IN "How Not To Fight Inflation" (Outlook, March 9), Gar Alperovitz and Jeff Faux express a highly justified frustration with the Carter administration's anti-inflation program. Unfortunately, they misdiagnose our current inflation problem and fail to provide any real solutions. Indeed, their proposals would make matters worse.
The centerpiece of their analysis is their so-called "necessities price index," advanced with all of the media hype -- and bearing all of the substance -- of this week's how new singing group. There are only two problems with the "necessities" index: It gives a distorted picture of who is most hurt by inflation, and it suggest that limited, gimmicky policies can cure inflation.
Alperovitz and Faux claim that inflation in the 1970s has been highly concentrated in the "necessities" -- food, shelter, energy and medical care. They also claim that the poor spend disproportionate shares of their incomes on these necessities, with many of them borrowing in order to spend more than their current incomes on food and rent. They conclude that inflation hurts the poor more than any other group.
While I'm not advocating an "I Got Plenty o' Nothin' " school of economics for the poor, I must point out that the Alperovitz-Faux account greatly exaggerates the effect on inflation on those with low incomes. The main reason is the failings of their necessities price index. It is not based on a surcey of true necessity items, but rather on the Bureau of Labor Statistics' urban worker consumer price survey. Alperovitz and Faux merely select from its items that they consider neccessities. (Clothing, to them, is evidently unnecessary -- perhaps because it rose in price 43 percent slower than the average in the '70s.)
This jerry-rigged design causes serious problems. The food portion of the index includes not only basic items, but also steaks and restaurant meals, not exactly necessities. Worse, the housing index suffers from the widely known problem of exaggerated home mortgage costs -- it assumes, in effect, that all homeowners buy a new house every month -- and how many poor people are signing mortgages now (or 10 years ago) anyway? By making shelter the most important part of their index (over 48 percent of the total), Alperovitz and Faux take the overstated interest costs on new home morgages and try to pass them off as a pervasive burden on the poor.
If you take our their distortions, you discover that their argument falls flat.
This emphatically does not mean that the poor are doing fine. It merely means that those who are hurting with inflation are those who would be hurting without it.
A second question is what this erroneous "necessities" index suggests about policy to stop inflation. Our inflation picture would be far brighter, to be sure, if we could slow prices in the areas they cite. But our efforts cannot stop there. With employe compensation increasing 8 percent a year and productivity stagnant, we are virtually guaranted an 8 percent inflation even if necessities prices could be stopped cold. Alperovitz and Faux are correct when they say that wage restraint alone will not stop inflation, but they miss the real point: Without wage restraint, we will never stop inflation.
Further, in their zeal to attack the "necessities" sectors, Alperovitz and Faux make some singularly unwise proposals. They advocate expanded subsities in the housing sector, which is already a tax shelter paradise. They also advocate an easier monetary policy to reduce mortage costs, ignoring the likely increasesin borrowing for consumption on non-necessities and the resulting general inflationary pressures.
It is in the energy sector that their policy proposals would be most damaging. Alperovitz and Faux would recontrol oil prices, which would set the market price of oil to the American consumer at an artificially low level. Much as we dislike the fact, future supplies of energy, barring unforseen miracles, will cost us at least the OPEC price. Postponing our day of reconding only depletes our resources faster and tells the world once again that we are not serious about conservation (yeilding a failing dollar and -- you guessed it -- more inflation).
Alternative energy sources cannot justify a lower-than-market price for oil; solar energy is years away, and gasohol is more expensive than gasoline in quantity. Conservation measures are helpful, but will not carry the freight.
Some people use the "necessities" index and the rapid inflation in energy prices to argue for fuel stamps to help the poor. That is the ultimate folly: urging people to conserve, and then giving them cents-off coupons they can only use for energy. Better to give the poor more cash, and let them choose between $1.50 per gallon gasoline and bus tokens.
If we want to slow inflation, we should certainly plan more rationally in the medical care sector, fight for greater food production, and conserve and seek new sources of energy. The administration has been weak in most of these areas. But we delude ourselves if we pretend that such policies justify subsidizing imported oil, encouraging higher wage settlements or running large federal budget deficits. We will need discipline on the part of business and labor, perhaps obtainable only with the help of controls. We will need more investment, although it may require further incentives from government, and increased investment alone will not solve the problem. We have an inflation problem in every sector -- and the longer we deny it, the worse it will get.