Heller 4 April 6, 1977 authorized to assess those statements. With the general thrust of One Third, let me turn to the touchy area of COWPS' role in voluntary wage-price restraint. Any role it plays should be "up front." Instead of being part of the post-game round-up, COWPS needs to be in the regular lineup and batting order. might note here that on the government actions on which it has had a turn at bat during the game in recent weeks, it seems to be compiling a respectable batting average. Its analytical inputs into the big wage and price decisions of the private sector should also be during the act and not after the fact. To pronounce benedictions and maledictions on past events is undoubtedly educational and consciencesalving. But to bring timely findings to bear on decisions in the making is far more constructive: Whether it is called "pre-notification" or "advance discussion," the concrete. Whether it is called "jawboning" or "little chats," COWPS' inputs Heller -5 April 6, 1977 Whether it is called "guideposts" or "guidelines," or "guiding These are all emotional issues for those directly involved. can understand White House reluctance to fly in the face of George Meany's outraged roars against guidelines or pre-notification and the business community's "nyet" on jawboning. But if efforts to cut into the self-propelling price-wage spiral are to get anywhere, there has to be a vigorous, pointed, publicized, and well staffed-out (by COWPS) assertion of the public interest and the consumer interest in those major wage and price decisions that defy the competitive laws of gravity. And who but the President and his surrogates are going to assert that interest? For no matter how vital a stake the country has in defusing our excessive inflation, it remains sadly true that there is no organized, well-financed, clout-wielding lobby to roar back at George Meany and mount a counter-attack for jawboning, prenotification, and price-wage restraint. The constituency is there, but it is unorganized and diffuse. The White House has to represent it and lead the charge. But even in a voluntary system, doesn't that require the goad of guidelines, the prod of pre-notification, and the jab of jawboning? - A specific core guidepost figure for wages like the one that evolved out of our price-wage restraint program in the early sixties may not be practicable. Not only is it a red flag to labor, but given the great diversity as to cost-of-living provisions, catch-up status, work rules and fringe benefits in various labor contracts, it might not have the necessary flexibility. And it would be brittle and risky it might be shattered in one major confrontation with a tough union. What Mr. Carter can do instead is, first, set a tough and convincing example of self-discipline and vigilance on the inflationary implications of the Government's own actions. Second, operating through a new labor-management committee and supporting industry-by-industry committees, ask business and labor to follow suit. More specifically, work out with them (a) some reasonable goals for easing basic inflation down in the next couple of years, and (b) what those goals imply in terms of restraining increases in profit margins and wages. Third, to lubricate this 93-924 O - 77-10 Heller - 6 April 6, 1977 process, use tax inducements like payroll tax cuts (a) to enable employers to cut prices without cutting profit margins, and (b) to give employees a boost in takehome pay without boosting wages. - Instead of using coercion and a bludgeon, this process would rely on Presidential leadership and commitment, on consultation, persuasion, and admonition all backed by the force of logic and arithmetic. The "guiding principle," for example, might be that to get the basic inflation rate down from 6% to 4% would require business restraint on profit margins and a gradual winding down of average pay boosts from 8%-plus to 6%-plus a year. The goal would be to maintain decent profit margins and wage advances in real terms 6 minus 4 comes out close to 8 minus 6 while de-escalating inflation. - - As for COWPS' role in all this, it would occupy the analytical hot seat. Apart from working with CEA to develop the guiding principles, it would analyze and show the inflationary implications of alternative wage settlements and proposed price boosts. It would buttress White House assurances to any given union or business that the same logic was being pressed evenhandedly on others. That brings me to pre-notification. Without it, COWPS might be forced to follow a hit-or-miss process of analyzing those proposed price hikes and wage boosts that it was able to get wind of. With it, however, would have to come specification and listing of the big businesses and powerful unions who would be asked to pre-notify. In the present state of nerves in the economy, when an admonishing finger is held synonymous with a mailed fist, such specificity has its drawbacks. The slightest intrusion into private-sector price and wage decisions on behalf of the public interest is treated as if (a) it is another milepost on the road to serfdom and (b) it and will inevitably lead us straight into the inferno of mandatory price 10 wage controls. Seven years Would pre-notification and guided jawboning lead to direct controls? of Kennedy-Johnson guideposts and arm-twisting in the 1960s did not come even close to triggering controls they may well have forestalled them. And 2 years of Republican mandatory controls