As a private economist, Charles L. Schultze - now chairman of the Council of Economic Adversers - accurately forecast why he would find his present job so frustating.
"We tend to subject political decisions to the rule. 'Do not direct harm,'" he once observed. "We cannot be seen to cause harm to anyone as a direct consequence of collective action."
Better than anything else, that explains why the Carter administration has not evolved an effective anti-inflation policy. Such a policy harms people. It requires the government to reject the pleas of special interest groups for protection against economic change. But shielding them often raises everybody else's price.
Calling these groups "special interests" makes them sound sinister, but, mostly, they are average folk. They are farmers who want the government to stop their prices from falling: they are steel workers, textile workers, television workers (the list runs on) who want to be protected from cheaper imports: and they are labor unions who insist that the minimum wage be raised. They feel threatened by economic change and look to politics - legitimately so - as an outlet for their grievances.
After initial resistance, the Carter administration has virtually collapsed before these pressures. No one has tallied the impact of import restrictions, a higher minimum wage and more generous farm supports, but the effect clearly is to push up the inflation rate - not nudge it down.
The administration's anti-inflation policy now consists of little more than a prayer that Father Time, like Santa Claus, will be kind. Earlier this year, the inflation rate accelerated (to an annual rate of 9 per cent in the first half), and now it has decelerated (to about 4 per cent in the past three months). Most economists assume there is an underlying rate of about 5 per cent to 6 per cent. Whatever the truth, the White House seems resigned to watch and hope.
The helplessness reflects the distasteful reality that any effective anti-inflation policy must ultimately aim at wages, not prices. Wages constitute more than half of all business costs. Manufacturing profits (before taxes) ar only 3 to 10 cents of each dollar of final sales. Raise wages 8 per cent, and prices surely will follow. Even a 1 or 2 percentage point rise in profit margins - a stupedous rise - would have a smaller impact.
But no politician, least of all the President, likes to attack the electorate, which is another way of saying the average wage earner.
The adminstration's steel policy represents a shining example of the government's inability to grapple with this problem. Measured by the wages of its members, the United Steelworkers of American has been an eminently successful union. At an average of $8 an hour early this year, steel workers are among the highest paid industrial workers. Their last contract settlement will, according to the Council on Wage and Price Stability, result in an increase of about 30 per cent over the next three years. (The contract has a cost-of-living adjustment clause, and the estimate assumes a 6 per cent inflation rate.)
Conspicuously missing in all the recent discussion of the industry's troubles has been the mere mention of the possibility that workers might forego some wage increases to maintain the industry's competitiveness. Earlier this year, for example the Alan Wood Steel Co. - a small producer near Philadelphia - went bankrupt. In an effort to save the firm, the management had asked the local union to take a wage cut. The local refused and 2,300 jobs were lost.
One obvious way that companies with older, less efficient plants can remain competitive is to lower labor costs. But understandably, this is anathema to unions. It would promote wage competition among workers, undermine the idea of equal pay of equal work and destroy nationwide bargaining.
The administration's steel plan - which aims at setting minimum imports prices - minimizes the need for such adjustment. When the administration says its proposal "should not contribute to unnecessary and disruptive price increases," it is dancing around the truth. What the administration hopes is that the steel companies will do nothing more than pass through their normal cost increases.
But nothing was done to moderate the pace of those underlying cost increases. And, according to the wage-price council, the labor costs alone would require price increases of more than 10 per cent over the three years of the contract. Other cost increases (energy, materials) would add another percentage point or two each year.
As much as anything else, the government needs to break this link between past inflation and present wage increases so that inflation ceases to be self-perpetuating. But stopping the spiral is difficult, if not impossible.
Except in periods of hyper-inflation or national crisis - when a political consensus exists for harsh action - wage-price controls will not command the political support necessary to make them work. "Guidelines" are a fantasy. Either they are a guise for controls or simply a public relations play, too weak to be effective.
Brookings Institution economist Arthur Okun's suggestion that taxes be lowered for firms and workers exercising wage restraint suffers from the same political defect. It would require the establishment of some guidelines and to be effective, would probably cost more tax revenue than the administration thinks it can afford.
The one realistic option available to government is to rely on available market forces that, by themselves, would tend to reduce wage and price increases. But even this - as the administration has learned this year - disappears unless the White House struggles to prevent Congress from tampering with those market forces.
Put simply, the President has not chosen to do this. There is no natural anti-inflation constituency, and Carter made no attempt to create one. If the thought that mere White House disapproval would prevent Congress from sharply raising the minimum wage or enacting more generous farm supports (still not sufficiently generous for farmers), he was naive. More likely, he decided that the possible gains - a slight reduction in the inflation rate that easily could be offset by oil increases or bad weather - weren't worth the enemies he would make.