Enforced savings could be one way to keep inflation under control
A ''tax increase,'' refundable with interest in the future, is needed now. This would be a form of compulsory savings. Since there is a determined White House opposition to a tax increase urged by economists, financiers, and many members of Congress, another means must be found to accomplish the same goal. The goal sought by all, including surely the White House, is to prevent the return of rapid inflation that would abort the present recovery. This proposed tax could be acceptable to all parties.
Its advantages become apparent when an analysis is made of a remarkable pair of present facts: We have very favorable dollar exchange rates and, in spite of this, an extremely unfavorable US trade balance. Analysis is also needed to head off some dangerous policy initiatives that are being strongly advanced.
The unfavorable balance of trade means simply that we are buying a great deal more goods and services from foreigners than they are buying from us. As a consequence there is great pressure to limit imports in order to increase the number of jobs in our country and to get our unemployed back to work. The pressure comes largely from the unemployed and their unions as well as from their former employers. But before we take such action, which would be an historic reversal of our stated views in favor of free trade, we should understand the implications of the strength of the dollar in world currency markets.
In former decades we learned that an unfavorable balance of trade was associated with a weakening of a country's currency, quite the opposite of what we are now observing.
Under the gold standard, with each nation carrying its own reserve, there would have been an outflow of gold from the United States and a consequent tendency for a credit tightening domestically, with attendant high interest rates. These then would combine to slow economic activity, drop prices, and create unemployment.
In other countries, those exporting heavily to us and acquiring the gold we were losing, just the opposite would be occurring. Their economies would be prospering but their prices would be creeping upward.
Under these changing circumstances, it was to be expected that we would start exporting more and importing less, while foreigners would find their sales to us decreasing and their buying from us increasing. Thus our outflow of gold would decline and reverse itself, while their inflows would also turn around. That this process of ''adjustment'' would cause harmful dislocations for both parties was a most unfortunate consequence to which economists, on the whole, gave little attention.
In the new age of floating exchange rates under the aegis of an international keeper of the reserve, the International Monetary Fund, a somewhat similar process of adjustment of trade imbalances was expected to occur. Under these arrangements, a country with a large trade deficit was expected to see a weakening of its currency against other currencies and, consequently, would find its imports rising in cost, and its exports falling in price. These changes would tend toward the reversal of its unfavorable trading position. Of course, there would be dislocations of labor and industry as there had been before.
But recently these adjustment mechanisms have not operated. Despite its burgeoning deficits in international trade, the US has seen its dollar attaining and retaining remarkable strength against other currencies. This implies, and data demonstrates, that many foreigners, rather than dumping their excess dollars in world markets for other currencies, are holding dollar assets. Many are delighted to turn them in for US securities. If they bought debt securities, they are garnering substantial interest payments, and if they bought stocks or real estate, they have been abetting and sharing in the price advances such assets have been experiencing.
This return of US dollars to our shores has come about not only because of the promise of our economy, its booming technological advances, and the mitigation of inflation and high interest rates, but also because of the strength of socialist parties abroad and numerous and disturbing wars, insurrections, and the like. We are, perhaps somewhat unwittingly, in a very fortunate position.
This flow of US dollars from foreigners is providing funds for our industrial expansion and helping to re-employ our unemployed. It is serving as a substitute for domestic savings and decreasing the ''crowding out'' effects of our grossly unbalanced government budget. The idea of crowding out is that private industry may turn away empty-handed from security markets when government is taking too large a portion of the funds offered in such markets.
But we cannot expect foreign flows to be sufficient for this purpose, nor should we ignore the increasing export of ownership of US industry. Moreover, we must not ignore the threat that small US savings, in spite of rising US incomes, poses to recovery. Since small savings imply heavy buying of goods and services, they could lead to a renewal of inflation. Such a renewal could cause, and would be made worse by, a dramatic reversal of this flow of foreign funds. Such events would cause dolor in our stock and bond markets.
What we must do is increase our taxes, and the very best way to do this would be to allocate the tax increase to the involuntary purchase of government debt by taxpayers. This would provide citizens with government bonds that, after a period of years, they could liquidate against their needs at that time. Such a ''reserve'' of purchasing power could bail us out of a future economic downturn.
Such a program now of ''forced saving'' would take a burden off goods markets and thus lower the possibility of inflation, considerably lessen the burden on the bond market, lower interest rates, and thus decrease any crowding out. Such a scheme would assure us a long period of economic expansion without overheating and upsets.
Does anyone have a more palatable way to do what is so badly needed, namely, to increase taxes?