The Great Stagflation Machine

...As applied in the U. S., controls freeze the economic pie as currently sliced...

...What Lekachman is describing is the creation of a class of people with no interest in containing inflation...

...Such reasoning is plausible, yet how different would the choices have been under any conceivable Democratic administration...

...Instead of commenting on economic politics generally, Lekachman carries out a vendetta against Richard Nixon and the Republican Party...

...Lekachman stresses the irrationality of such intransigence: the Republican Party will lose big if times turn hard...

...John Kennedy told his friends he would remove the troops from Vietnam, after he was reelected...

...This irritating patina would be trivial did it not arise from the same bias that leads Lekachman to a deeper analytic mistake...

...One-trying to make inflation tolerable through increasing the use of cushions-is almost certainly doomed to defeat...

...How confident can we feel in either his literary taste or his sense of political relevance after reading, “The Administration’s plan to scotch the snake of inflation without unleashing the dragon of recession proved as secret as the famous blueprint for ending the Vietnam war...

...John Kenneth Galbraith has been telling us for years that large companies can set their own prices...

...sin...

...Very little in Britain’s economic performance recommends itself as a model, except this: successive governments have recognized that controlling inflation was an imperative long-range goal, one that must be served even at the cost of electoral suicide...

...This last step should be accompanied by programs to make sure that those of average income or below do not bear the entire brunt of the slowdown...

...Yet the proper way to interpret the persistence of inflation is less as a partisan issue than as the victory of short-term necessity over long-term prudence...

...businessmen and the political right have made similar observations about organized labor...

...One way to improve our understanding of national economic management may be through a similar model of the “Stagflation Machine”: Rule 1: Do Not Allow Noticeable Unemployment Before the Next Election...

...Politically that was wise: taxes designed to fight inflation inevitably fall hard on the Democrats’ constituent, the average man, because it is his purchasing power the government wants to reduce...

...These last could be painful, but the pain was concentrated on the market system...

...In the long-run “cushioning” is disastrous, yet as a means of minimizing public displeasure with inflation it serves a short-term purpose...

...According to Lekachman, a government serious about planning for the future has four alternatives to choose from...

...there was always the chance of victory and rarely the opportunity for calm consideration of the basic issues...

...The inflationary cushions created by the Udal1 Amendment and its counterparts in the private sector are obviously the perfect way to create permanent inflation...

...In describing the transition, Lekachman has produced one of the best popular accounts of the two theories of inflation: “demand-pull’’ and “cost-push.’’ The descent from what Lekachman portrays as the Garden of Eden-the happy boom times of the early sixties-began with the onset of the Vietnam war...

...No-fault liability has been delayed for years by trial lawyers who have profited . . . . These are a very few examples of an army of restrictions upon entry into the unions and professions...

...Even though we may see a recession in 1974, we can count on living high in the fall of 1976...

...BOOKS: The Great Stagflation Machine by James Fallows In its treatment of economists is this nation’s true compassion revealed...

...This revelation led to Rule 3. Rule 3: Do Not, Until Rule 2 Has Gotten Out of Hand, Take Any of the Following Steps: a. Impose wage and price controls b. Create new injlatiofi cushions c. Raise taxes d. Break up monopolistic segments of the economy...

...Each year more and more of us are protected against inflation by special “cushions...

...Nixon had plans to visit Peking and Moscow...

...More money was chasing a static amount of goods...

...never went down...

...What American leaders have most obviously lacked is a sense of responsibility for long-term economic consequences...

...Rule 2: Do not, unless essential to satisfy Rule 1, in the immediate crisis or an earlier one: Bomb South Vietnam Bomb North Vietnam Commit U. S. combat troops to VietInvade North Vietnam Use nuclear weapons...

...It is not a question of sturjidity on their part, but of a perverted kind of logic...

...Today we coddle our economists, call them forth in swollen ranks to confront our economic plagues...

...Now, miraculously, they find they can have both at the same time...

...The Nixon Administration is trying to serve the upper classes, Lekachman concludes, but it is suffering from terminal myopia...

...A price rise in one area is communicated through the economy at breakneck speed...

