The Brookings Institution - the well-known Washington research organization - has just released a series of papers called "Innovative Policies to Slow Inflation." The title may be a misnomer. A brief review of the papers leaves the chilling impression that there are no "innovative" ways to fight inflation. Instead, the only way to kill today's inflationary psychology may be a period of painfully slow economic growth.
This is presumably, not the conclusion that the editors of the papers, economists Arthur M. Okun and George L. Perry, prefer. Both are prominent proponents of so-called incomes policies - a vague term for any program that seeks to convince business and labor to hold down price and wage increases.
Great Britain is often cited as an example of the potential effectiveness of incomes policies. Superficially, it is. In the past four years, Britain's inflation rate has dropped from 24 per cent to about 9 per cent, in large part because the government convinced major unions to restrain the size of their wage increases.
In fact, though, Britain is more instructive of the limitations of incomes policies. Britain's unions - far more powerful and radical than their American counterparts - agreed to support wage limitations only after inflation had reached frightening proportions. Morever, the existence of the program did not spare Britain the pains of slow growth, high unemployment and (for a time) declining living standards. In the past four years, Britain's economy has grown hardly at all.
The lesson in Britain is that resisting inflation requires a political and social consensus for policy. More sobering, Britain's experience suggests that consensus - even the crude, fragile one that exists there - may not evolve until inflation hits furnace-level temperatures.
If political consensus is essential, the Brookings papers show why economists here have contributed little toward such a consensus. In part, their failure reflects the legacy of past mistakes (and economists' involvement in those mistakes) and a misguided view of their role in making policy.
What distinguishes the present inflation from its predecoors is an apparent resistance to the traditional anti-inflatonary medicine: recession and high unemployment. Economists themselves induced this change, albeit unwittingly and with good intentions. In the 1960s, the "new economics" promised that government could "manage" the economy to achieve both low unemployment, low inflation and sustained growth.
Unfortunately, the economy becomes increasingly inflationary when business and labor accept this promise at face value. Making government responsible for adequate growth lifted from business and labor any responsibility for their own pricing and wage behavior. In effect, they were told that rising wages and prices would not slowdown because the government could - and would - restore healthy growth.
Consequently, the history of inflation in the past decade is that each recession or slowdown brings a slight moderation in price increases but leaves a higher "underlying" rate than before. When the economy resumes growth - as it does, in part, because the government is committed to growth - new demand pressures (for skilled labor, land or money) cause more price increases and create a higher "underlying" inflation level.
The cycle is depressing, and the economy may be at the end of it again. Back in the early 1970s, the underlying inflation rate was considered to be 3 per cent to 4 per cent and then, 5 per cent to 6 per cent. Now its moved closer to 7 per cent. The quickening rate threatens growth, as the Federal Reserve resists higher prices by refusing to supply all the extra money needed to accommodate the steeper inflation. Interest rates have risen, and whether the economy slips into recession or slowdown next year may depend on how much the Fed continues to resist.
Incomes policies, including the Carter administration's voluntary anti-inflation program, are advanced as a way of reconciling the conflict between rising inflation and continued growth. But they lack political support. Why should major unions restrict their bargaining freedom when - unlike many other workers - they cannot only stay even with inflation, bu beat it.
An alternative anti-inflation strategy exists, though it's advocated by only a minority of economists (including Milton Friedman and William J. Fellner). Put simply, the government would declare that it will maintain economic conditions conducive to moderate growth (between 3 percent and 4.5 percent annually) with little or no inflation. Mainly, this would mean restricting the money supply. Business and labor would then have to choose between growth and inflation.
This is risky - some would say reckless - strategy. It might take years of slow growth and high unemployment to convince business and labor (including non-unionized workers) to revert to a pattern of wage increases that roughly parallels productivity increases: that is, 1 percent to 3 percent annually.
But these proposals do have an educational virtue. They emphasize the conditions required for greater price stability and the absolutely grim prospects faced by the economy in reducing ever-higher rates of inflation. The prospects are not merely theoretical. Most of Europe has been experiencing this wringing-out process since 1975.
Instead of emphasizing these fundamental choices, however, most economists spend their time exploring increasingly intricate forms of incomes policies.
This is, mainly, make-work for economists that may actually have damaging side-effects. Any incomes policy is a political deal among the government, business and labor. It's the job of politicians. No amount of advanced study will avoid an inevitable politicizing of economic life inherent in such a deal, or rid any incomes policy of clumsiness and unfairness.
But, paradoxically, even proponents of incomes policies go about their promotion in the wrong way. No incomes policy can work without wider public understanding of the conditions necessary for less inflationary growth and of the prospect that ever-rising inflation risks prolonged retrenchment. These are the fundamental ingredients of social and political consensus, but they are obscured by an obsession with false "innovation."