The New Economic PUSH
WEINTRAUB, SIDNEY
CARTER BATTLES INFLATION The New Economic Push By Sidney Weintraub From the halcyon days of radio, oldsters will recall a news commentator whose broadcast signature ran, "Ah, but there's good...
...Thus the genesis of stagflation, of the double-trouble of heaping unemployment on inflation by the use of dreadful Pavlovian remedies that have outlived their usefulness...
...Moreover, compared to Carter's previous choice of good ole Bert Lance as economic adviser, and pol Strauss as inflation spieler, the selection of Alfred Kahn to administer the program, after his sojourn at the Civil Aeronautics Board, appears felicitous...
...Walter Cronkite, instead of burying the Dow Jones silently, gave grim priority to the tumbling stock market...
...Shades of the Hoover and Roosevelt dialogues (the Coolidge versus Davis replays are more difficult to dredge up...
...Nonetheless, the President is embarked on a one-way journey...
...CARTER BATTLES INFLATION The New Economic Push By Sidney Weintraub From the halcyon days of radio, oldsters will recall a news commentator whose broadcast signature ran, "Ah, but there's good news tonight...
...With inflation we have been in the strange position of resembling a banana republic in a comic opera-buffeted about and beset by overwhelming problems, problems with no solutions...
...Intended is a "gradualist" scenario mimicking the Nixon "game plan...
...Even the most casual examination of statistical series over the long haul will reveal the far faster money wage surge...
...The world dollar slide was duly relayed...
...during the abysmal 1970s the figure has fallen under 2 per cent...
...Our credibility as a mature, stable, governable nation also rests on the outcome...
...So wages and salaries exert a simultaneous cost-push and demand-pull whenever they advance, and from both sides of the price equation they exert pressure for price escalation...
...For every proposal whose time is past due, the most effective criticism is that it threatens more inflation...
...Foreign exchange speculators, eying the Treasury foreign currency boodle, are likely to be more reluctant plungers, much less rash in unleashing speculative hit-and-run attacks on the dollar...
...For 1980 the wage figure will probably be chipped to 6 per cent, etc...
...The banalities go too far in indicting government expenditures as the cause of inflation...
...Labor has too often been beguiled in recent years into identifying money income gains as real income enhancement, with individual unions disposed to consummating hefty deals while others were excluded...
...For instance, the $500 billion Federal outlay for fiscal 1979 would amount to about $240 billion in 1963 prices...
...Victimized first, in anguish and iniquities, are individuals whose incomes lag the price pace: read, old folks and poor people...
...Second, to subdue inflation with the only discretionary tools at hand, and acting on outmoded theories, the Federal Reserve tightens money, producing predictable dire consequences...
...Although it took 22 months, he has now made inflation a first priority, and his renomination and re-election hang on the Administration's success in controlling it...
...Manifestly, some wage earners can have incomes mounting in excess of 2-3 per cent per annum (without price boosts) so long as other money incomes move by less than the average...
...The sum will thus equate to a 2-3 per cent pay boost for workers earning $10,000-$15,000...
...To reward conforming unions, borrowing from Okun's version of tip, the President will recommend to the new Congress a tax rebate if prices rise by more than 7 per cent...
...Should prices bound upward by 10 per cent over the next four years, the budget will total about $800 billion in fiscal 1984 regardless of which economizer occupies the White House...
...With measures that carry a weighty price tag precluded, we have become immersed in shrill, sometimes frivolous and almost frenzied debate on subjects that provoke evangelical passions, exposing traits of demagoguery and shades of tyranny-from ERA, to abortion, to the right to smoke, to homosexuals' rights to live, to capital punishment, etc...
...Variants of the idea have been sponsored by Arthur Okun of Brookings, and by Lawrence Seid-man, my colleague at the University of Pennsylvania...
...Carter's exposition of the tax rebate was not a model of clarity...
...And money wage gains in, say, 1977, contributed to the price history of 1977...
...Administrative costs and bureaucratic intervention would be minimal...
...Every time business costs go up for defense hardware or other government procurements, or Civil Service pay climbs, the government must spend more for the same basket of goods and services...