...The only ones to suffer are the entrepreneurs in those parts of the economy still vulnerable%tbth e laws of supply and demand: the pre-freeze prices may...

...Thanks to the efforts of Rep...

...This may explain why the two bedroom counties bordering Washington, D. C. are the two richest in the country, or why the District of Columbia, which contains a staggering proportion of poor people, has a higher per capita income than any state...

...Lekachman is not the first to explain this “cost-push” feature of the economy, but he does it in an admirably even-handed way...

...In his famous essay, “The Quagmire Myth and the Stalemate Machine,” Daniel Ellsberg explained why this reasoning could not adequately account for the war...

...But unlike Irving Friedman, who in Inflation: A Worldwide Disaster heaps the blame on a race (presumably human) grown too fond of material possessions, Lekachman chooses a more attractive target: the politicians...

...He traveled farther down the list of brutal options than his predecessors and then pretended that the Communists had not taken over in Vietnam...

...These range from provisions as definite as a cost-of-living clause in union contracts to the tacit assumption among members of trade associations that they will be able to jack their incomes up in pace with inflation...

...have left them no slack to absorb an increase from some uncontrolled i tem like farm produce...

...While it has a few regrettable defects, Inflation is an excellent brief summary of why President Nixon’s Phases may come and go but inflation is with us forever...

...No doubt all of the Prime Ministers would have preferred to preserve themselves rather than protect some vague national interest, but the country’s terrible vulnerability to the pressures of international trade meant that the only course more painful than stopping inflation was letting it continue...

...He turned his Vice President down...

...Ths is because the corporations that make up what Galbraith calls the “planning system” of the economy have long been setting their own prices...

...Under the imperatives of the Stagflation Machine, Presidents from both parties will follow roughly the same course, pumping up the economy and then trying desperately to cope with the results...

...Rule 2: Do Not, Unless Essential to Satisfy Rule 1, Allow Unreasonable Inflation...

...Under the rules of the machine that is all it is asked to do...

...If these alternatives are ignored, policy concocted in the short run will have two consequences: mounting inflation, with its social injustice and economic distortions...

...People were being paid to produce goods (rocketry) and services (craters) that could not be consumed on the market...

...Only those left uncushioned can complain...

...Robert Lekachman...

...Only with an electorate educated to the long-range dilemmas of economic management can a President feel safe in attacking the causes of inflation rather than the symptoms...

...But Kennedy died before his promise could be put to the test...

...The story in each case is one of blunder and imperfect understanding...

...As Galbraith puts it in his new book, Economics and the Public Purpose, “It was possible for the planning system to live in reasonable comfort with both inflation and the orthodox efforts to control it...

...The economy had developed a one-way valve that allowed prices to rise whenever the demand pressure stepped up but which preventcd them from ever falling...

...Five centuries ago physicians were put to death when pestilence persisted...

...Eisenhower was probably the last presidential exception to Rule 1 : all of his advisers except Arthur Bums opposed the intervention, and Ike didn’t believe in deficit spending anyway...

...This the planning system could endure.’’ The important truth about controls is not that anyone ever expected them to work in a long-run sense...

...To repeat: this book is commendable for its clarity and information...

...experience suggests it would lead to a rate of inflation reminiscent of those in Latin America during the 1950s...

...In the age of innocence, political economists thought they had a choice: either unemployment, or inflation...

...and the customary sequel, unplanned, and often intense, recession...

...This rule applies with special potency to members of Herbert Hoover’s party...

...Nixon worked his way out of the Vietnam Stalemate Machme rather than challenging its precepts...

...The national government offers the most grotesque illustration...

...Someday Nixon and his big-business backers will be sorry, he says, for their boom is headed for an inevitable bust...

...American policy in Vietnam was not a “mistake,” he said, because at each point the Presidents’ decisions were perfectly rational...

...Wage and price controls, which the Republicans once opposed most dogmatically, are in fact the mildest irritant to big commercial interests...

...naturally, prices rose...

...While Mr...

...Not only is Lekachman that rare academic who can write without resort to jargon (or except when necessary even to numbers), but also his book is modestly priced...

...Too often the booms do lead to busts...

