Four views -- How Reagan can corral the economy; WHICH WOULD YOU PICK IF YOU STOOD IN HIS BOOTS?

The times have changed. Today we must cope with the upward momentum of the wage-price spiral as it adjusts to the self-fulfilling expectations that have developmed since the mid-1960s. To break out of the spiral by conventional means would require years of stagflation, lost jobs, and bankruptcies.

What we need, therefore, is some way to back up conventional monetary and fiscal restraint with shock tactics designed to reverse expectations. We need some form of intervention that will approximate the results that restraint should have produced through competition in the marketplace.

Logic calls for a wage-price freeze, followed by an incomes policy that will stabilize unit labor costs. The freeze should last only until appropriate monetary and fiscal policies, previously blunted by the spiral, at last begin to bite.

To have any chance of success, controls must reinforce rather than substitute for monetary and fiscal restraint.

We have seen that the old-time religion by itself, in the shape of current monetary and proposed budgetary restraint, at best promises only very gradual deceleration of inflation. The role of controls should be to add to the effectiveness of monetary and fiscal restraint. By adding moral suasion and legal compulsion, they should reinforce the market incentive for sellers to ask for less when labor and product markets soften.

The lesson from the administrations of Kennedy, Johnson, and Nixon should serve, certainly, as useful guidelines.Let me list them.

* Limitations on wages and prices should be legally enforce. The 1962-1966 controls failed because they lacked enforcement.

* Government must take particular care to follow its own rules. The federal government failed to do so in 1965, when it granted its employees more than its own guidelines permitted.

*Cost-of-living adjustments, even in existing contracts, should not be allowed. To try to shield the wage earner by indexing his wage will merely promote further inflation.

*Wage increases should not be based on real or fancied productivity advances in individual firms or industries, but only as they are realized in the economy as a whole. Such advances should be reflected in price cuts for products; otherwise needed adjustments in relative prices cannot occur.

*Second-and later-year increases in existing long-term labor and commodity contracts should not be honored; otherwise, gross inequities will occur between groups with differing contracts.

The plan is simple, and can be implemented in three phases.

Phase 1 -- The first 12 months. To reverse expectations -- that is, to cause people to expect stable prices thereafter -- the initial freeze must be complete. However, some leeway might soon be needed with respect to prices of goods entering foreign trade.

An appeals mechanism (price and pay boards) should be set up; but the public's sense that the "expectations spiral" has been broken should be confirmed by a policy of few or no exceptions.

However, a productivity guideline (i.e., annual percentage increase in man-hour productivity in the economy as a whole) should be annouced at the time of the freeze. Any group of workers or employers that agreed to abide by this wage guideline for a two-year period would, on the second anniversary of their agreement, be exempted from controls.

Phase 2 -- Second year of controls. On the first anniversary of the freeze, all employers and workers who had not yet signed contracts (to abide by the productivity guideline) . . . would be required to observe the guideline for two years, or until the third anniversary of the freeze -- on which date all controls would be abolished.

During Phase 2, the price and pay boards, which had so far granted almost no exceptions to the freeze, would now look into hardship cases.

However, no exceptions to wage control should be granted on grounds of higher living costs, for to do so would risk reviving the spiral. For the same reason a claim that higher material costs justified higher selling prices should be recognized only in the case of farm products and imported materials.

Phase 3 -- Third and final year of controls. As the two-year contracts concluded during phase 1 expired, the parties would be released from all obligations. On this third anniversary, prices, too, would be completely decontrolled.

If President Reagan licks inflation, he may well go down in history as the savior of American capitalism. If he has the courage to adopt such a plan and the charisma to sell it to the nation, he will require the wholehearted support of many people -- but especially Paul Volcker and David Stockman, and Secretary Regan at the Treasury.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.