policy has been reinforced by a failure of explanation...

...The history of such compacts, however, iteaches that they do not come without harsh compulsions...

...For these have been generated by the expansionary drive of multinational corporations, in combination with the investment needs arising from changing technologies...

...I regard these contradictions as endemic in modern capitalist society, and not the result of political tensions imposing themselves upon an otherwise sound economic system...

...But is this a rivalry between “welfare state” and the “free market...

...Second, the main beneficiaries of the commodities boom were the industrial countries themselves...

...Shortages of automobiles, TV sets, refrigerators have been rare...

...Rather, our concern is why this economic expansion, which accelerated after about 1960 and still more after about 1965, should have been inflatioaary...

...4 and 5. 7 Ibid...

...The reasons why taxes have in fact been reduced-or, better, for the tendency to refuse increases in tax rates as well as significantly redistributive tax reformsare embedded in conservative resistance to expansion of the domestic reach of government, and the discriminating use of the ltax system to maintain consumption standards and investment incentives...

...This has happened all the more so since the state has borne much of the cost of the research and development required for technological advance, and ‘since it has borne all of the cost iof securing access, politically and mililtarily, to world markets and investment opportunities...

...The questions that must then be faced go beyond, or at least are quite different from, such matters as collective bargaining strategies or tax equity...

...But is this a rivalry between “welfare state” and the “free market...

...Leon Keyserling, voicing the concerns of economists close to labor, deplored “the immense economic error and social crime of making the unemployed and other vulnerable groups bear an unconscionable burden of fighting inflation...

...of wages (as public services compete for manpower...

...but it will not prove possible to create a kind of worldwide cartel sustaining such cutbacks (and there is no evidence of such an intention...

...Relaitive costs cannot for long be allowed to get much out of line with those of rival eoonomies...

...For primary commodities other than petroleum, states a United Nations report, “the price increases (since the end of 1972) reflect, to a considerable extent, a conjunction of largely temporary-though acute-shortages of some commodities due to climatic and other factors, and an unusually rapid acceleration in demand...

...Normally, a rise in the cost of a be shifted to working people, whose pay and benefits will drop in relation to price levels-as has already happened in the United States and elsewhere...

...But these pressures could, as Keynesian analysis teaches, be relieved through tax hikes and the expansion of the tax base...

...Joint Economic Committee, Congress of the US, on the January 1973 Economic Report of the President (Washington, D.C.: Government Printing Office, 1973), p. 66...

...and by consumption-inducing tax incentives, such as homeowners enjoy...

...While this brief analysis lays no claim to being conclusive, it indicates that the “tide of social demands” is unlikely to have contributed to federal deficits, and that it had even less impact on federal loan programs not reflected in the budget...

...by creating vast infrastructures, such as the federal highway system, which intensified automotive consumption...

...It is possible that the seemingly increasing obstacles to economic growth and the evident uncontrollability of inflation, together with the rapid erosion of living standards it has brought, spell an end to this modus vivendi...

...Deficit finance and such other devices as loan guarantees translate into the biddingup of credit (via rising interest rates...

...and the growth in the aged population (whose health problems could no longer be resolved through local and state finances, nor of course by means of private insurance, but which demanded a national health insurance scheme...

...But the more important consequence is sharpened rivalry over resources, which results in inflation of prices...

...Perhaps a better indicator is direct loans outstanding (although new Commitments are more indicative of actual pressures on capital markets): of the $44 billion of such loans in 1973, 26 percent represented international development and security assistance...