...Briefly, what was envisaged was a sort of speeding fine by way of extra corporate income taxes restricted to the largest 2,000 firms who paid, on average, more than a 5 per cent wage and salary increase per annum...
...Yet the agenda for a fairer democracy will be deferred as long as the price level is not stabilized...
...The time is propitious for a more original approach...
...A $30-billion stabilization fund was organized and larger gold sales were announced, equipping the monetary authorities with foreign currencies to inhibit additional serious exchange-rate slippage...
...Some will denigrate this as a wage-push thesis of inflation...
...Controls, however, can have only a tenuous future: They are bureaucratic, they incite chronic business and labor conflict, they are costly to administer, and costly for business-and labor-to live with in the dilatory decisions...
...Objection, inflationary-as revealed by President Carter in declaring a deferral of cost-increasing regulations...
...Carter had condemned inflation intermittently, carefully sparing us any leftover win buttons inherited from the Ford Administration...
...In the 22nd month of his incumbency, and merely about 18 months late, he finally readied himself for the fray...
...They make inflation daily front page news, distracting us from other serious issues...
...In the United Kingdom the pay boosts decelerated from 25 to 10 per cent between 1975-77, with commensurate price level drops...
...The Carter advisers subscribe to the opinion that inflation must be nipped slowly to avoid "distortions...
...Inflationary...
...Reserve requirements for banks against $100,000 or over savings certificates were hiked to restrict credit availability...
...The double-digit consumer price pace lent further proof of pending doom...
...Wall Street gyrated by a 35-point Dow Jones comeback, the largest one-day euphoria in the market's annals...
...If the President and the nation's editorial writers are correct in fingering expenditures as breeding inflation, they ought to summon all of us to cut expenditures, not merely government alone, and advocate higher taxes to compel purchase restraint...
...There seems to be a wall blocking the perception of government outlays as largely a consequence of inflation...
...Give the Federal Reserve its head and this could endure until the end of time, with monetarists still clamoring that the Fed is simply not adamant enough until everyone is unemployed...
...Wages and salaries, with depreciation, cover about 80 per cent or more of the cost-side...
...Instead, mindful of the Proposition 13 clamor, the President stood five-square against wasteful government expenditures...
...Churchill, one can safely aver, would have grimaced at the cadences and expressed dismay at the context...
...Here President Carter might have rightly asked: What kind of people are we...
...Stock market jitters...
...Wall Street and foreign exchange markets went further in their reaction to the Carter television chat...
...This has not worked because each group, after some time lag, ends up playing the same leap-frog game...
...For wages, while holding government employees to a 5.5 per cent increase, the guidepost on contracts to be negotiated was set at a 7 per cent average, including fringe benefits...
...It defies reason...
...The President set a 1979 guidepost for price rises at 5.75 per cent (or one half per cent below a firm's 1976-77 hike...
...It is the main reason why the United States has been fast approaching a bind parallel to that of India, where it used to be said that every place one turns a problem is uncovered...
...Other possible punitive steps include voiding import protection and denying subsidies...
...My own position has been that we shall never stop inflation until the mad race for higher money incomes abates...
...At 10 per cent annual rates compounded, in just over three years merely the annual increases will surpass all current Federal outlays...
...The President's course should be better sustained in the months ahead if he can win reasonable cooperation...
...The very novelty of the Carter Approach ran into rough seas from a banking community that dotes on tight money and shuns fresh thinking where it is best able to fathom events only by hindsight...
...On October 24 President Carter unwrapped his anti-inflation package...
...In retrospect, prohibitionists appear tame and tolerant, recalling (not quite) John Stuart Mill on respecting private actions that wreak no harm on others...
...Fed posturing on its inflation valor could be defended if its self-inflicted unemployment wounds deterred the price spiral...
...Recent history would confirm the generalization that presidents are chosen for their economic incapacity: The Nixon expletive-deleted on the Italian lira exaggerates their incompetence only a little...
...But somehow we will have to resolve this hit-and-run grab over money incomes if we are ever to banish inflation and maintain a full employment society capable of solving its many problems and commanding its own destinies...
...In the longer past, productivity per employee grew by 2-3 per cent per annum...
...Note that a pay alignment with economy-wide productivity gains refers to average rates of money income increases...
