How to Mobilize Against Inflation

By GEORGE J. CHURCH

Inflation may be becoming to the 1970s what depression was to the 1930s--not only an economic agony but a crisis that threatens the stability of society. Like the Great Depression four decades ago, today's Great Inflation has struck a blow at Americans' usual optimism about the future and replaced it with a deep worry--about whether families will be able to afford travel, comfortable housing, quality education for their children, even the foods they like best.

Millions of people justifiably feel that the economy is cheating them of the rewards of hard work and thrift. A few more years of skyrocketing prices that wipe out much of the middle class and reduce some Americans to eating dog food could well cause many voters to question whether a system so fundamentally flawed can endure.

The public demoralization is being vastly increased by a gnawing fear that no one knows how to stop inflation in a modern democratic capitalist economy. The Government swings erratically from price controls to a free market, from budget stimulation to budget cutting, from easy money to tight money; nothing seems to work for j long. Economists discussing anti-inflation strategy have rarely been so modest and tentative; several seem confident only in proclaiming that their colleagues' ideas will not work.

Modesty is advisable: inflation is in fact the most torturingly complex problem of modern economics. It seems inextricably bound up with growth and high employment; a quick and sure solution might be achieved by inducing another depression--but that would be too severe a cure. Moreover, inflation has become a worldwide plague (TIME cover, April 8). The U.S., even if it can control the economic sickness within its own borders, might be subject to reinfection from abroad.

But if no quick, final cure is in sight, the Government still has an obligation to act. The economy, to be sure, is not completely manageable by Washington, but there are a number of policy actions that could be taken to greatly reduce inflation's severity. And in dealing with inflation, degree is crucial; the difference between price increases at annual rates of, say, 6% and 12% is the difference between excessive social drinking and incapacitating alcoholism.

The steps are slow-working and painful. Worse, they sound like a prescription for ensuring the defeat of any President who tries them, since they amount to taking on every vested interest in the economy at once. So there will be a strong temptation to avoid them and hope that a recent downturn in inflation--from an annual rate of 12.3% in the first quarter to 8.8% in the second--continues on its own. But that improvement is scarcely satisfactory; the Government must do all it can to bring the rate down further.

The first essential is to hold down federal spending and reduce the rate of increase in the U.S. money supply. That classic remedy for inflation has been advocated so often that Administration officials refer to it as "the old-time religion."

It means slow growth, sluggish profits, distressing unemployment. So it is not surprising that the old-time religion has been more often preached than followed.

Right now, the Federal Reserve Board is acting the role of zealous convert. In 1972 and early 1973 it pumped out enough money to overstimulate a booming economy; money supply in the last quarter of 1972 grew at a startling annual rate of 8.4%. Lately the board has held the increase to a rate of about 6%, a growth much slower than the explosive--and inflationary--surge in demand for business loans. Interest rates have consequently gone into orbit. But as Alan Greenspan, who is Nixon's choice to become head of the Council of Economic Advisers, has pointed out, that policy has been pushed close to the point at which it will selfdestruct. Savings and loan associations and savings banks cannot effectively compete with commercial banks for funds in the tight money market, and some may soon teeter on the edge of collapse.

If so, the Federal Reserve would have to come to their rescue as "lender of last resort"--and that would mean another massive, inflationary increase in the money supply. The Federal Reserve, in other words, cannot fight inflation all by itself; it needs help from Adminis-tration budget makers--iwho, while preaching fiscal conservatism, have run up a cumulative deficit of $68 billion in five years.

Federal Reserve Chairman Arthur Burns called last week for a $10 billion cut in Government spending for fiscal 1975, which is budgeted at $305 billion, v. $270 billion in the last fiscal year. President Nixon himself has said that expenditures should be held to $300 billion, at which point they might just be balanced by growing revenues, but he has postponed the hard decisions about where to cut. Small wonder. The choice will have to be made from a herd of sacred cows: military spending, veterans' benefits, revenue-sharing aid to states and cities.

The size and specifics of any cut in this year's budget are less important than that the Administration, the Federal Reserve and Congress all determine to apply fiscal-monetary restraint for as long as is necessary. The policy need not be pressed hard enough to cause a recession. Rather, the strategy should be to permit some real growth, but keep the budget and monetary brakes on hard enough to hold total demand for several years slightly below the economy's capacity to increase the output of goods and services, until the inflationary momentum at last subsides.

Such a hold-down would set up severe strains in the economy, which the Government must be prepared to ease. For one thing, credit would remain scarce and costly, especially for small businessmen and home buyers. To prevent big corporations from gobbling up all the loan money, the Government would have to nag bankers to turn down some loans and perhaps institute credit controls if they refused.

A long-term program of holding down demand would mean that for years the nation could not reduce the jobless rate to the 4% "full employment" level; unemployment might well rise beyond the present 5.2%. The unemployed, of course, cannot be callously written off-- but heating up the whole economy to the point at which employers are eager to hire everyone who turns up is at present a sure prescription for accelerating inflation. Instead, the jobless should be helped by higher unemployment benefits, public-service employment programs, massive job-training efforts to give them marketable skills--and the budget should be cut in other places to provide the money.

