Inflation and recession have combined with industrial layoffs to shatter the financial equilibrium of Chicago, Philadelphia, New York City, Cleveland, Buffalo, and Washington, D.C. A new phenomenon is now superimposed, the skyrocketing revenues (mostly in the form of severance taxes and royalties) to be collected by the oil-producing states as a result of oil price decontrol. The Northeast-Midwest Institute has recently published a study estimating that from 1980 to 1990 the states of Alaska, Texas, California, Louisiana, Wyoming, Oklahoma, New Mexico, and Kansas will collect increased tax revenues amounting to $115 billion.
Alaska just abolished its income tax and is paying cash dividends to its citizens. Like a domstic version of OPEC, the oil-producing stats can use their vast revenues to lower other taxes, increase services, attract industry by almost unlimited means; their economies as well as the economies of surrounding states will get significant boosts.
And, like a domestic version of the third world, the Northeast and midwest, importers of fuel, needy for additional federal assistance, will bear the burden since, after all, this is a zero sum game. It is really not very difficult to see where this inevitably leads. Half the country nearly bankrupt, many of its major cities pools of unemployment and unrest, adn the other half swimming in oil, industry, adn wealth. This is not the stuff of a union of states. For a union to survive there must be a sense that both burdens and benefits are shared on an equitable basis.
A short-range and long-range program should be examined by the President and the Congress to remedy this particular situation before it is too late. It should include:
* For the short run, we need a safety net to preclude massive bankruptcies at a time of extreme financial fragility. We need an institution modeled after the Reconstruction Finance Corporation of the 1930s to provide low cost long-term financing to permit those localities and industries in difficulties to weather the next few years.
* For the long run, new permanent revenues must be funneled to the Northeast and Midwest, in the form of direct federal budgetary assistance and incentives for private industry to remain and grow. A possible source of revenue could be created by dedicating a portion of a national gas tax for that purpose.
Only a comprehensive policy approach, in an atmosphere of relative stability, can have any chance of success. This would include:
* A temporary wage/price freeze. I do not believe in a system of permanent wage/price controls. However, recent large labor settlements make it clear that the voluntary guideline program is a total failure. I believe that a temporary freeze, imperfect as it is, could be combined with budget cutbacks to break inflationary expectations and the underlying core rate of inflation.
* It will be impossible to lwoer interest rates meaningfully at home and simultaneously protect the dollar abroad without reducing oil imports. The choice is between a large gasoline tax or rationing. I come down on the side of the gas tax since I believe its revenues should be recycled into the economy. A 50 cent gas tax is a minimum. It will immediately strengthen the dolalr, reduce US consumption and permit the reduction in interest rates that is a necessity.
Neither the Europeans nor OPEC will believe we are serious about conservation with less than $2 per gallon gasoline or unless we institute rationing.
* The appointment of a temporary National Economic Commission with representation from business, labor, academia, and government. It would recommend to the President and Congress, prior to the expiration of the wage/price freeze:
(A) A mechanism for a limited period of wage/price restraint following the expiration of the freeze. Possibly a tax-based incomes policy or other transitional mechanism leading back to a full and free market will be needed for some time and the commission should be charged with that responsibility.
(B) In a more general sense, the commission must recommend an economic strategy for the US for the next two decades. It must do sor for two basic reasons: first, because nowhere in government today does strategic economic planning take place; second, because difficult, controversial policies must originate from nonpolitical, credible bodies, created in an atmosphere of emergency, to generate the political support enabling the President and Congress to act.
It is argued that wage and price controls have not worked in the past. That does not mean, in my judgment, that a temporary freeze in an environment of restraint, could not be successful while overall policies are put in place. It is argued that a gas tax is politically impossible and, if anything, rationing would be easier. But everyone agrees that tax cuts aimed at investment are necessary, increased military expenditures are necessary, balancing the budget is necessary. Those cannot happen without revenues, and rationing will not produce revenue.
We are at a turning point in our economic, social, and political life.It has been coming for a long time and it will take a long time to adjust to the new realities. If the impetus for reexamination does not come from the political leadership seekign solutions, it will come from the citizens demanding them. Democracy no longer involves a social contract by which the minority complies with the will of the majority; consequently there is a clear danger that continued deadlock over many of these issues, or continued application of Band-Aids, will ultimately create social and political upheavals of unforeseeable dimensions.