Back to the Dismal Science

A revolution of falling expectations is spreading among U.S. economists. For years they have thought that if the right mix of policies could be found, the nation could enjoy full employment with reasonable price stability. Growing numbers now fear that the goal has become unattainable and that for years to come the world's mightiest economy will produce both more unemployment and more inflation than scholars in the past have defined as acceptable.

For the past dozen years, the official definition of "full employment," at least as a target that the Government should try to reach by fiscal and monetary policy, has been a jobless rate of 4%.* Now, President Nixon's forthcoming budget is expected to set a new target between 4.5% and 4.8%. Meaning: any reduction in unemployment below that level can be accomplished only by overheating the economy and risking serious inflation. In the past two decades, U.S. unemployment has not averaged 4% in any peacetime year, though it went lower during both the Korean and Viet Nam wars. Last month it rose to 4.9% from 4.7% in November.

The change of mind on inflation has been even more striking. As late as 1969, Nixon Administration economists thought that the U.S. could and should hold price increases over the long run to an average of a mere 2% a year. Some critics believed 3% to be a more realistic figure. But at a recent meeting of TIME'S Board of Economists, Banker Beryl Sprinkel reluctantly counseled acceptance of "a rather perpetual, sizable inflation on the order of 5%" yearly. In a recent poll taken among some members of the American Economic Association, no fewer than 43% forecast that inflation will average 5% annually for the rest of the 20th century.

At that rate, prices would double every 14 years.

The cheery optimism of the 1960s has been eroded by an awareness of deep structural changes that have occurred in the economy. Unemployment rates have been pushed up in recent years largely by a huge increase in the numbers of women, blacks and teenagers looking for work. Often poorly educated and unskilled, these would-be workers have trouble finding jobs even during a boom. Under present conditions, about 90,000 surplus job hunters produce a one-tenth point rise in the unemployment rate.

Inflation has worked its way into the innermost interstices of the economy. A key reason is that, though it may change its definition of full employment, the nation remains committed to using the full spending powers of the Government to avoid a deep recession. Thus the U.S. must forgo the breaks in the price spiral that recessions used to produce.

Labor unions have seen to it that wages go only one way: up. Manufacturers sometimes can offset the higher costs by raising output per man-hour; but service industries, which account for more than 40% of the economy, find that difficult. And as U.S. industry grows more concentrated, businessmen can raise prices more confidently than they could if there were more competitors around who might undercut them.

Quite as important, the economy has grown far beyond the point at which it can supply all the needs of its own citizens and of export buyers by using home-produced raw materials. So the U.S. is increasingly at the mercy of inflationary trends in world commodity markets. American inflation has been fanned in recent years by such disparate events as the Arab-Israeli war, a low Soviet grain harvest, copper-industry strikes in Africa and even a change in the ocean currents off Peru (which temporarily wiped out the catch of anchovies, a key source of protein in animal feeds, causing panicky foreign buyers to bid up the price of U.S. soybeans).

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In such an environment, the traditional tools of economic management are no longer enough to keep the economy in good health. Heavy government spending and increases in the money supply that boost demand are more likely to tempt employers to bid up the wages of skilled workers than to hire the unskilled jobless. Cutting back the flow of money to the economy can produce a shallow recession, but as Americans learned in 1970, prices are likely to keep rising rapidly anyway.

Some more specific approaches hold promise. Manpower training and public-service-employment programs could cut the jobless rate without producing ruinous inflation. Prices could be held down somewhat by repealing such measures as the Fair Trade acts, which set retail price floors under certain products, and the Jones Act, which prevents U.S. shippers from using low-cost foreign vessels between two U.S. ports. Cost-of-living escalator clauses in labor contracts and the Social Security Act could keep incomes ahead of price boosts. Even so, the more economists try to be realistic in talking about the depressing prospects for unemployment and inflation, the more they look once again like practitioners of the dismal science.

* Though the Kennedy Administration originally set 4% only as an "interim" goal on the way to a lower rate.

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