Next Round Against Inflation

Carter makes a new start, but problems are tangled, and gains will be slow

"Inflation has become embedded in the very tissue of our economy." --President Carter in his speech last week.

The metaphor may be strained, but the perception is as realistic as it is frightening. Since the late 1960s, inflation has first crept, then leaped upward, expanding its list of victims to include just about the whole of U.S. society. A rare investor, rich and savvy enough to buy Renaissance paintings, Chinese ceramics or African diamonds, may still make money out of inflation, but for almost everyone else the inexorable rise in prices makes economic life a debilitating race in which one must run ever harder just to stay even.

The worker's raises have become a hollow joke; for him the '70s has been a decade of nearly zero growth in living standards. Weekly wages of the average nonsupervisory employee have jumped 86% since 1967, but because of high inflation and high taxes, real spendable earnings have increased only 2.8%. The squeezed, middle-class homeowner often reaps little or nothing from the rise in value of his house; if he sells, he will have to buy another that probably costs even more for the same or less room. Many of the poor have been denied the opportunity to join the middle class because the cost of doing so keeps going up. The federally defined poverty line for an urban family of four has risen from $3,968 in 1970 to an estimated $6,190 now.

Inflation seems immune to all antibodies. Wage-price controls held it down in 1971-72, but as soon as they were eased living costs soared. OPEC oil price gouging and crop failures round the world further lifted prices in 1973-74, but the inflation rate has not returned to "normal" (whatever that might be), even though, OPEC is observing a price freeze and harvests are filling bins. The 1973-75 recession for a while cut the inflation rate in half, from 12% to 6%, at the savage price of almost 9% unemployment in early 1975. But 6% inflation is still too high for the U.S. to tolerate without enormous pain--and now the underlying rate seems to be rising again, perhaps to 7% this year. After that, who knows?

Worst of all, inflation has insinuated itself into every economic and social decision, perverting and frustrating the best-intentioned Government efforts to make life better for its citizens. Attempts to reduce unemployment can easily aggravate inflation by leading to excessive spending and deficits. Efforts to improve the lot of old people and the poor, or to clean up pollution, can and do make inflation worse. When the Government increases Social Security taxes and the minimum wage, and pours on more and more federal regulations, it imposes extra costs that business passes along in higher prices. Finally, inflation seems to have become self-perpetuating. One example: uncertainty about whether a new factory will repay the costs of building it causes business to hold back on investment in new plant and equipment. The lack of investment reduces potential production and output per man-hour, pushing prices up still further.

The very devilishness of the complexities, however, forces Government to keep trying new ways to tame inflation. No policymaker can pretend to himself any longer that it will subside on its own, and every national poll identifies inflation as the issue that most worries voters.

Last week, in a solemn address to the American Society of Newspaper Editors, President Carter outlined his approach to keeping prices down. His stress, appropriately, was on reducing the Government's own contributions to inflation, thereby setting an example for the private economy. To that end, Carter:

>Pledged to hold the federal deficit for fiscal 1979 to the $61 billion he has budgeted ("as large as we can afford") and to veto any bills that threaten a deeper bath in red ink. He warned that bills now being seriously considered by congressional committees might push the deficit $9 billion to $13 billion above target.

>Announced that he will limit raises for 3.4 million federal civilian workers and military personnel to 5 1/2% this year, v. the 6 1/2% previously budgeted (unless Congress forbids it) and will freeze the salaries of 2,300 political appointees. The President also sent letters to all Governors and many mayors asking them to hold down the pay of state and city employees.

>Vowed to make federal regulation less burdensome on business, and thus less inflationary. The President was unspecific, but he cited as an example of what could be accomplished the deep cuts in air fares since the Civil Aeronautics Board has turned to encouraging reductions.

>Renewed his plea to labor and industry to bring wage and price increases below the average of the past two years. Carter specifically called on high executives to freeze their own salaries and bonuses as a kind of anti-inflationary example to the troops. He added that the Council on Wage and Price Stability will begin a series of meetings with executives in the steel, paper, aluminum, railroad and other industries to formulate goals for wage-price boosts.

>Appointed Robert Strauss, the witty and smooth-talking Texan who has become the Administration's trade negotiator and chief troubleshooter, as the President's special counsellor on inflation. That presaged a step-up in efforts to jawbone against excessive wage-price boosts, with Strauss as the premier jawboner.

This program is scarcely bold or innovative. Indeed, parts of it merely repeat pledges and exhortations that the President made earlier. Alan Greenspan, who was Gerald Ford's chief economic adviser, commented bitingly: "If it had been the first time I heard the speech, I would judge it exceptionally good--right in tone, right in balance, voicing the type of general philosophy that I support. The problem is that I have heard it all before."