in the 1970s surely accomplished one of their managers' chief objectives, namely, to discredit them so thoroughly that politicians and the public would join the great majority of economists in their allergy to such controls. What has to be done to wind down inflation adds up to a very tall order indeed. The time to act is now when renewed expansion is underway and ample slack exists to provide room for maneuver. Once excess demand stares us in the face, it will be too late. THE WALL STREET JOURNAL April 6, 1977 The Battle Against Inflation By WALTER W. HELLER President Carter, the Congress and the country are about to consider a renewed campaign against inflation. This calls for both a hard look at the battle-worthiness of the traditional monetary-fiscal weapons of demand management and a new look at the less orthodox weapons aimed at the cost-push forces. supply constraints and structural factors that make up the hard core of inflation. What comes through with distressing clarity at the outset is that the steep price we are paying in unemployment and wasted capacity is buying us little or no progress in unwinding the price-wage spi ral. During the past 24 months, unemployment has averaged 8% of the labor force (closer to 10% if one adjusts for discour. aged workers and the part-time unem ployed). Operating rates in manufacturing have ranged between 70% and 80% of capac ity. Yet, leaving out the erratic factors of food and fuel, one finds basic inflation orbiting in a 5 to 6 range, with no discernible trend up or down, during the past two years. Thanks to falling food prices. the Consumer Price Index seemed to be breaking out on the low side of that range in 1976. but this illusion has now been dispelled. Wage and salary advances show a simi. larly stubborn pattern. Average hourly compensation rose at a 7.8% rate during 1975 and an 8.2% rate during 1976 (including an 8.4% rate in the fourth quarter). Clearly, the harsh discipline" of high unemployment and weak markets has done little to moderate wage and price advances in this period. Because 1977 inflation is at bottom a cost-push phenomenon-no excess demand or critical bottlenecks are in sight. and winter's freeze and drought are largely broken-the failure of weak prod. uct and labor markets to unwind the wageprice spiral sends a pregnant message to policymakers: Restraining aggregate demand by a Spartan monetary and fiscal diet might eventually bring inflation to bay, but it would be a painfully slow and bitterly costly process. Cuts Both Ways The foregoing record transmits another and more immediate message as well. The sluggish wage price response cuts both ways Just as inflationary salvation won't be found in running the economy way be. low par. so perdition does not lie in mod. estly stepping up the pace of expansion. It is a safe bet that the price-wage spiral won't speed up appreciably if real GNP advances at a 5% or 6% rate this year in stead of chugging along at the growth rate of the past 12 months The most respected economic models, both governmental and private, tell us that at present utilization rates in the economy. at least fourfifths-some go as high as seven-eighths-of any given fiscal or monetary stimulus will express itself as higher real GNP and only one-fifth as inflation. That means trading off one point of added inflation for four to seven points of extra GNP. Yet in the present state of jangled nerves in the financial markets, every uptick in the inflation rate-however clearly traceable to bad weather or cost-push pressures seems to trigger new fears and criticisms of expansionary policies and specifically. the Carter stimulus package. It seems ironic that the business and financial community, partly owing to a misreading of the inflation signs, should be directing its critical fire at the very moves that would generate stronger markets for their goods and services. higher operating rates. and consequent lower unit costs and stronger incentives for capacity expansion. But misdirected or not. the state of nerves is an economic fact of life. It is contributing to malaise in the stock market, to a wait-and-see" attitude on business capital spending and to delays in enacting Mr. Carter's modest proposals for fiscal stimu lus. And more fundamentally, the fact of today's 6plus inflation and the fear of accelerating it as we take up economic slack remain an important barrier to policies for bringing aggregate demand and business activity up to the full potential of the U.S. economy. Well-modulated demand management through fiscal-monetary policies remains a necessary condition for non-inЛationary expansion. But it is by no means sufficient. To remove the inflationary roadblock to full employment also requires direct action to forestall supply shortages and bottlenecks. to promote competition and reduce cost pressures, to overcome structural unemployment and improve productivity, and most urgently, to de-escalate the wageprice spiral. We need to take anti-inflation Board of Contributors What comes through with distressing clarity is that the steep price we are paying in in unemployment and wasted capacity is buying us little or no progress in unwinding the wageprice spiral. steps like these, as Mr. Arthur Okun artfully puts it, to make the world safe for prosperity." Among the measures that Mr. Carter might well consider for the longer pull are the following: Buffer stocks: To protect both consum. ers and industry from the 1973-74 type of