The following article, by President Carter's nominee as chairman of the Federal Reserve Board, is reprinted from Oct. 5, 1974, issues of Business Week magazine, by special permission.)
The present long-term inflation spiral is the result of trying to fulfill legitimate worldwide needs and wants by means of credit and deficits rather than by savings, investment, and productivity.
As a consequence, demand has outrun the capacity to supply. Shortages have bred cartel nationalism with dramatic redistribution of capital. Financial mechanisms, domestic and international, have been straned nearly to the limit.
The problem of arresting inflation is today more political and social than economic. The task is to find an economic solution that is politically acceptable because it accommodates sciety's value goals.
Working our way out of inflation requires an allocation of the available but limited resources to areas of priority, thus reestablishing a proper balance between supply and demand. Allocation solely by controlling the aggregates - the supply of money and not federal spending - will bring about levels of unemployment and general economic hardship that are likely to be acceptable. Allocation by direct controls involves even more difficulties.
An alternative is allocation by inducement, supported when needed by restraints and specifc controls.
Discussion and debate have begun to reveal a preponderance of opinion favoring a selective approach. (President Ford's) summit meeting gave scant attention to the theology of conetary-fiscal and income policies. Instead, it produced a cornucopia of ideas, suggesting a restraint here, an incentive there, a protection of family income yonder, or a direct control in certain cases. There now seems to be implicit recognition that the economy should be managed by dealing with its parts and not jus the whole.
It may be argued that economic inducements, such as tax credits, are counter-productive because they decrease federal revenues or involve increasing federal expenditures. But such inducements will have offsetting effects. What is important is the net effect on the system - positive, negative, or neutral.
Responsibility has been too dispersed among government agencies for adequate focus. (Former) President Ford has taken a step in the right direction by establishing a board to coordinate anti-inflation actions. Any such board should be given strong powers to act promptly and with maximum flexibility, subject to appropriate Presidential and Congressional oversight. Because of the urgency, the board should hava authority to waive or suspend departmental and agency regulations. Of course, considering the political realities, the board should operate in close cooperation with Congress.
Many suggestions have been presented as to specific measures the board should take. The following list is by no means unique or exhaustive, but it includes some of the selective measures I would recommend:
To restrain consumption -
Selective consumer credit controls.
A mandatory interest surcharge on loans for low priority purposes.
A requirement for larger banker reserves for certain types of loans.
Reduction in or deferral of government spending.
Strong inducements for conservation of scarce items, such as a gasoline surtax.
Deferral of requirements to meet certain environmental standards.
To encourage, personal savings and investment-
An exemption from personal income tax for interest and dividends up to $1,000 a year.
A reduction in capital gains taxes by progressively lowering the rate.
A lifetime exemption for a fixed amount of capital gains, such as the $30,000 total now allowed in the case of gift taxes.
To spur business Investment and productivity-
A variable investment tax credit, ranging from zero to 20% to be changed from time to time by the President, subject to veto within 30 days by either house or Congress.
Certificates of necessity providing five year write-offs for desired investments to increase supplies or cut costs.
A two- or three-year moratorium on strikes, with a requirements for arbitration of disputes.
To reduce hardship-
To overcome the depression in housing, a variable personal investment tax credit for purchase of new, owner-occupied dwellings. This could range, perhaps, from $1,000 to $2,500. The amount could be changed or the credit eliminated by the President subject to Congressional veto.
A decrease (or even a credit) in bank reserve required for loans for high priority purposes, such as for housing or for small business.
Workfare and training programs to offset abnormal unemployment during the period of transition to stable conditions.
Tax relief and emergency loan facilities for small businesses.
Extension of tax loss carryovers to 10 years.
The inflation from which the whole world is suffering will not be overcome by a simple formula or by an amulet. Nor will it be exorcised quickly. It can be conquered by a sound if undramatic program of selective, flexible, and compehensive actions, relying mainly on allocation by inducement while avoiding undue hardship. Such an approach can regain public confidence and provide the best chance of success while preserving our democratic, private enterprise system