The Bank for International Settlements, a vehicle for Western Europe's central bankers, today urged industrial nations to tackle stagflation - by spurring business investment.
[Stagflation refers to a combination of a stagnant economy and inflation.]
In its annual report delivered from BIS headquarters in Basle, the bank contends that increased outlays for factories and machines are lagging and should be stimulated by making industry more profitable.
The institution did not spell out the policies to achieve this end, but those most commonly sought would hold down wages, cut taxes for the wealthy and for corporations and subsidize in vestment directly with tax favors.
A less conservative view holds that the best way to promote investment is by increasing the demand for industry's products. This typically means increased government spending, cutting taxes for consumers, or both. The thrust of the BIS report is that such techniques worsen inflation.
The BIS document is closely exampled in financial circles because it is thought to represent the collective wisdom of European central bankers. They dominate the BIS board, whose chairman is Jelle Zijlstra, head of the Dutch central bank.
It is hardly surprising that central bankers think the way out of inflation-unemployment lies in promoting the fortunes of the most favored. But the bank's frequently expressed "optimism" over financing the huge imbalances in international accounts is less characteristic.
The imbalances were created largely by the quintupling of oil prices which brought huge financial surpluses to a few oil producers and big deficits to most other nations, and which left a handful of countries who had no oil - Germany, Japan and Switzerland most notably - with surpluses, too.
In late 1973 and 1974, there was widespread alarm over the task of financing or paying for these deficits. But as the BIS observes, the private banking system has managed the whole affair with relative ease - and handsome profits.
Now, however, another source of funds is needed, BIS warns. It urges that the International Monetary Fund assume this role.
Unlike private banks, the IMF can insist that borrowing nations follow restrictive tax and spending policies which the BIS thinks is a good thing. In fact, the U.S. and others have been trying to set up a new $16 billion credit pool inside the IMF, but they have insisted that surplus-oil-producer nations join in.
This project has been stalled because Saudi Arabia has been holding back. That has led Britain and others to urge that the Western countries go ahead with a smaller pool.
In a brief and unexplored reference, the BIS contends there are "ample grounds for concern" over imbalances, especially the likely size of the U.S. payments deficit this year. Elsewhere in Europe, however, the deficit is welcomed. It means the U.S. is taking in more goods from Italy, Britain and other nations with many out of work. It also means that the U.S. is helping to reduce the payments deficits of others.
The BIS acknowledges that the U.S. deficit "contributes to world recovery and facilitates the adjustment process elsewhere." Nevertheless, says the bank, the deficit can't go on forever - a proposition with which few economists could argue.
The BIS gives surprisingly high marks to the performance of the British Labor government without mentioning it by name: The bank attributes the source of Britian's wicked inflation to the 30 per cent increase in the money supply produced by the Tory government in 1973.