Cost-Push or Demand-Pull Robert

...The Council's own criteria suggest either the substitution of public for arbitrary private allocation, or a senous attempt to make powerful corporations and unions behave as though they were governed by free market forces The first response the Council excluded The second was embodied in the wage-price guideposts The original guidepost standard for wage increases was 3 2 per cent annually, roughly in line with per capita productivity increases Last year's average settlement won unions 5 5 per cent What the Council proposes in the face of this experience is almost embarrassing to describe The Economic Report inevitably urges labor and management to behave responsibly Then it proposes a new mechanism, a Cabinet Committee on Price Stability charged with the preparation of "studies in depth of economic conditions in those industries which are a persistent source of inflationary pressure," and provided with a mandate "to reach some consensus on appropriate general standards to guide private price and wage decisions " The last point is a retreat from the Administration's claim up to this year that such standards had already been enunciated As if all of this were not bad enough, the Administration is pledged to a series of controls over American travel, bank loans to foreigners, and investment in Western Europe If these devices do not interfere with the sacred allocations of the free market, what on earth does...

...The Great Society is not standing still It is in full retreat The details make the flesh creep Here are some of the flowers m the large garland of program reductions The Admirustration plans to close 16 Job Corps camps, and as an odd response to last summer's riots, it proposes to hold down the summer youth programs The same government which touts the passage of the Flammable Fabrics Act and advances toward victory over Tainted Tuna, also plans to curtail grants to commumties for improved sewage treatment?just possibly a more important problem Although the President does seek to shrink the space agency's swollen budget by $447 million (over the anguished protests of Werner von Braun), he has found a quarter of a billion dollars for the idiotic, environmentally destructive supersonic transport The [President's affection for education is notorious and the details of his early days as a schoolteacher have bored a nation All the same, this year he plans to lop $361 million off education programs, one of the causes, presumably, of John Gardner's resignation from the Department of Health, Education and Welfare As a result there will be fewer books and fewer libraries to put them in, a smaller number of laboratories and lab equipment, and fewer dormitories, although there will naturally be a great many more students seeking college admission and the price of their books and supplies will be rising Why has the President crippled what he labored so hard to create...

...The President and perforce his subordinates dodge the large fact that any war represents a serious misallocation of resources In past wars the administrative response has been general control of the economy so that whatever was left over from the appetites of the military could be reasonably allocated to the various civilian claimants The inconsistencies of the Administration's positions are a testimonial to the general unpopularity of the Vietnam war A WORD is in order about the only novelty of the Presidential message season This is JOBS...

...Social Security and Medicare (financed largely out of payroll taxes), higher military and awl service pay, more generous veterans' pensions, and, unavoidably, higher mterest payments on the Federal debt If proper attention is paid to the country's increased population and higher price levels, it is plain that the sums available for social welfare in real terms per capita are considerably smaller than they have been...

...Like most answers these days, the response goes back to Vietnam and Wilbur Mills of Arkansas, chairman of the House Ways and Means Committee By now the Administration is committed to the incessant repetition of a one-note economic song Raise taxes As the Administration sees the world, unless Congress speedily enacts the tax surcharge, the wage-price spiral will quicken, what is left of our favorable merchandise balance of trade will van-ish, and our large deficit in the overall balance of payments will worsen Already under assault, the dollar will be attacked by the speculators with redoubled enthusiasm and the consequence will be either a humiliating increase of the dollar price for gold—to the benefit of South Africa, the Soviet Union, and General de Gaulle—or, even worse, a reversion to economic protectionism that will soon be emulated by other major trading nations The case is founded upon what economists term demand-pull influences As this story goes, prices rose over 3 per cent last year simply because individual consumers, business investors, and government agencies in concert spent too many dollars, stimulating too many price hikes Not all economists, myself included, accept this tale, preferring instead an emphasis upon actions by large unions and large corporations which in the jargon of the trade has been dubbed cost-push inflation Whether out of conviction or convenience, Congressman Mills has attached himself to this wing of economic opinion During last November's performance of the Theater of the Absurd that the Congressman from time to time conducts for the harrassment of the Administration, he grilled Charles Schultze, then still head of the Budget Bureau, Secretary of the Treasury Henry Fowler, and Federal Reserve Board Chairman William McChesney Martin on the official version ot inflation Mills pointed to such contradictory auguries as sluggish retail sales, high consumer saving, unused factory capacity, and the modest real growth of the economy How, he wondered, could a tax increase master the problem when unions were capable of negotiating 5-6 per cent wage increases and large corporations were able, within generous limits, to set profit targets which necessitated higher prices for their realization...

