The most important decision Ronald Reagan can take in these weeks before moving into the White House is to make reducing inflation his overriding economic goal and to explain to the people why.
Inflation can't be fought as a matter of blind faith and religious dogma. The result of 20 years of doing that has been the economic equivalent of weekend religion: sermons on Sunday and plenty of sinning during the week. If Reagan preaches but doesn't persuade, he may soon face a rebellious congregation.
The trouble with inflation is that it's not as evil as it was supposed to be. It's now running somewhere between 9 percent and 14 percent, which is three to six times what anyone, expert of layman, could have conceived 20 years ago. Yet, the country survives. To be sure, the uncertainty is annoying. But there are still 97 million people employed, and the Constitution hasn't been torn up.
This lesson seems to have almost universal applicability. Modern democracies have enormous resilience and capability to adapt. Other countries have experienced higher inflation rates -- Israel's now exceeds 100 percent, and at one time Britain's neared 30 percent -- without suffering political or economic collapse. We do not know what inflation rates might provoke such convulsions, but surely the limits are higher than was once suspected.
The key to understanding the inflationary economy is to appreciate the public's widespread insulation against price increases.
Most wages are indexed roughly to inflation; so far in 1980, average labor costs have risen nearly 10 percent. The most democratic form of wealth in this country is real estate, where prices have generally stayed ahead of inflation. The peculiar indexing of Social Security has resulted in a 65 percent increase in benefits between 1975 and 1980 -- probably ahead of actual living costs.
Some liberal commentators even see inflation as a marvelous machine for income redistribution, hurting the wealthy most. Stock and bond prices clearly have failed to stay up with inflation, and the very wealthy -- the top 1 or 2 percent of the population -- account for more than half the personal ownership of these financial assets.
All this has given rise to a deepseated public ambivalence about inflation. On the one hand, people regard it as a pestilence that bodes ill for the nation. On the other, most people think it has had a much smaller impact on their personal lives.
Consider some evidence from a recent issue of Public Opinion magazine. Over the past 20 years, people have been asked regularly to rate their personal futures and the country's future -- both viewed five years out -- on a scale of 1 to 10. Between 1959 and 1979, the average personal rating declined slightly from 7.8 to 6.7, which is still fairly optimistic. But the rating for the country's future dropped sharply, from 7.4 to 4.6.
More recently, a pool taken in the third quarter of 1979, when inflation was running about 12 percent, asked repondents how they had been affected by price increases. Fully 48 percent said they had "stayed even," while 37 percent said they had been "hurt," and another 12 percent said they had "gotten ahead." sConsidering that people often think they're worse off than they are, the results are startling.
Against this background, it's not surprising that the country hasn't developed consistent anti-inflation policies. We have mass constituencies with vested interests in inflationary practices. Everyone is against inflation, so long as individual inflation preferences are left intact. Inflation persists, to a large extent, because it is most people's political preference.
It shouldn't be. The case against inflation stems from its long-term effects, not its immediate consequences. From all evidence, it breeds a vicious circle of political and economic rot. It slows economic growth, which means less new wealth and more conflict between private consumption and government spending.
The process by which this occurs is becoming increasingly clear. One way people protect themselves against inflation is to consume more and save less; this simply represents a rational response to the failure of stocks, bonds and other financial investments to maintain pace with inflation. But underinvestment weakens our productive base. We can't produce sufficient goods for the economy at "full employment."
Consequently, inflationary pressures develop prematurely. Government reacts with tight money and budget policies. In this sluggish economy, companies can't earn adequate profits or generate new employment.
Seen in this way, the notion that inflation is an invisible engine of income redistribution is illusory. Sure, the very wealthy get hurt. But the anti-inflation reaction harms the poor in two ways: first, higher unemployment and, second, diminished spending for social programs.
The middle class suffers heightened uncertainty and erosion of its pension funds, which hold an increasingly large portion of the nation's stock and bonds. As more workers approach retirement, this is a guaranteed formula for rising cynicism and discontent.
Who knows whether this stalemate can be broken? But this much is certain: It cannot be broken unless there's broader public understanding of inflation's mechanism and costs.
Tight money and budget policies promise only excruciatingly slow and painful reduction in price increases.
They need to be augmented by specific policies that hasten things along: adjustment of some overindexed federal programs; gradual elimination of some inflationary tax preferences, such as the tax deduction for home mortgage rates; brutal rejection of help for basic industries, such as steel and autos, that are being driven into the ground by inflationary increases in labor costs. t
None of these policies is likely to be popular. Given the uncertainties of food and energy, none assures success. But Reagan cannot possibly pursue them unless, through public persuasion, he can create an anti-inflationary climate and constituency. President Carter never understood that need and, in the end, suffered the consequences.