There's a whiff of panic in the air about inflation. The consumer price index rose at an annual rate of 18 percent in January, and it is a measure of our current frustration and confusion that formal wage-price controls are riding a new wave of popularity. Not only has Sen. Edward M. Kennedy (D-Mass.) proposed them, but a number of experienced economists -- such as Barry P. Bosworth, former director of the Council on Wage and Price Stability -- are abandoning suspicion of controls, saying in effect: They're not the best thing, but they may be the only thing.
This is desperate advice, but it is advice worth examining for what it reveals about our attitudes toward inflation. For the past 20 years, we have approached it superficially, deploring it as a self-evident evil but not really trying t understand what keeps it going and what is wrong with it. We haven't resisted inflation because we never truly have figured out why we should.
Inflation's very persistence has dulled our senses. When government takes control of our wages and prices, for example, it claims a good deal of our personal freedom. The assignment of such power ought to involve a corresponding sense of danger and a confidence that the new power is equal to the threat. Yet we tend to regard controls as simply another highly technical solution offered by economists to a stubborn problem.
Fifteen years of inflation have taught us how easy it is to disregard its profound effect on our politics and society. We have learned that inflation rates once considered intolerable and unimaginable (including today's 11 percent to 13 percent) not only are tolerable, but can coexist with widespread prosperity. Much of the public regards inflation in the way that smokers see smoking: They know it isn't good for them, but -- deep in their hearts -- they wonder whether they ever will suffer.
The experience of much of the 1960s and 1970s buttressed this complacency. Consciously and unconsciusly, inflation eased political and social tensions. Rising government spending satisfied new constituencies. Although people complained about losing ground to higher prices, it's clear that for many groups the story was just the opposite.
Certainly many of the big unions didn't lose. Between 1967 and 1968, the consumer index rose 95.4 prcent; meanwhile, average hourly earnings increased 164 percent for steel workers, 140 percent for auto workers and 140 percent for teamsters. The elderly? Their average Social Security benefits rose 240 percent between 1967 and 1979. Many of these families also owned (and sold) homes that increased sharply in value.
A plausible case can be made that many young workers did lose ground, in part because there were so many of them (these are the children of the "baby boom" competing for the same jobs. But it is precisely these workers who had the highest proportion of two-earner families and postponed having children, leaving themselves more discretionary income.
None of this means that inflation is painless, but rather that its effects often are delayed. Now it is catching up. By almost any measure, "real" earnings (after inflation) dropped last year. The mere passage of time also aggravates inflation's unsettling effect on relative earnings.
Consider two workers who started 10 years ago at $15,000. If one received 6 percent annual increases and the other 9 percent -- a differential that could reflect union and nonunion status -- the first now would earn about 25 percent less. People are beginning to understand and be angered by these changes.
But we mistake the evils of inflation if we think that anything that stops it must be good. Inflation is dangerous because it ultimately fans social conflict, makes people cynical about government -- which gets blamed both for creating inflation and being incapbale of protecting people against it -- and threatens the economy's capacity to create new wealth. Controls carry the same dangers.
It isn't inflation that hurts economic performance so much as the uncertainty it creates. Controls simply replace one type of uncertainty with another. Producers don't know whether they can charge enough to justify their time, money or risk. It is rent controls on a national level; the controls keep both rents and housing supply low.
The politics of controls are no more attractive. Rigidly administering controls to gain public confidence is likely to alienate large numbers of businesses and individuals, who conclude that Washington's rules don't fit their own situations. They lose faith, seeing bureaucrats as mindless and arbitrary. But accommodating to the "real world" by being flexible makes the program appear a cynical sham, to be manipulated by anyone with a shrewd lawyer.
The most sophisticated advocates of controls don't see them as a panacea, but only as a dramatic political and economic lever to enact a more comprehensive package. Bosworth's proposal includes sharp spending cuts (on the order of $50 billion over two years) and stiff measures (such as a gasoline tax) to reduce oil demand. Some of these measures are desirable, but coupling them with controls involves massive contradictions.
Government is an essential reason today why inflation perpetuates itself. Ever since the Depression, we have turned more and more economic decisions into political imperatives: to prevent recessions, to keep up farm incomes, to protect the elderly, to save dying corporations. More and more groups tie their economic fortunes to government, which finds it difficlut to be "fair" to all without creating inflationary costs and expectations.
All this had eroded the private economy's natural resistance to inflation. Of course, foreign oil price "shocks" have created inflationary pressures, but previous price "shocks" -- after World War II and at the start of the Korean ar -- didn't translate themselves into permanently higher inflation levels, which is what happens today.
Coming to grips with inflation is so difficult because it involves conflicting democratic ideals: on the one hand, satisfying constitutent demands; on the other, preserving freedom. Proposals for controls simply gloss over this basic conflict, allowing politicians to say that they have "done something" while creating the practical political pressures that ultimately tend to corrupt the controls.
The fundamental reason for resisting inflation is that it threatens to create a damaging vicious circle, with people getting angrier and angrier as inflation rises but with the economy and the government being able to satisfy them less and less. Everyone knows how to slow inflation -- slow down the growth of money. But the underlying cost pressures are so great that people fear this remedy; so we have to deal with those underlying pressures which often are legislated or sanctioned by government.
We now have loaded government with more than it can do. Unless we lighten the load, we won't break inflation, but simply strain our democracy.