...During the 1960 campaign, Nixon pleaded with Eisenhower to luck the economy out of its recession before unemployed voters went to the polls...

...The choices may have been immoral or historically wrong, but that was another issue...

...Moreover, increasing numbers of Democrats find themselves with as great a personal stake in anti-competitive arrangements (professional associations, labor unions) as the big businessmen...

...Economists, he tells us, are no more responsible for inflation than priests are for *Inflation: The Permanent Problem of Boom and Bust...

...for their part, the Republicans profit from what has been created in the market’s stead...

...As expectations of inflation rise, so does the rate of inflation: a union hoping for a five-percent increase in its real wages knows it must ask for a 15 percent money-wage increase to offset the rising cost of living...

...The middle phase of the first Nixon term, from the 1970 elections until the 1971 economic manifestoes, drove this message home...

...Lekachman takes a they-knownotwhat-they-do tone in surveying this mess...

...Average Joe will suffer more than Bob Abplanalp during the recession, it is the rare tycoon who welcomes lean times...

...In a world of economic perfection, could nearly a dozen books about inflation make their way onto the publishers’ fall lists...

...Trying to buy full employment with a little payment of inflation, Nixon discovered what the Europeans learned several years back: the price of full employment has risen out of sight...

...The President cannot do this by himself-although he can set an example of either foresightedness or opportunism...

...Lekachman’s insight is that increasing numbers of us are in on the anticompetitive deal, safe in our monopolistic enclaves: Universities and professional societies...

...It is not an exaggeration to assert that wherever an observer’s eye falls, it registers a situation of market control or actual domination by a small number of individuals, corporations, health insurers, trade unions, business associations, or professional societies...

...As presented in this book, Lekachman’s theory of inflation is similar to Arthur Schlesinger’s attempts to explain Vietnam as a quagmire...

...Since big business would be displeased by a tax rise and apoplectic about antitrust, Nixon’s hands are tied...

...Lekachman makes his case against the nation’s leaders in the course of presenting a solid historical explanation of the inflationary process...

...He hauls in Harold Geneen, money-stuffed suitcases, Dita Beard, and the CREEP, both to provide pizazz and to confirm his own admission that “it is hard to be fair to Republicans...

...For the last two decades British governments have operated under the rules of a “Stop-Go Machine,” consisting entirely of our Rule 2. Whenever inflation imperiled Britain’s balance of payments, the government of the day would throw on the brakes...

...In the resulting recession, the other side would take power, and then begin the same cycle...

...Where a four or five percent inflation rate might have done the job in the mid-fifties, now it may take 10 percent, 12 percent, or more...

...Only strangers to the laws of supply and demand can be surprised to learn that the experts have done more describing than solving...

...It could have slapped on a surtax to reduce inflationary pressure, and then have humanized the results through public works programs and generous compensation for the unemployed...

...Given their prioritiesnamely, not to have Communists running through Saigon on election, day in America-everything from the Diem coup to the Hanoi bombings made impeccable sense...

...A government less firmly wed to big business might have chosen a different anti-inflation strategy...

...it has been seared onto &chard Nixon’s brain...

...So far, Nixon has confined himself to the first two...

...Like others of his brethren who have taken to print, Lekachman makes excuses for his craft...

...Discomfort would be minimized if we attempt to change the rules themselves so that they look to a time more distant than the next election day...

...More often they smack of gratuitous partisanship...

...even the threat of slipping into recession-and therefore of violating Rule 1-may not persuade him to do so...

...Random House, $5.95/$1.95...

...Each step along the way had seemed so necessary, so wise...

...As Lekachman puts it, “In the 1970 election the poor Republican showing sharply warned the President that if the economy did not soon display improvement, he was likely to be retired from the White House in 1972...

...when he finally reached the White House, one of his first acts was to appoint Bums as a presidential counselor...

...Can the man who writes, “Phase I1 controls...

...In evaluating this process one must criticize not its goals-for unemployment is clearly worse than inflation-but its selfdefeating nature...

...These options are listed in ascending order of distastefulness to conservative administrations...

...Too many wrecked control systems lie strewn across Western Europe to permit such fancies...

...But his explanation of why the Republicans lumber on toward disaster is wrong...

