AN ATMOSPHERE of urgency seems, at last, to have overtaken the American debate on inflation and what to do about it.Perhaps the catalyst was the last price index, although it was predictable. Perhaps it was also a spreading realization that there is no visible limit to the level to which the inflation rate may go.
An inflation rate at last month's 18 percent is no more stable than the ideal zero percent, and it is no easier to maintain. On the contrary, it is harder to hold the rate constant at 18 percent because everyone sees prices slipping regularly upward. The higher the inflation rate goes, the stronger the inflationary forces become and the faster the rate rises. There are two ways that the cycle can end. One is the imposition of strongly anti-inflationary public policy -- much stronger than anything President Carter has yet suggested. The other possibility is, unfortunately, some unforeseeable economic slide downward, painful and destructive.
The United States has been through four previous episodes of severe inflation in this century. All of them were ended within several years. How?
Prices doubled during World War I. But with the peace, the cost of living promptly fell a bit and then held constant. One reason for that was the collaspe of farm prices in the early 1920s and the onset of a profound agricultural depression that, incidentally, contributed to the greater depression in the next decade. The process of stabilization, left to itself, is not necesarily benign.
During World War II, controls and taxes held prices down. At the war's end, when the controls came off, there was an inflationary leap. But it was short-lived with the return to normal production and, again, a drop in farm prices. During the Korean War, the medicine was not only controls but, again, taxation. There were three tax increases within 13 months, totaling $13.6 billion a year in new revenues. In relation to the size of the economy, $13.6 billion in 1951 was the equivalent of $100 billion now. You have recently heard talk about returning to controls, but you haven't heard anything about a tax increase on that scale.
The first spasm of severe peacetime inflation was from 1955 to 1958. The government's response was to run the economy in low gear and choke off prematurely the recovery from the 1958 recession. That left a lot of slack in the economy, and there followed four years of very fast growth. But in 196k, the first impact of the Vietnam War hit the economy and there was no tax increase to offset it. High inflation has been continuous ever since. The first public reaction was to try to protect people by writing cost-of-living escalators into a great variety of laws and contracts. Now those automatic escalators are aggravating the trouble and accelerating it.
There is nothing about the present inflationary wave that makes it essentially different from the previous four. But this time it began with an unpopular, underfinanced war and continued through three administrations not sufficiently sure of themselves to impose the necessary correctives. Those correctives are never welcome. But the alternative remains far more dangerous.