The Carter administration's anti-inflation guidelines are collapsing, and unless President Carter is willing to commit his body and soul to curbing inflation - something he has shown no willingness to do - they probably aren't worth picking up.
The settlement between the rubber workers and B.F. Goodrich Co. seems to have put the last nail in the coffin.Even at an assumed inflation rate of 6 percent (used in estimating the effect of a cost-of-living clause), the contract reportedly provides a 27 percent cost increase over three years. At a 9 percent inflation rate, the increase would probably total 35 to 36 pering "uncontrollable" cost increases could apply a "profit margin" standard. Price increases could exceed the guidelines as long as profit margins - profits as a percentage of selling price - didn't increase over those in a "base" period. Though the rule has been toughened, more and more companies (including, recently, the U.S. Steel Corp.) are choosing this option.
Inflation, of course, is the immediate cause of the anti-inflation program's eclipse. For the first four months of the year, consumer prices have increased at an annual rate exceeding 13 per cent. Oil prices have jumped spectacularly. Food prices - heavily influenced by reduced beef supplies - have risen cent; there's no way this can be squeezed inside the 7 percent wage guideline.
Nor can the government do much about it. The power to withdraw federal procurement - a power upheld last week in a Court of Appeals decision - is more a feather than a stick.Consider rubber. The government buys about $20 million to $25 million of tires annually, but few - if any - of the purchases exceed the $5 million contract minimum subject to the program.
The price side of the program is also beginning to disintegrate. Initially, the administration had hoped that companies would reduce their average price increases half a percentage point below the 1976-77 average. But companies experienc-sharply. Likewise, an unexpectedly strong economy early this year increased many raw material prices.
So both unions and companies passed these costs along in higher prices and wages that, of course, simply perpetuate the inflationary spiral. With cost-of-living adjustment clauses and legislated changes in government programs (Social Security, food stamps), the process has become semi-automatic.
All this simply highlights the deeper cause of failure. Americans are living a collective fantasy. There is still no widespread understanding that higher living standards ultimately stem only from higher productivity. The fact is that today's productivity gains (less than 1 per cent last year) are tiny, while a number of factors will take more and more output away from the average worker - whether a secretary, auto worker or executive.
These are worth repeating if only because everyone wants to forget them. High energy imports, for example, mean that more of our output must ultimately go to oil countries as exports. Government regulations - to lower pollution, improve product reliability or reduce worker hazards - all raise costs, but not output. There are also pressures for higher tax rates (especially Social Security taxes) to support the growing over-65 population and higher "real" defense spending.
Not all these pressures reduce the nation's "living standard." Environmental controls clearly improve them, as does better care for the elderly. But they all tend to reduce workers' purchasing power, which is what people watch. Unless productivity goes up, wage increases must come down or inflation simply intensifies.
Economic policy today ought to put people more in touch with these facilities and attempt to improve the realities. This requires an intellectual grasp of the problem and the political ability to translate it into practice. In short, leadership. Carter hasn't provided it.
His failure, of course, is understandable. The process by which investment and innovation lead to higher productivity and rising living standards is an invisible, imprecise one for which no politician can easily claim credit. Who knows when today's "incentive" will yield results? Meanwhile, everyone hopes to stay ahead of inflation, and no political leader wants to deliver the bad news that such self-advancement isn't automatic.
Government is caught in contradiction. People correctly believe that their individual behaviour has no national impact and blame any collective problem - a recession, energy shortage or inflation - on the obvious agency of collective action, government. But government is not omnipotent. It can succeed at mastering these problems only by influencing collective individual actions.
The government needs to create a sense of collective responsibility. The guidelines attempt to do this. But, human nature being what it is, the guidelines won't work unless backed by threat - recession. The government must declare that it won't print the money to support extravagant wage settlements Otherwise, people have no real reason to adhere to the standard.
The doesn't mean wage increases should be uniform. Short of wage and price controls, which don't endure except during periods of national emergency, a democratic government cannot police every wage agreement in the country. At best, guidelines can only creat a sense of proportion.
Around a general wage standard, larger increases may be justified by higher productivity increases; lower increases ought to result from lower puroductivity or fierce competition. Labor unions and companies that have the market power to ignore such pressures ought, at least, to be seen as causing both more inflation and lower growth. Only then is anyone likely to ask fundamental questions of why such market power should continue.
The choice cannot forever be wished away: High inflation is now pushing the country into slowdown or recession. Ultimately, someone is going to have to be honest with the public. Carter has not been, but, to be fair, there is not a politician of national stature - not Edward Kennedy, not John Connally, not Ronald Reagan - who is either.