...Cost-Push or Demand-Pull By Robert Lekachman The President's economic program for the coming year eenly reads much of the time as though Ho Chi Mmh and Wilbur Mills had collaborated in its composition The two notes sounded by the tired rhetoric of the Budget, the State of the Union Message, and the Economic Message are perseverance in Southeast Asia (despite "the cost of our commitment to freedom" as President Johnson humorously puts it) and the utter necessity of retrenchment at home For some time past a sour joke, the Great Society is now a drop-out even from Lyndon Johnson's public prose In its new "honest" dress, the Budget includes trust fund accounts as well as the consequences of the government's vast lending operations Thus the projected total budget outlay for the fiscal year ending June 30, 1969, is a majestic $186 1 billion, a figure that has set conservative tongues to clucking By any budgetary concept, the actual total is only $10 4 billion above the current fiscal year's expenditures The only deserves emphasis because the entire $ 10 4 billion goes to defense...

...Such a diagnosis might lead an old-fashioned trust buster to cry anew for the dissolution of General Motors and the lesser goliaths annually celebrated m Fortune's directory of the 500 largest American industrial corporations The analysis might induce a modern economist to advocate further experiment with wage-price guideposts, some version of English compulsory reporting and review, selective wage and price controls, or even general controls and rationing Congressman Mills' conclusion is decidedly different an insistence on further reductions in non-defense spending (he is hawkish on Vietnam), and the installation of the new principle that public spending should grow more slowly than private spending For what the quality may be worth, Mills has displayed exem-plary consistency In a recent News-week column, Paul Samuelson has blamed him for a year's delay in the passage of the 1964 tax cut and the consequent loss of $10 billion in the Gross National Product Rather bitterly, Samuelson now suggests that Mills' present tactics will compensate for the loss by causing an extra $10 billion of inflation Politically the Administration's posture is uncomfortable If the President holds the budgetary line, maintaining that all possible cuts have already been made, he risks the death of the surcharge in the House Ways and Means Commitee And even Administration stalwarts, more or less convinced that higher taxes are necessary, will in an election year breathe a small, silent prayer of thanks to their Arkansas colleague But it is by no means certain that if the Administration yields to Mills and shaves two or three billion dollars more off the education, model cities, job retraining, and economic opportunity budgets, the Congress will act favorably upon taxes The point is simple enough Since expenditure reduction and tax increases are alternative means of dampening down aggregate demand, the more there is of the first the weaker is the case of the second Under these circumstances, it is quite possible that Mills will get what he wants, the wreckage of social programs, and the President will never receive his yearned-for recompense, the surcharge The contretemps is largely politically inspired, but truth to tell, the Administration's intellectual position does not deserve much better Winning the praise of even the Wall Street Journal, the Economic Report comes out strongly against mandatory wage and price controls on the grounds, traditional to economists, that "they distort resource alloca-tion, they require reliance either on necessarily clumsy and arbitrary rules or the inevitable imperfect decisions of Government officials, they offer countless temptations to evasion or violation, they require a vast administrative apparatus ' This would be a fair statement of the conventional wisdom on this subject if the Economic Report were not at frequent odds with its own position Take one important point Although the Council of Economic Advisors emphasizes demand elements in inflation, it does not deny the relevance of market power to recent price increases Now it is legitimate enough to contrast free markets and government controls as allocative mechanisms to the praise of the former and the derogation of the latter, but the inconvenient fact is that wherever concentrated corporate or union power is important, corporate and union officials, not the free market, do the allocative work Is it obvious that their work is to be preferred to that ot public officials...

...Job Opportunities in the Business Sector The President proposes to enlist the business community, not heretofore enthusiastic, in the solution of hard-core unemployment He wants $350 million to create 100,-000 new jobs over the next 18 months The rationale is this It may cost as much as $5,000 per trainee to absorb "severely disadvantaged" workers Business, however public-spirited, cannot be expected to bear the training, counseling, and supervisory costs At $3,-500 per person, business will cover its costs, a particularly intractable variety of unemployment will diminish, welfare costs will drop, and peace will return to the slums Understandably, the notion has won converts among the more enlightened members of the business community In Detroit, Henry Ford seems engaged in a serious attempt to suspend the usual screening devices which automatically exclude the hard-core unemployed Members of the Urban Coalition are publicizing the President's program and the general advisability of a greater business commitment And indeed something may come of the program, less because of business altruism than because of labor shortage One suspects that a good many businessmen will be receiving public subsidies for hiring and training the same people they would have recruited at their own expense Unless standards are high, these businessmen will be making substantial profits out of the scheme In 1968 this may be the best we can do as a nation But if one returns to the subject of resource allocation, the proposal illustrates the disorder of our priorities Only a year or two ago, the Automation Commission identified something like five million public service jobs unfilled according to present definitions of staffing need One could usefully employ several hundred thousand people just making additional mail deliveries This might do rather more to raise growth rates than laboriously created jobs in the pnvate sector It is hard to preserve one's patience with an Administration which preaches rational resource allocation and cannot so much as deliver the mail on time The picture before us is of a President who has presided over the liquidation of the fragile period of social reform he did so much to initiate For his pains, he has not even won the war which has caused all the trouble Lyndon Johnson would deserve our sympathy if we did not need it all for ourselves...