...Ordinary corporate tax rates could be reduced to fit the full tax-take at the same (or a lower) level...
...Ah, good dollar news-at last...
...A common rebuttal is that labor only seeks to "catch-up" to prices...
...Slow surgery, they contend, will leave fewer casualALFRED KAHN ties-except those who have been damaged irreparably...
...Yet we have sought income increases of 8,10, 12 per cent or more, and profess shock when price boosts close the gap between the pay leaps and productivity crawls...
...While the facts are striking whenever we go to the store, the deeper malignancy is underestimated by liberals who see a host of unfilled national needs...
...President Carter embraced the tip theory of inflation, but spurned its full features...
...A mid-October headline hunter saw the American economy in shambles...
...Yet it is not implausible that the President's initial program will, over time, abate the price thrust and thus permit a moderating of interest rates to blot out the prophesied downturn...
...By November 1, a shaken President took determined extra steps more congenial to the financial mentality: Tighter money was invoked in an almost unprecedented lift in the Federal Reserve rediscount rate by a full percentage point...
...This outcome is inescapable, however unpalatable the message is to too many who prefer to confuse money and real income improvements...
...wage gains in 1978 will influence price moves in 1978, and so on...
...The international plight of the dollar, which implies soaring import prices and erases amenities in foreign travel, is wholly an inflation casualty: The belief that our price escalation will persist invites speculation against the dollar that assures a self-fulfilling prophecy, opec countries, paid in depreciating dollars and facing higher industrial prices, acquire plausibility to support their cartel actions in raising the cost of oil: It would be far less controversial to denounce their behavior if our own prices were stable...
...Any wage moves in 1979 will contribute to the 1979 price pace and the 1979 economic scenario...
...Improve our transportation network to economize on energy...
...Mortgage borrowers, likewise, are burdened by the extra interest charges for home ownership...
...We, too, could move faster rather than erect an avenue for interminable acrimony over precisely the same issues...
...Events may propel him to go further next year as the weaknesses in his own plan surface...
...Inflation...
...Ravaged by inflation, disgusted with colossal government waste, oppressed by venality in high places, and overwhelmed by the solemnity of the tax revolt, they have yet to recognize the shallowness of the tax myths...
...Public utilities, citing the higher cost of capital, petition regulatory commisions for higher rates and redress, according to law, is more or less mandatory...
...With dictators on the march, democracy in retreat and civilization in jeopardy, he would clutch at a promising tidbit to convey a morsel of sunshine...
...Interagency snarling seems assured as, say, the Defense Department requires essential materials and price-watchers protest price jumps by contractors...
...Why the fuss about inflation...
...long, ought to insure a housing industry collapse...
...jobs are lost and the results fan out in a magnified multiplier pattern through the economy...
...The Dow Jones tape broke under the hard-won 800 average...
...Protect the environment...
...A national health bill...
...These considerations led to a collaboration between Henry Wallich (then a professor, now Fed governor) and myself in devising a Tax-Based Incomes Policy (tip...
...In any case, if the President's program is not the last word on what will have to be done, Churchill would surely have noted it as the end of the beginning...
...Quoting Churchill to quell doubters?and there are many-he asked: "What kind of people do they think we are...
...The decade record hardly inspires confidence...
...Production workers could get more if managerial people obtained less...
...The mistake is a common one...
...The idea of catch-up is based on a precept that it is somehow possible to catch up tomorrow, by a decision reached today, to events that happened yesterday...
...Bouts of "Yes they did, no they didn't, what difference does it make," seem foreshadowed for a piddling de-escalation, with the President's prestige always at stake...
...This is to protect labor from real income erosion should inflation surpass the 7 per cent pay standard...
...Why don't we rebuild our cities...
...Look at the matter this way: If production goes up by 3 per cent per annum and money incomes by 10 per cent, the end result must be higher prices of 7 per cent...
...Inflation rates accelerated under this homespun bungling posing as policy...
...Volunteers are conspicuously absent...
...Further, the same employee compensation comprises about 85 per cent of consumer demand...
...Ah, but there's good news tonight...
...This is simply to engage the logic of the appeal...
