CREEPING INFLATION

How to Keep It from Galloping

THERE are some who say that we cannot enjoy the blessings of progress without incurring in some degree the ravages of inflation. I don't believe it. I refuse to adopt the defeatist position that inflation is the alternative to unemployment."

Thus, William McChesney Martin Jr., chairman of the Federal Reserve Board, last week angrily waded into a raging economic argument. The subject: creeping inflation. That inflation is creeping nobody can deny. The August cost-of-living index figures show the twelfth consecutive monthly rise (see NATIONAL AFFAIRS). The argument is between those who say that inflation of any kind is evil and those who accept a limited amount of it as the inevitable price of prosperity and an expanding economy.

Prominent among the limited inflationists is Harvard's Professor Sumner H. Slichter. The U.S. has had a rising price and wage level almost from its infancy, he argues, simply because an expanding economy steadily bid up the prices of labor and materials. Both sides agree that in a perfectly run economic world it might be possible to avoid inflation if wage rates, labor productivity and profits all rose together in direct proportion to output. But even the classic economists foresee no such perfect world. Thus, if the U.S. is to continue to expand, the prices of labor and materials are bound to rise.

Furthermore, says Slichter, there are good reasons why wages and prices go up more easily than they go down. "Wages in the American economy do not readily drop in contracting industries" because of union strength. Moreover, Slichter argues, when general business threatens to contract and drop prices, antirecession measures are applied by Government before falling prices lose all the ground gained in the last boom, giving a higher jumping-off point for the next rise.

Slichter finds considerable agreement from Harvard's Professor Alvin Hansen, who maintains also that the word inflation is often misused, notably as it applies to the U.S. It is inexcusably "loose," says he, to call what happened in Germany after World War I inflation and also use inflation to describe the "comparatively moderate price rises in U.S. history." The German case was "pure inflation" because there was no offsetting increase in output, reinvestment and in per-capita real income. What has happened in the U.S., says he, is something quite different. The best way to describe it is "price adjustments to output changes." Hansen says it would be a tragic mistake to set a "fixed goal with respect to price stability." The nation should keep its eyes glued on goals of maximum production, employment and purchasing power; otherwise, says he, "we shall not even discover what our potentialities for growth are."

These views hot up the collars of classic economists such as Dean Neil H. Jacoby of the business school of the University of California at Los Angeles. In the Harvard Business Review he called Slichter the exponent of a "defeatist school," which is coldly callous to the fact that creeping inflation has "pauperized countless retired and disabled American citizens" living on fixed incomes. Jacoby urges the Government to make its goal an "absolutely stable price level." This means stopping the wage-price spiral by tightening credit and reducing federal spending, leading to less buying, bigger inventories, production cuts, lower profits, and layoffs. He argued, in effect, for a small recession.

On Jacoby's side are such authorities as C. Canby Balderston, vice chairman of the Federal Reserve Board. If people become convinced that the Government intends to make inflation permanent, he says, an "inflation psychology" will corrupt all decisionmaking. Businessmen will not fear overexpansion because higher profits will bail them out. The public will stop buying life insurance and fixed-income bonds and scramble to buy land, commodities and equities, bidding up prices. Says Balderston: "The infant ceases to creep. It learns to walk, then run and finally gallop over the brink of the precipice" and bring the bust "which everyone agrees must be avoided."

Actually, most signs last week indicated that the creep, far from increasing to a gallop, was slowing to a stop. Sales of fixed-income bond issues are booming. The commodity market, classic escape for capital in inflationary periods, is in the doldrums. Washington officials see a chance that the September consumer price index figures will show no rise over August because of the seasonal drop in used-car and food prices. Eventually they expect that inflation will begin to creep again. To keep it from accelerating to a gallop, both sides agree on the need for wise use of credit and fiscal controls. Says Slichter: "The greatest danger confronting the economy today is that political pressure will force abandonment of credit restraint."

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