When President Reagan took office, he promised that his economic program could simultaneously cure inflation, create new jobs and hasten economic growth.
Few experts believed him then. The present deep recession, which has continued for much longer than expected either by the administration or by most private economists, has demonstrated that fighting inflation is indeed not painless. Some economists believe that continued losses in output and employment are inevitable if economic policy remains focused on slowing inflation.
Is the pain unavoidable? And is it worth the prize of lower inflation?
The main argument in favor of concentrating policy almost exclusively on fighting inflation has been that long-term growth and prosperity cannot be achieved without a significantly slower rate of inflation.
At the end of the 1970s, the gradual acceleration in inflation that had been present for 15 years turned into a rapid and apparently uncontrollable acceleration of price increases. Policymakers, particularly at the Federal Reserve, became concerned that inflation was feeding on itself and seriously distorting the workings of the economy.
Moreover, it was clear that rapid, double-digit inflation was extremely unpopular politically.
As Brookings Institution economist Martin Neil Baily pointed out this week, however, the political debate about fighting inflation was very unrealistic. Carter talked of reducing inflation, but did not describe how. Reagan promised that tight money would do the trick, but at no cost to the economy.
If the costs had been laid out more clearly, the political momentum in favor of curbing inflation may have been less. There also may have been a more vigorous attempt to find other ways of doing it.
Reagan officials often have rejected the notion of a trade-off between inflation and unemployment, whereby lower inflation must be bought at the cost of higher unemployment, and low unemployment leads to faster inflation.
But the present notable success in reducing inflation has resulted in large part from recession. Severely depressed markets have cut some commodity prices, and have forced manufacturers and retailers to hold down their prices.
For any inflation gain to be long lasting, it must feed through to wages. If labor costs continue to rise rapidly, then eventually businesses have to push up prices to cover them if they are to survive. Wage inflation has apparently moderated somewhat during the recession. High and rising unemployment has pushed workers into accepting smaller wage increases than they otherwise would.
Administration officials now say that the predicted economic recovery will be unusual -- it will not trigger faster inflation, and will therefore represent a break with the past. But the predictions of economic growth without much speeding up of price rises again depend to a great extent on the fact that only a very weak recovery is forecast. Unemployment is likely to stay extraordinarily high.
Claims that government could achieve much lower inflation with little cost in terms of unemployment rested in some cases on the "rational expectations" view that if wage and price setters only knew in advance that monetary policy would put a lid on the economy, they would tailor their wage and price demands so as to stay in jobs or in business. Inflation would slow with no pain.
The experience of the past three years makes it clear that this is not how things work. The nation's total output is now almost exactly the same as it was three years ago. Without the two recessions since 1979, real Gross National Product might be 9 percent higher than it is.At this huge cost in lost output, gains have been made against inflation -- but they are small. The underlying rate of increase in prices is now about 6 percent or 7 percent, down from 8 percent or 9 percent.
Many economists were more realistic than the president about the costs of reducing inflation, but still believed that it was worth it. Martin Feldstein, Reagan's nominee for chairman of the Council of Economic Advisers, said last year, "I think stretching out the recession into 1982 is the only way that we're going to really change inflationary psychology, shake up labor markets, begin to get progress on the wages front."
What concerns others is that far from being put through a once-for-all wringer, where inflation is beaten down so that normal rapid growth in employment and output may take place thereafter, the economy is likely to be constricted for many years if policymakers continue to focus on fighting inflation.
"Suppose you get inflation down close enough to zero that the authorities declare victory," but they then decide that unemployment must stay high -- perhaps as high as 9 percent -- in order to preserve the inflation gains, suggested economist James Tobin recently. Will that be acceptable?