A fresh try at inflation
President-elect Reagan, as last week's consumer price figures tell us, has his work cut out for him in tackling the twin woes of high unemployment and double-digit inflation. Despite a recession that has yanked the unemployment rate to 7.6 percent, inflation remains at intolerable levels, currently registering an annual rate of 12.6 percent. When one recalls that during the 1950s and early 1960s inflation seldom shot above 3 percent, the enormity of today's roller-coaster price spiral is sharply apparent. What, then, can and should the Reagan administration do to halt this insidious assault on the very well-being and long-term stability of the US? Equally important, what can each individual do to help drive down the inflation rate?
The first thing, it seems to us, is the need for a change of attitude on the part of US policymakers and the public -- a determination that continuing inflation will no longer be accepted as part of the economic fabric of society and, yes, can be reduced. Infortunately, an "inflationary expectancy" has permeated the US, illustrated most dramatically perhaps by the increase in federal deposit insurance for bank accounts. Lawmakers concede such insurance has been raised to $100,000 from $40,000 because it is assumed inflation will continue for many years.
There is today, moreover, a political constituency of Americans who profit from inflation (at least in the short run). They do so through such devices as cost-of-living escalator clauses in their pay contracts; through dealing in rare commodities and precious metals that often post spectacular price gains during periods of inflation. The federal government, meanwhile, is perhaps the biggest profiteer of all, since rising pay levels, prompted by cost-of-living raises, mean rising tax receipts for federal coffers.
Mr. Reagan must quickly establish a nononsense approach in dealing with inflation. It is argued among his senior economic advisers that the chief culprits in the inflation cycle are budget deficits stemming from too rapid growth in federal spending. The solution, as they see it, is to reduce that spending through budget slashing while bolstering the efforts of the Federal Reserve Board to reduce the rate of increase in the money supply. By using a mix of fiscal and monetary measures, the Reagan camp says, the inflation rate should eventually start to drop.
Mismanagement, waste, and some graft (remember the recent scandal involving the General Services Administration?) have undoubtedly crept into the federal budget. There are some areas, we are sure, for the kind of pruning that Mr. Reagan has called for, although only 25 percent or so of the budget is actually open to cutting. To build a public consensus for his policies, however, Mr. Reagan has to demonstrate he is willing to take the political heat from special interests when he goes after programs he deems unnecessary or too costly. He must be firm, for instance, in resisting excessive federal pork-barrel projects. President Carter, to his credit, tried but eventually yielded in many cases.
Mr. Reagan will also have to convince Americans he is prepared to be as tough on unjustifiable programs that help industry as on those affecting working-class segments. When will a president have the courage, for instance, to do away with subsidies for the tobacco industry?
At the same time the Fed must be encouraged to get back to its monetary restraint. Such belt-tightening, however, need not preclude an initial tax cut next year as now proposed by Mr. reagan and a growing number of lawmakers. Such a cut should be primarily geared to business expansion through enlarged depreciation allowances, while providing some relief for consumers who will be facing not only a substantial hike in social security taxes in 1981 but also the likelihood of higher food costs. A tax cut is also necessary to help ease the US back into recovery -- besides helping prevent a further slump, as some economists now forecast. The task for the new administration will be to design a tax cut that is not itself inflationary.
Whether fiscal and monetary policies by themselves will be enough is open to question, however. There is mounting convern in some economic circles about what appears to be the absence of a gOP strategy to deal specifically with controlling the wage-price spiral. Like President Carter, Mr. Reagan rules out wage and price controls -- correctly, we think. But he is also expected to quickly abolish wage and price guidelines and to slash the staffing of the Council on Wage and Price Stability.
Where, then, does not leave the administration when confronted with sometimes unreasonable wage and price demands from unions and industry? Mr. Reagan will be faced next year with contract wage negotiations involving 2.5 million workers in a number of strategic industries. And what about frequent price hikes from such industries as autos? will "jawboning" be enough without some form of guidelines? Top Reagan advisers like former Treasury Secretary George Shultz believe that the overall long-term approach -- the total financial "environment" -- will hold the wage-price spiral down.
We hope he is correct. Given the President-elect's persuasiveness, jawboning -- or a gentle variation thereof -- will probably characterize the Reagan years. The current Carter administration guidelines, for their part, were too frequently inequitable and too often breached. Thus, their absence will likely be little lamented. But would it not be prudent for the Reagan team at least to be looking into a standby wage-price policy, perhaps something as innovative as its current tax-cut proposals"
Finally, better ways must be found to allocate scarce capital resources among industries. The aim should be to encourage the growth of new industries, rather than just prop up dwindling ones, whatever their past glories. That means a willingness to examine the whole tax structure with a view to creating more investment capital by making savings once again attractive to Americans. Americans will save when there are financial incentives for them to do so, and when they again have enough discretionary income to salt away that "penny a day." The plain fact is that few American families today, given spiraling inflation, have much left to save.
On a broader level, getting the US economy moving again will also require firing up the enthusiasm of individual Americans to do their part. To be more efficient and more productive in their own lives, in other words.There is still room aplenty to prune away personal habits that add to inflation. Like taking the car when a bus ride would do. Or buying shoddy products at high prices.
We have no doubt of the determination of President-elect Reagan to move swiftly and successfully in tackling inflation. Nor do we have any doubt that the great majority of the American people wish him well in that pursuit. Perhaps that public good will in itself is the greatest single asset the President-elect has. Thes is the force he must harness. The United States, after all, is a resilient, innovative society. It once overcame the ravages of depression. It can do the same with inflation.