...They create a field day of dramatics for lawyers, they clog court calendars in legal appeals, they foster a new kind of crime, rear a class of snoopers, and encourage the Captain Queeg's among us in tracking down the theft of a plate of strawberries...
...Once more the financial community has revealed its mindless myopia, welcoming only recession and the lash of unemployment as an inflation remedy...
...Not unrelated is the persistence of a decade of stagflation...
...For a no fuss-no muss tip proponent, therefore, the Carter inflation pill is too weak and carries too bureaucratic an intervention in price decisions...
...To prevent inflation we must align money incomes to production growth, whether in a market capitalisitic economy or in the most benign and idealistic never-never dream land...
...The budget is at $500 billion because prices have risen...
...To deter evasion, a provision was lifted from a United Kingdom country cousin of tip-still on the parliamentary calendar there-that calls for diverting government purchases from firms that puncture the price target...
...Short-term gains have consequently been converted to inflation losses, while too widespread unemployment, poor job security and cumulating national problems have remained unattended...
...It will probably end up as a tax credit of $200-300 to complying unions, and the bonus will probably have to be generalized to cover all taxpayers with limited income increases...
...Consider other contemporary concerns...
...The higher interest rates, if they persist Sidney Weintraub, a past NL contributor, is the author of Capitalism's Unemployment and Inflation Crisis...
...Last spring he named old pol Robert Strauss to man a telephone hook-up to labor and business shakers to sweet-talk prices downstream...
...Firms could transgress the 5 per cent norm at a penalty...
...I favor tax cuts, considering the unemployment to follow the new round of Federal Reserve policy...
...Fear of inflation, leaving eyesores and deterioration...
...AFL-CIO President George Meany has rejected the program, calling instead for mandatory price and wage controls...
...Our problem is the pay scramble, where all seek to run faster but go nowhere, with only inflation and unemployment to show for the speed burst...
...this is merely the other side of real income growth over time...
...cooked up by many (timid) advisers, it resembles the camel conceived by decisions within a consensus committee...
...Shoppers in the supermarkets, appliance stores, furniture and clothing shops, etc., are mainly employees...
...Worst of all, when and if successful, they are dismantled-and then the old charade of prices and wages comes on for a replay...
...Foreign exchange speculators were driven to cover, and the financial community grasped the signal that the President was not going to preside over a United States held hostage to their whim of depressing the dollar mercilessly, raising our import prices and the price level generally in the process...
...With money tightened, business investment is choked and new building and home construction are stymied...
...The news sounded ominous...
...It was surmised that tip would establish wage settlements more nearly in line with productivity, so as to end inflation and restore a full employment growth economy...
...Inflation is "the one in many," inhibiting the resolution of pressing matters...
...If the pay settlements consummated prior to the October 24 statement do not carry the average pay eruption above 7 per cent, the 1979 inflation pace should settle in the 6 per cent range...
...Some unelaborated penalties may be invoked against union violators...
...It is easy to appreciate its appeal, and why otherwise reasonable folk fall prey to drives having overtones of anarchy...
...Many would elect a stiffer de-escalation...
...Falling bond prices, and higher borrowing costs that drive up business costs...
...The great social, political and economic conflict is over which groups will consent to retarded income gains...
...The dollar plummeted to new lows in Tokyo, Frankfurt and Basel...
...More boring and specious is the noise over Proposition 13 that injects some delirious Jarvis jabberwocky on slashing taxes without caring what government expenditures are cut...
...A 5.75 per cent price target linked to pay rises of 7 per cent conveys a projected productivity advance of 1.25 per cent...
...Ray Brady, the frenetic CBS economic specialist, showed stock market scenes calculated to incite panic...
...Inflation, then tight money, higher interest rates-and plunging stock markets and bear bond markets...
...The United Kingdom and Australia, in 1974-75, allowed incomes to go up by 25 per cent per annum and were mortified when prices matched the explosion...
...The total wage and salary bill is currently $1.4 trillion...
...Press releases indicate that price and cost behavior of 400 large businesses are to be monitored...
...In short, a case exists for the President's approach, despite the flak even before its inception...
...It may be that unless the Carter norms are observed, we will come to that bleak impasse...
Vol. 61 • November 1978 • No. 23
