Some ideas are so spiritually appealing and plausible that you want to hug them instantly. They usually turn out to be wrong.
As price increases quicken, you probably are going to hear a lot of one such idea -- inflation of the "basic necessities."
It is a simple proposition: fourfifths of families (it is argues) spend "nearly 70 percent" of their budgets on necessities -- food, fuel, shelter and health care -- whose prices are increasing faster than average. Therefore, the official statistics understate inflation's impact on most Americans.
The idea comes from a small Washington group called the Exploratory Project for Economic Alternatives, but it has won some impressive adherents, including the AFL-CIO, Ralph Nader and a long list of "public interest" organizations. The Exploratory Project is telling them precisely what they want to hear: Inflation of the "necessities" reflects special problems, mainly profiteering corporations and inadequate government regulation, which, if addressed, would keep prices down.
There is just enough truth to this idea to seduce unsuspecting reporters, politicians and bureaucrats. Unless you are Rip van Winkle, you know that food, energy, health and housing costs lie at the heart of our inflation. And most of us want to hear that we are simply victims.
A comforting thought, but wrong. What makes inflation such a maddening problem is that we are all its villains as well as its victims. We have created mass demands -- including an addiction to inexpensive energy, which is no longer available, and a craving for a cleaner environment -- that increasingly overwhelm our ability to produce and to buy overseas.
Individually, each of us is incapable of reconciling the conflict, and our political process -- which prefers to satisfy demands, not levy costs -- has aggravated the tension systematically by promoting some new tastes (for a better environment and health care, for example) while preventing the market from making us pay for some of the old (such as energy).
Ultimately, we have to choose. If we don't, we simply will have more inflation, scarcities or stagnation: enforced slowdowns to dampen consumption. The "necessities" approach cleverly attempts to obscure this but, beyond its appealing wrapping, there's not much to it.
Its centerpiece is a separate "necessities" index, which purports to show the rate of inflation as most "ordinary" people experience it. The new index subtly implies that these people buy only "necessities." Last year, the index rose 10.8 percent.
In fact, this is statistical sleight-of-hand. The new index simply consists of part of the government's regular consumer price index. The components in the "necessities index" already constitute 61.4 percent of the regular index, which may not strick you as much different from the "nearly 70 percent" (in fact, it is 67.7 percent) that the Exploratory Project's typical family spends on "necessities."
The more basic problem is the facile assumption that spending neatly divides into "necessities" and "nonnecessities," as if everyone is entitled to the former and the rest is frivolous.
Life isn't that simple.
Consider housing. We long ago passed the point when housing costs simply represented minimal shelter needs. A home is a status symbol, a luxury and (at times) a toy. Our appetite for housing has grown considerably and, in the process, has raised our energy bill, created enormous environmental pressures -- on land and lumber -- and augmented demand for other scarce building materials.
Between 1970 and 1977, the average size of new homes increased steadily, as did the conveniences they typically provided. About one-third of new homes had central air conditioners in 1970. By 1977, more than half did.
Or take food. Most of us could reduce our food bills considerably by eating out less. Not only is food away from home more expensive, but its price has risen more rapidly. Na dyet, Americans have dramatically increased their meals away from home, a reflection (in part) of the increase in the number of working women.
As these examples suggest, today's inflation is much a social as an economic phenomenon. We see our existing standard of living as etched in granite and we attempt to keep our wages rising with sufficient rapidity to offset increasing prices, no matter what the source. To be sure, some "special" problems help push up prices, but they usually reflect mass tastes.
Health-care spending is a good example. Almost everyone now agrees that rapid health cost increases result from the prevalence of "third party" payments -- from insurance and government -- that render both doctors and patients oblivious to cost constraints. But that system emerged primarily from conscious political decisions (Medicare and Medicaid) or collective bargaining agreements that expanded company health plans.
Cutting health "costs" by regulation inevitably involves reducing health care, because higher costs have meant more services, as Martin Feldstein, a Harvard economics professor, recently pointed out. Feldstein, incidentally, thinks a better way to deal with the problem would be changes in the tax laws that, by removing some of the subsidy for health insurance, would make patients more cost conscious. They would have to pay for more of their own health care.
The same unpleasant logic applies to energy. Can anyone doubt that the average consumer -- as driver, homeowner or renter -- is heavily implicated in the rising demand for fuel? Oil demand is now up 4 percent over a similar period in 1978. No one likes paying high international oil prices, but unless vast new oil pools are discovered -- or we devise a cheaper alternative -- it is a reality that we cannot deny.
To belabor these points is not to suggest that inflation hasn't created huge economic and psychological stress. It has. But we delude ourselves if we consistently fix blame on some distant villain. Corporate after-tax profits -- a frequent target -- represent only about 5 percent of final sales, for example. Eliminating them entirely would achieve only a one-time price reduction of that amount and would assure immense future shortages.
To a large extent, inflation is the economic result of a successful democracy. That's why it is so difficult to accept and cure. We can ignore our complicity, but not easily deny it.