...Shortly afterwards, Milton Friedman and company were chucked overboard so that Nixon could produce at least a small boom by 1972...

...Nixon has not yet taken steps (c) and (d...

...Memories of the raw marketplace make the heirs of the New Deal unwilling to dismantle the many forms of government intervention...

...Doctors and, university professors raise ever higher credentials barriers to protect their own income...

...Two years of controls had brought forth few threats of auto or steel shortages, but packing houses left and right were closing down when the freeze on meat prices continued...

...permanent controls on those sectors most prone to costpush inflation...

...The Stagflation Machine is not to be taken as a universal model...

...Morris Udall, father of the so-called “Udall Amendment,” millions of federal employees are guaranteed a pay increase whenever the cost of living rises...

...Instead, they were an overtly temporary step, necessary to carry out the logic of Rules 1 and 2. Step (b) is even more crudely designed as a time-buyer...

...Before they knew it, the politicians were nostril-deep in the mire, without any good ideas for escape...

...The greater the number of people who think they can laugh in the face of inflation, the smaller the resistance to wildly inflationary policies...

...In spirit he now reached out to Cambridge, Massachusetts, and recruited John Kenneth Galbraith...

...One may have more sympathy for attempts to cushion other groups-the social security pensioners or recruits for the volunteer army-but the overall impact is disastrous...

...They know the answers, but can’t convince others to listen...

...featured one of those bureaucratic inventions of which Republicans seem particularly proud,” ever have heard of the Great Society, let alone the New Deal...

...The best illustration of this was the recent beef tumult...

...From there, the process became less conventional...

...His campaign donors prevent him from taking the steps that might be necessary to reduce inflation and keep his party in office...

...if anything, they allow the share of corporate profit to increase...

...But the perspective conveyed in this last passage-a smug equation of Nixon’s economic policy with the shortsighted greed of Republican businessmen-illustrates a major flaw in Lekachman’s presentation...

...As for opening up larger sections of the economy to free competition, liberals have as many hesitations as plutocrats, but for different reasons...

...Now and then, Lekachman’s wisecracks on current affairs let him get off a good line: “Mr...

...Nixon’s first two years as President proved that fears of the Great Depression could be awakened with surprising ease...

...In Nixon’s case, we all can watch as political pressures prevent him from carrying out his intentions...

...now we have neither...

...James Fallows is an editor of The Washington Monthly...

...Trying to beat the Stagflation Machine at its own rules would also be a costly and drawn-out process...

...Ten years ago we had relatively full employment with stable prices...

...Some combination of the other three alternatives seems more likely to work: anti-trust and procompetitive action to introduce more price flexibility into the economy...

...Lekachman’s book is a valuable contribution to that education and as such is welcome...

...This is not only unfortunate, but also unwise...

...Lyndon Johnson displayed no great eagerness to increase taxes...

...To accept this theory as it applies to inflation requires a major leap of faith: believing that Nixon and his planners thought their patchwork remedies would actually solve the economic troubles instead of just buying time...

...With the gelid logic that has made the Rand Corporation famous, Ellsberg outlined a “Stalemate Machine” that went a long way toward explaining the Presidents’ decisions : Rule 1: Do not lose South Vietnam to Communist control-or appear likely to do so-before the next election...

...in 1971 Richard Nixon may have had similar hopes about stopping inflation...

...The lesson was not wasted on Nixon...

...While fears of unemployment may be the least of the Republicans’ worries now, the same pattern is beginning again...

...So far this theory could have been taken whole from the pages of any standard economics text...

...and “recession,” in the morally neutral sense of lowering demand through prudent taxation...

...In Lekachman’s world, men with dollars hanging out of their suitcases lie behind all economic policy...

...operate less in the public than in the private interest, and according to the model of the more exclusive construction crafts...

...Of course, political allegiance is of some importance...

...By trying to pay for his soldiers without raising taxes or sacrificing the Great Society, Lyndon Johnson created the classic demandpull situation...

...When a general freeze comes, it ensures that their expenses will not rise...

...Of the current harvest, Robert Lekachman’s Inflation: The Permanent Problem of Boom and Bust* is one of the most appealing...