Don't panic over prices
For the layman, the economic echoes out of Washington these days are frustratingly confusing and unsatisfying. President Carter says that inflation, along with the energy problem, has reached "the crisis stage." Federal Reserve Board chairman Paul Volcker adds that the nation is at "a very critical juncture" and that "coherent action is urgently needed." Yet the rhetoric is not being matched by the kind of government action which a problem of crisis proportions would seem to merit. Does this suggest that the "crisis" is being overstated?
Figures don't lie, of course, and Americans are not cheered by the news that inflation soared to an annual rate of 18 percent during January. But, before psychological panic sets in, it should be borne in mind that this leap was something of an aberration, caused by rising mortgage costs and, above all, the huge increases in the price of OPEC oil. It is also possible that all the growing talk about wage and price controls, fueled in part by Senator Kennedy's back-to-liberalism speech, has spurred corporate business to jack up prices in anticipation of controls. In any case, it may be significant that most economic experts still expect the inflation rate to decline to below 10 percent by year's end -- in time for Mr. Carter to reap some political benefit. By then, Data Resources Inc. and other econometrics firms suggest, Mr. Volcker's tight money policy and the OPEC price hikes will have begun to work themselves through the system.
This would seem to be a good argument for patiently holding steady and not turning in desperation to dramatic panaceas which may not succeed anyway. As economists keep telling us, wage and price controls do not work in the long run since they simply build up pressures for price increases which explode once the controls are lifted. This time around there is the added problem that the President does not yet have stand-by authority to impose such controls, and while Congress is going through the motions of granting it industry will again try to steal a beat on them by raising prices.
If, nonetheless, the inflation rate continues to spiral and finally provokes controls, such a freeze would be effective only if short-term, and only if accompanied by stringent fiscal and monetary policy over a long period. It is not only the monetarists who see excessive money creation as the fundamental cause of inflation; this is widely accepted today. Hence the government will not cure this insidious problem if it falters in its present commendable effort to bring the supply of money under control. Holding the federal budget down to reasonable levels is also called for, a goal which will be hard of attainment, however, if the nation insists on massive defense expenditures. Here, as we have said before, the aim ought to be to eliminate waste and to make sure the government is ordering only what the Pentagon really needs, not what it may want -- and there's a big difference.
It is on the energy front, however, that we see the biggest opportunity for progress -- and, to our dismay, the least commitment. Mr. Carter has spoken of the energy crisis as representing a "clear and present danger" to the nation's security. Yet he has failed to exploit this opportune time -- with national attention focused on the turmoil in Iran and Soviet adventurism in Afghanistan -- to mobilize the public through some hard-hitting action which would reflect the magnitude of the problem and begin seriously to wean the country away from dependence on Middle East oil. Despite the efforts of three presidents, there is still no national direction, no energy program, and no signs that Congress either thinks time is of the essence. America, in short, is dawdling. Only a few voices, such as that of Republican candidate John Anderson, have had the political temerity to propose a creative solution. In this connection, it should not be lost on the public that Mr. Volcker joins Mr. Anderson in favoring a 50- cent-per-gallon tax on gasoline. This is the kind of measure that ought to be thoroughly explored.
Where does this leave us? Not, certainly, ignoring the very disturbing inflation predicament, which could erode the nation's economic stability and security almost more than any threat we can forsee abroad. But there is also danger of overreacting to what could prove to be a temporary phenomenon and not waiting for the administration's sensible monetary policy to take effect, a policy which necessarily requires time. We hope the President toughly perseveres in his efforts to bring down inflation -- even while tackling in more forceful manner than he has to date the problem he says has largely caused it.