THE ALUMNI MAGAZINE
THE ALUMNI MAGAZINE seems to be a much better forum for developing inflation fighting policies than the Congress. Here the suggestions have diversity, irreverence, humor, and temptation. But even with all these virtues they seem to fall into rather basic, even classic categories:
• Raise taxes, cut government spending. This would be the impact of taking away particular tax deductions and creating incentives for budget balancing. It is an approach that will reduce upward pressure on prices by holding down both public and private spending. The problem is that it also has an effect on output and employment and that it is a difficult policy to activate because each of us wants the tax increase and the spending decrease to fall on others.
• Hold down the money supply. Policies that tie the money supply to gold or that hold money supply growth to some given rate will do this. The money supply may not be the only determinant of price movements, but it is an important one. With the Federal Reserve we have tried to manipulate that supply to keep inflation, unemployment, and balance of payments where we want them. We have failed. It's unpleasant to admit failure, but unreasonable to ignore the evidence that attempts to manipulate money are a principle cause of inflation.
• Raise productivity. Breaking up monopolies, encouraging efficiency in government, and similar suggestions all mean using resources better. If we use them better and have more output for the same input then we achieve our real objective, which is not just to slow inflation but to live better. Who could argue with this? But who would believe that sudden bursts of monopoly and government inefficiency in the late 1960s drove prices up and that anti-trust suits or government work incentives will significantly slow price increases?
• Shift buying away from things that have had large price increases. This is what cutting down on electricity or fuel use or discovering Costa Rica means. The shift is natural and requires little exhortation. It helps put some lid even on oil prices, and it indicates that the adverse impact of inflation is probably a little bit exaggerated because buyers move away from the goods that go up most in price.
• Get rid of the upward ratchet on wages and prices. The suggestion that wages be allowed to fall as well as rise is along this line. We have built into our contracts and into our laws, minimum wage and others, a great many features that permit increases but discourage reductions. If some prices and wages should go up to acknowledge changing conditions and none can go down, then inflation is unavoidable. Reworking the institutional structure to correct this is no more an immediate cure for inflation than anti-trust or government efficiency incentives but, just the same as the other suggestions, it makes sense for our long-term welfare.
• Exhortation, moral suasion. The policy of convincing people to save, cut down on travel, or buy more carefully for society's sake, rather than their own, has the appealing sound of reason and collective self-sacrifice to it. It may work with some who feel they were not doing the best they could for their families with the dollars they had available. My guess is that it promises nothing more than additional recycling costs for WIN buttons.
The suggestions received by the ALUMNI MAGAZINE are an interesting set, but their timing and the timing of this comment may be more important than anything explicitly said about fighting inflation. Here we are discussing inflation when the unemployment rate is moving beyond seven per cent and the Congress and Administration are designing recession remedies. Our timing is off. Theirs will be too, and the anti-recession actions will probably fuel later inflation. The problem for public policy and for economists seems quite clear in this. We may know what to do but we certainly do not know when to do. Perverse timing of public policy actions, not inflation or recession, is the problem we have to consider.
TUCK SCHOOL