Even a consistently pursued policy of fiscal and monetary restraint, however, would not defeat inflation by itself.

It should be reinforced by an array of other policies, all of which should be put into effect together. No one of these policies is likely to have much impact on its own, but cumulatively they could put a substantial dent in the inflation rate.

For one thing, the President--possibly acting through a revived Cost of Living Council--should monitor wage-price increases in key industries with a baleful eye and demand from Congress stand-by authority to roll back those that are far out of line. Even liberal economists are generally reluctant to go back to comprehensive wage-price controls. But in a highly inflationary climate, the Government must try to counter the temptation for unions and companies to push for the biggest increases that their raw economic power would temporarily command. Indeed, many economists fear that high wage demands are about to replace shortages as the prime inflationary force in the economy--and the Government cannot persuade labor leaders to moderate them unless it makes a conscientious effort to restrain business too. The President, as wielder of the nation's largest jawbone, should define what wage and price behavior is responsible and focus public opinion pressure against increases that violate the guidelines. In order to assure that he is listened to, he needs the authority to order occasional rollbacks.

-A resurrected Cost of Living Council or some other body should also monitor the Government's own price behavior. As economists tirelessly point out, Government departments and regulatory agencies, in an effort to please narrow constituencies, often adopt policies that spur rather than slow inflation. For example, the Agriculture Department is now buying up $100 million worth of "excess" beef and pork in a deliberate effort to keep prices paid to farmers and feed-lot operators from dropping. Federal regulatory agencies often set railroad, truck and barge freight rates high enough to protect the most inefficient carriers from competitive damage. A separate federal agency should be empowered specifically to watch for such practices and try to get them stopped.

The Government should also explore all possible ways to increase the productivity, or output per man-hour, of the nation's work force. High productivity enables employers to grant wage increases without raising prices, but U.S. productivity fell at an annual rate of 5.5% in this year's first quarter.

As a first step toward reversing that trend, Congress should legislate extra tax credits for companies that have superior productivity records. The tax credit now granted on the purchase of new equipment, says Michael Evans, president of Chase Econometric Associates, a subsidiary of Chase Manhattan Corp., "is too broad-based. It gives the same 7% for everything from office furniture to industrial machines. It could be more stratified; it could give more emphasis to productivity." The President, by jawboning through the Department of Labor and Federal Mediation and Conciliation Service, should also press for more labor-management agreements that phase out featherbedding and other make-work practices.

Finally, the Administration should ask Congress to wipe off the books a complex of outdated laws and practices that keep prices high for the benefit of special constituencies. Every economist has a long list of these that has turned yellow with age. Among them: the Davis-Bacon Act, which guarantees that construction workers on federal projects receive the often inflationary prevailing wage in the area where they work. The Jones Act prevents shippers from using low-cost foreign vessels to haul their goods from one U.S. port to another, and the "Buy American" Act forbids the Government to buy from foreign suppliers unless their bids are at least 6% below those of U.S. companies. Quotas still hold down imports of foreign textiles, steel and butter. Misnamed Fair Trade laws in 15 states, authorized by a federal enabling act, prevent retailers from cutting prices on many brand-named goods. The key to getting rid of these outrageous anomalies is to attack them all at once by putting together something like an "Omnibus Inflation Control Bill of 1974" that could win broad public support. Trying to repeal them one by one is no use; the only people who would be excited would be the lobbyists for the special interests involved.

Even if the Government does everything it can to contain inflation within the U.S., though, there will still be that danger of imported inflation from abroad. American prices for many key raw materials --oil, wheat, lead, sugar--are heavily influenced, if not dictated, by the world supply-demand balance. All have zoomed in the past year or so because of global shortages, real or engineered. Restraining demand in the U.S. may not be enough to keep prices down--especially if other industrialized countries stimulate their economies to make up for a loss of export sales to the U.S. and commodity-producing nations form more price-raising cartels modeled after the Organization of Petroleum Exporting Countries.

To counter that threat, the U.S. must take the lead in organizing international cooperation against inflation. As a start, it should try to win at least an informal agreement among the leading financial powers to synchronize their monetary and fiscal policies.

The goal should be world restraint to combat world inflation. Further, the U.S. should attempt to reduce the frenzy of international bidding for scarce commodities by forming a world organization that would improve forecasting of global supply and demand. And the State Department should push harder to form an organization of petroleum-importing countries that could bargain with Arab leaders for lower prices.

This program contains something to offend almost everyone: liberals and conservatives; businessmen, workers and farmers; and several departments of the Government itself.

Whether President Nixon, facing impeachment, can put such a program across, is all too obviously doubtful. The more important question might be whether any U.S. Administration could summon the courage to launch this kind of all-out attack on inflation. It would succeed only if the public could be persuaded that all parts of society--the businessman jawboned out of price increases, the worker asked to settle for a modest wage increase, the banker told not to make certain loans --were being asked to make equitable sacrifices. The only answer is that the risks of not doing so are even greater. For the Nixon, Ford or any other Administration that might be in power--and for the nation as a whole--there is no deadlier danger than continued raging inflation.

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