A top-level committee of international economists, commissioned to look at the wealthy industrial nations' problems for the next decade, yesterday advised the West to go slow on expansion policies for fear of regenerating inflation.
A detailed report to the Organization for Economic Cooperation and Development, nearly two years in the making, was "cautiously hopeful" about improving real incomes in the developed world, but said that governments "can not pursue policies which will permit or accomodate high rates of inflation."
The group of eight experts was headed by University of Michigan Professor Paul W. McCracken, former chairman of the Nixon Council of Economic Advisers. It held eight meetings, and was aided by the OECD staff in Paris.
The McCracken report deals not with all 24 OECD member countries but with a "representative group" which includes the so-called Big Seven - the United States, Japan, West Germany, France, the United Kingdom, Italy and Canada - and two smaller countries, the Netherlands and Sweden.
The report supports the idea that business, labor, and government in these countries regularly should discuss wage and price behavior, but not "detailed intervention on any permanent basis."
Such a policy is followed in West Germany. The report also said other countries might consider the French technique, which places a penalty tax on excessive increases in unit wages or profit margins ("the conjectural levy").
"Indeed," the report says, "if governments are going to adopt a policy of not accommodating high rates of inflation, they must be prepared to indicate to those responsible for wage and price determination what kind of behavior on their part would be consistent with the monetary and fiscal policies the authorities intend to follow."
The essential theme of the report is that "governments cannot guarantee full employment regardless of developments in prices and wages." This language is more direct, but carries the same meaning as the inflation-conscious conclusions of the recent Downing Street Summit among heads of state.
The report said there could be no "complaceny" about prolonged unemployement or its relationship to social tensions.
"As compared with a strong, front-loaded recovery, followed by an early recession, what is involved is accepting , reluctantly, a less rapid reduction of unemployment now in order to achieve lower levels of unemployment later on," the report said. "The correctly judged recovery track is one which will minimize average unemployment over the recovery period as a whole."
To mitigate high unemployment rates, the report advocates new, temporary programs for public jobs, or programs where the government subsidizes additional jobs in the private sector.
The report says the best contribution government can make in dealing with the problem of insufficient business investment in some countries is to steer a middle-level course directed at a steady rise in activity and jobs, and reduced expectations of inflation. Tax incentives are an alternative, "but where low profitability reflects strong wage pressures, these incentives may well be undermined by further wage pressures," the report asserts.
The economists say "there is little point" in pursuing the fastest possible economic growth, but argue against the "zero growth" school which is concerned with supply shortages. The constraints on growth depicted by the McCracken committee relate to the need to overcome social imbalances such a inflation.
For OECD as a whole, the report projects a real growth rate of about 5.5 per cent for the years 1975-80, or almost as fast as economic growth in the 1960s.
The report leans to the "steady as you go" economic policy that typified the advice given by McCracken and other American economists of the Nixon-Ford era, and by monetarist-oriented economists in Europe.
It advocated, for example, "public announcement of targets for the rate of growth of the money supply (as) . . . one of the best ways of giving concrete expression to the government's intention not to accomodate high rates of inflation."
Such money targets are now part of policy in West Germany and in the U.S., but are criticized by followers of the Keynesian school who believe that too much weight is given to money supply targets. Keynesians focus more on the impact of budget and tax policy, and look to interest rates as the main core of monetary policy.
But the McCracken report advocates that "somewhat more weight" be given to various measurements of money than to interest rates. It contends that too much attention to interest rates creates an inflationary bias to monetary policy.
Looking backward to spot "what went wrong" in recent years, the report said that old relationships between unemployment and inflation had changed dramatically. A given level of unemployment did not result in the traditional declines in inflation.
But the economists rejected the notion that "demand management" - the application of fiscal and monetary restrain - no longer is effective in reducing inflation. "Without significant restraint of demand, the wage-price spiral would not have slowed down, on the contrary, the rate of inflation would have risen further," the report said.
The most important reason for the severe problems of 1971-75, is the "unusual bunching of unfortunate disturbances", like the oil price shock, the report asserted.
"We reject . . . the view that existing market-oriented economic system and democratic political institutions have failed," it concluded.
Other signers of the report, who agreed in general, but not necessarily with every specific recommendation were: Guido Carli, president, Confindustria of Italy; Herbert Hiersch, director of the World Economics Institute at Kiel University, Germany; Attila Karaosmanoglu, World Bank; Ryutaro Komiya, University of Tokyo; Assar Lindbeck, Stockholm University; Robert Marjohn of France, former vice president of the Common Market commission; and Robin Matthews, economics professor at Oxford University, England.