shortages and resulting price explosions and to limit the power of foreign commodity cartels-our economic stabilization pol. icy should include a careful build-up and management of buffer stocks of oil, food. primary metals and other strategic raw materials. Bottlenecks: To spot bottlenecks and shortages in the making. an expert staff should monitor such key industries as aluminum, steel, paper and chemicals. Measures ranging from modification of import regulations and defense procurement schedules to accelerated amortization might be drawn on to help break impending bottlenecks. Energy: It will be vital to manage the energy program so as to (1) neutralize as much of the inflationary impact of neces sary tax and price increases as possible through innovative measures to deploy energy tax revenues in cost-reducing ways (see Tax policy" below) and (2) retard the rise in energy costs over the longer run by inhibiting wasteful use and stimulating production. Structural unemployment: Converting the structural or hard-core unemployedbroadly defined as those who can't get decent jobs even in a high-employment econ. omy-into productive contributors to soci. ety can help reconcile high employment and low inflation. Public policy needs to equip the disadvantaged with training and experience through a large-scale and sustained program of publicly assisted private-sector jobs. Productivity stimulus: Apart from upgrading of the human agents of production, we need to step up the investments in plant and equipment, technology. research and development that are needed to expand capacity, improve efficiency, and cut costs. Tax policy: When further opportunities arise to cut taxes, they should be used to buttress anti-inflation objectives. Exam. ples: "buy out" state and local taxes that enter directly into the Consumer Price Index, cut the employer's payroll tax and hence employment costs, cut the employe payroll tax as part of a bargain or com. pact to de-escalate wage claims. Moving to measures that can arbitrarily be classified as having a shorter fuse-and are prime candidates for inclusion in Mr. Carter's immediate anti-inflation program -one can catalog the following: Stimulate competition: Intensify antitrust activities and the dismantling of reg. ulations that throttle competition and prop up costs and prices. Reduce trade barriers. Government self-monitoring: Step up efforts by a strengthened Council on Wage and Price Stability (COWPS) to assess the inflationary impact of government programs and regulations COWPS has recently weighed in against selected protectionist measures. overly burdensome regulations and farm price supports. The use of government leverage: As a purchaser. for example. government should reexamine cost-plus contracting. As a source of grants to state and local gov. ernments, it should call on them for cost. reducing actions. As a subsidizer of medical and health care services. it can call for cost controls and price restraint. Price-wage monitoring instead of pronouncing its benedictions or maledictions on major wage and price decisions after the fact. COWPS should be visible and au dible during the decision-making process. Pointing out the inflationary and non-inflationary alternatives in wage negotiations and pending price decisions could have a healthy effect without any coercion. This brings us. finally, to the prickly instrument of wage-price restraint. When all is said and done, unless Mr. Carter can deescalate that self-propelling price-wage spiral-and its sidekick, the wage-wage spiral - his near-term anti-inflation program will come to little. Battle Scarred Terrain This is much ploughed and battlescarred terrain. In the early skirmishes. Mr. Carter has retreated from pre-notification to advance discussion of major wage-price decisions, from jaw-boning to "little chats." and from guideposts or guidelines to guiding principles." What can he do with what's left? Probably more than meets the eye. Among other things he can (1) assert the government's presence in wage and price matters. (2) set a convincing example of government self-discipline in all matters inflationary. (3) ask big business and big labor to follow suit and reason together" with them to develop guiding principles that will ease basic inflation down from, say. 6% to $ and spell out the need for restraint on profit margins and a gradual move from 8% hourly earnings boosts to around 6%. (4) use tax inducements. as indicated above, to lubricate this process and help develop a social compact with business and labor. But will it work? On one hand, one should not underestimate the power of persuasion, especially if it is underscored by government self-policing and self-restraint, If it is backed up by heads-up staff work, and if it is put into a logically airtight framework of goals and guiding principles. At the same time, if it is too gingerly and gentle, it will not carry conviction. If it treads on eggshells, the eggs will hatch. and the inflationary chickens will event ually come home to roost. If that happens, the Carter administration might well be thrown back on the oldume religion of slow growth, high unem. ployment and economic slack as the antidote for inflation. In turn, a lot of cherished goals-jobs for the disadvantaged. vigorous capacity expansion, a balanced budget, and health and welfare reformwould go down the drain. Mr. Carter'sand the country's-stake in a successful broad-gauged anti-inflation program is high indeed. |