Businessmen were disappointed that Carter had not vowed to cut the budget deficit, which they regard as the root of inflationary evil. That was also the reaction of Federal Reserve Chairman G. William Miller, who sounds every bit as independent of the President as did his predecessor, Arthur Burns. Miller urged the Administration to delay by three months the $25 billion tax cut that the President is proposing; Carter, he said, should ask Congress to make it effective on Jan. 1 rather than Oct. 1. That, said Miller, would cut the deficit by $9 billion. In riposte, Treasury Secretary W. Michael Blumenthal insisted that the tax cuts must take effect Oct. 1 if the economy is to keep growing and unemployment coming down. However, Miller's idea is being considered in the White House.

Even given Carter's conviction that cutting the deficit sharply carries the risk of recession, he could have put together a much tougher anti-inflation program. For example, he could have asked Congress to repeal antiquated laws that drive up wages on construction projects and force businessmen to ship many goods in costly U.S.-flag vessels. Nonetheless, Carter's speech marks a start in the right direction. He is correct in stressing that the Government must begin by reducing its own contributions to inflation--because those contributions are both highly important and infinitely more subject to change by White House pressure than are the decisions of labor leaders, corporate executives and consumers.

At minimum, the President has finally acknowledged that inflation is "the most serious threat" facing the economy. As late as January he had given policy priority to promoting growth and cutting unemployment. But unemployment has declined substantially in the past two years, and industrial production in March took its biggest jump in a year. Even the long depressed stock market suddenly roared up last week on record volume. Meanwhile, inflation has stuck at 6%, and now is heading higher. Said Carter: "It persists because all of us--business, labor, farmers, consumers--are caught on a treadmill which none can stop alone."

All too true, and trudging the treadmill is putting a growing strain on nerves and tempers. For the most part, inflation causes not outright hardship but constant, grinding irritation. Hard work, raises and promotions do not make life materially better; for many people, simple pleasures such as a movie or dinner out become expensive indulgences.

For young marrieds, inflation makes the early years more of a struggle than ever. David and Cynthia Fernandez married in 1975 in Oakland, Calif., and two years later bought a house. "Our payments were double what we had been paying in rent," says Cynthia, "so I cut our food bill by 50%. Instead of buying five pork chops I buy three, and we don't have pastries and candy any more." Even so, David's salary of $14,000 as a teacher will not cover expenses, so Cynthia has taken a job as a payroll clerk, leaving their four-month-old daughter to be cared for by Cynthia's mother. There are no savings to guard against emergencies, and one occurred last week when the couple's washing machine broke down beyond repair.

For low-income people, inflation robs life of its small amenities. Dianne Fields and her husband Michael, a seasonally employed construction carpenter in Concord, N.H., used to dine out once a month and often attended movies. Now all Michael's earnings are swallowed by the rising cost of necessities. Says Dianne: "We used to go for a drive in the car on Sunday afternoon, but gas has got so expensive we can't afford it."

Psychologically, the strain of inflation may be greatest on middle-class people who grew up expecting a constant increase in comfort and affluence. "The values I was taught are no longer applicable to this world," says Frank Parker, 36, a sales representative for an appliance firm in Portland, Ore. "You can no longer take a college degree, go out into society, try to raise a family and live comfortably. That happily-ever-after line was a punch line for fairy tales."

Parker's annual income has risen $10,000 in the past five years, to $25,000 now, but he finds himself less able to meet current expenses. Says he: "For the first time in my life, I became overdrawn in my checking account this month without even knowing it. Rising insurance rates for the car and the house, and rising property taxes are the things we feel the most."

The frustration and fear of the future bred by inflation are social poisons. Parker bitterly reports that his parents, who had looked forward to a comfortable retirement on Social Security, have been squeezed out of their house into a small condominium, and he fears that the $75,000 he will collect from his own endowment insurance policy will be a pittance by the time he retires at 65. "The way I see it," says he, "the Government is running one sham [Social Security] and the private sector [the insurance companies] another. It's easier for people on welfare than for people like us to feed, house and clothe their kids, and there are all kinds of grants and programs to help get their children an education. I went to college and fought all the liberal fights, and I still am a liberal Democrat who believes in social programs for the poor. It's just that we, the middle class, can't afford them any more."

It is dangerous to say that the U.S. could adjust even to a 6% inflation rate, if only that pace could be stabilized. Carter himself last week, while expressing alarm about the current speedup, inexcusably referred to last year's rate as "reasonable and predictable."

Reasonable? A continued 6% inflation rate would reduce the buying power of a current dollar to 25-c- by 2001. If that happens, mistrust of the Government and business, and hostility between social groups, would become more envenomed.

