We may be looking in the wrong place for the essential causes of our deep, intractable inflation. Budget deficits, government regulation and money supplies are marginal, sometimes phantom, reasons for today's spiraling prices, according to economist S. Jay Levy, publisher of Industry Forecast. The fault, he says, lies more in our numbers and habits of life, which aren't about to be changed by congressional budget committees or tight-money policies at the Federal Reserve.
Our troubles, he says, stem from three major causes:
First, the stunning change from a world of abundance to a world running out of easily accessible natural resources. Cocoa, copper, corn, cotton, lead, silver and other basic commodity prices soared, followed, in 1974, by oil and sugar. Nature is not infinitely bountiful, Levy says. No economic policy can compensate for the shortage.
Oil from Alaska is more expensive than oil from Texas. Silver from the poorer ores of worked-over mines is more expensive than silver from newly opened lodes. We used to import 10,000 pounds of coffee for the equivalent price of one Oldsmobile. Now, worldwide demand has pushed the price up to two Oldsmobiles -- twice the manpower and equipment spent for the same amount of coffee.
We used to invest in technology that would provide more products at lower cost, Levy says. Now we invest in technology that provides products at higher cost, because that's the only way to get them at all. The federal Reserve could send interest rates on 90-day Treasury bills to 35 percent and stand on its head and whistle God Bless America, but it will still cost more, in terms of men and equipment, to get gasoline from a coal mine than from a Texas well, Levy says.
The second cause of our inflation, he says, is the kind of buying decisions that families make today. We're buying more services that require detailed personal attention and don't lend themselves to mass-production techniques.
Mass production is one of the keys to higher standard of living. If a worker earns more money, and at the same time increases the amount of goods or services he produces, there's no inflation and the worker comes out ahead. But to the extent that his wages outstrip his productivity, inflation results. Productivity improved smartly in the manufacturing sector of the economy in the second half of the 1970s. But the growing service economy -- now about half of our personal consumption expenditures -- can't easily be made more efficient.
Working wives are responsible for much of the growth in the service economy. The husband's income probably bought the basic household goods -- the car, the TV, the washing machine. The second income in many families tends to go for services like restarurant meals, college education and vacations. As long as we choose to buy more services, gains in national productivity will remain low and high wage gains, inflationary.
The third and most serious cause of inflation, Levy says, is the novel class war developing in America. Our underlying economic problems -- low productivity and natural-resource shortages -- ensure an underlying inflation rate of 4 to 5 percent, he says, which translates into a lower standard of living for the average American. But no one wants to accept that. So each group tries to grab an income advantage, at the expense of others. Their competition produces money gains, but makes inflation worse.
During most of the 1970s, wages and salaries rose faster than prices, putting employes ahead of inflation , but at the expense of people living on savings and investments. Since the mid-1970s, retirees have struck back through indexed Social Security and are now agitating for indexed private pensions.
This class war is worsened by the growing number of nonworkers vs. workers. In the 1970s, the general population grew 8 percent, the working population, 24 percent and the retired population, 50 percent -- which meant that fewer people were producing, relatively speaking, and more people consuming. The percentage of retirees will grow in the 1980s, which will put even more inflationary pressure on the amount of goods and services available for sale.
If class warfare could be reduced, inflation would fall, Levy says. But we still won't be able to overcome the resource-shortage and productivity problems for many years. Levy's conclusion: a lower standard of living in the 1980s will be hard to avoid.