Predictable? Acceptance of a 6% inflation rate would practically guarantee that it would promptly shoot higher. Inflation never distributes itself evenly over the economy; if the overall rate is 6%, some groups will have raised their incomes and prices more than 6%, some much less. Those who are temporarily ahead struggle to stay in front; those who fall behind strive desperately to catch up, and their efforts push the price level still higher. This competitive scramble is a powerful reason why the inflationary cycle keeps spinning long after some of the forces that gave it a starting push (the Viet Nam War, the crop failures of 1973-74) disappear.

More and more long-term contracts--for labor, raw materials, industrial supplies, plant construction--have built-in inflationary escalator clauses. They make business costs more predictable, but they I also ensure that today's inflationary pressures will still be pushing up some wages and prices, say, three years from now.

Also, and of supreme importance, output per hour worked in the economy has grown an average of only about 1.7% a year since 1967, v. 3.3% in the previous decade, lessening the ability of employers to grant almost any wage increases without raising prices. There are many reasons for the slowdown in productivity: growing numbers of unskilled women and teen-agers in the work force; a shift of workers from manufacturing to service trades or state and local governments, where productivity gains come hard, if at all; government regulation that forces companies to spend on antipollution and safety devices the money that could otherwise be used to install more productive machinery; and lagging spending for research and development.

An inflationary spiral could well lead to a shattering recession. Inflation already is making businessmen timid rather than expansion-minded. Explains Donald J. Donahue, vice chairman of the Continental Group (formerly Continental Can Co.): "If inflation goes up, interest rates go up, and if interest rates go up, the rate of return you have to make on an investment also goes up. Therefore, we tend to do fewer things and employ fewer people." Add to that the very real possibility that consumers would slow their buying on houses, cars and other costly goods, and all the ingredients would be present for a downturn and rising joblessness.

Given the power of the forces promoting inflation, the Government's ability to slow it is limited. Carter's pleas for voluntary wage-price restraint, in particular, are a weak reed. But if controls are sensibly rejected, and numerical guidelines are ruled out as a form of soft controls, what is left?

Much could be accomplished by getting the Government's own house in order. Regulation could be made far less costly, without surrendering the Government's environmental and safety goals. Environmental regulators often prescribe detailed and expensive procedures that industry must follow. For example, Washington is almost sure to require that "scrubbers" be installed on the smokestacks of all coal-fired plants, even if they burn low-sulfur coal. The Council on Wage and Price Stability urges that the regulators instead set standards for the discharge of pollutants, levy heavy penalties on violators and leave it up to industry to figure out the least costly means of complying.

The Government also could develop special programs for coping with highly inflationary sectors of the economy. The standout one is the field of health care; Carter noted that daily hospital charges have rocketed from $15 in 1950 to more than $200 now, and doctors' fees have risen much faster than other consumer prices. One big reason: Government and private health-insurance plans guarantee payment of "reasonable and customary" fees, which in practice has meant just about anything that a doctor or hospital can get away with. Carter last week pleaded with Congress to pass a bill he sent up last year setting a ceiling on the increase in revenues that any hospital could reap (9% the first year, less thereafter).

Further, HEW Secretary Joseph Califano announced some administrative measures designed to put a lid on medical inflation. Example: within 30 days, HEW will order that Medicare payments for twelve common lab tests be limited to the lowest charges widely available in a community, rather than average charges; the expectation is that high-cost hospitals will lower their charges rather than lose Medicare patients.

Cutting the federal budget is an alternative that Washington is not yet vigorously pursuing; right now all the pressures are to add a billion here and there. Nonetheless, there are ideas, of widely varying reasonableness. Some conservatives would shrink foreign aid, welfare, Social Security benefits. Alan Greenspan suggests reducing expenditures for public service employment of the jobless, a most dubious economy. Rudolph Penner, director of tax policy studies of the American Enterprise Institute, a conservative think tank, more sensibly would pare the roughly $68 billion in federal grants-in-aid to state and local governments, many of which are now running budget surpluses.

The standard target of liberal Democrats is the defense budget, which has leaped from $74.5 billion in fiscal 1973 to $117.8 billion budgeted for fiscal 1979, largely because of increased personnel costs. A presidential panel last week recommended reform of exorbitant military pensions. Now, a 20-year veteran can retire at 37 and draw a full pension for the rest of his life. Thomas V. Jones, chairman of Northrop, a major defense contractor, charges that the Pentagon and its suppliers have come to accept cost overruns as a way of life. He urges that the Defense Department sign fixed-price contracts with no renegotiations allowed. If costs cannot be estimated accurately, says Jones, the military should award a prototype or development contract rather than a production contract.

Even the most determined anti-inflation program will yield results only slowly, and at first these results may be disappointingly small. That is all the more reason for starting the attack now. Inflation has indeed become part of the tissue of the American economy--and to let diseased tissue spread is a certain way to ensure disaster.

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