THE CONVENTIONAL view of the inflation rate is that it's being reduced slowly but steadily. The cost in unemployment is very high but, according to this view, the outlook is promising. That's a nice thought. Is it right? For the past two years there has been no real improvement. Prices have continued to creep upward at a rate of about 6 per cent a year, a good deal too high to be healthy. Now there are beginning to be indications of a coming increase in inflation - with no accompanying improvement in employment and production. In a recent speech Arthur M. Okun of the Brookings Institution warned that the country's present economic strategy is headed for trouble. It's a diagnosis, and a prescription, that deserves careful attention.
In pursuit of various national goals, all of them desirable, the federal government is now on the point of raising a series of important prices. Mr. Okun cites four examples. The price of labor will go up in January when the Social Security and unemployment-insurance taxes rise. The price of labor will go up again when the minimum-wage bill takes effect. The crucial element in President Carter's energy program is the tax on crude oil, which - if it is eventually passed - will make oil products more expensive, beginning next year. For the coming crop year, the Agriculture Department has just reimposed acreage limits to cut production and raise prices.
Each of these increases has been debated on its own terms, separately from the others. But, taken together, Mr. Okun estimates that they could increase the inflation rate 1.5 per cent by the end of next year. Although Mr. Okun doesn't mention it, some of the Carter administration's trade policies point in the same direction - the limits on imports of cheap shoes, for example, and that bill to put more of our oil imports into American-flag tankers despite their exorbitantly high freight costs.
"All things considered," Mr. Okun said, "my best guess is that, between now and 1979, inflation is more likely to accelerate than to decelerate - and not because of overly rapid growth or excess demand." How does a government curb inflation without injuring economic growth and destroying jobs? Mr. Okun offers several suggestions. First, he proposes a rule of not net cost-raising by the federal government. Whenever the government raises a price, under this rule it would be obligated to offset it. In some cases, that might mean relaxing onerous regulations. In others, it might mean subsidies. Second, and even more unconventional, Mr. Okun would like the federal treasury to buy the state and local governments out of some of their sales taxes. Third, he would offer tax cuts as incentives to businesses and working people to hold down prices and wages. The administration is already taking about large tax cuts. Why not try to get something back for them, in the way of inflation agreements?
You might object that all of these ideas would be hard to administer, in practice, and most of them would be unpopular. True. There is only one thing, really, to be said for them: They are explicit and rational attempts to answer a very hard question. It's a question that very few people, in or out of government, have had the courage to take on. But there's a considerable urgency attached to it.
People used to think that unemployment and inflation were a see-saw; when one went up, the other would have to come down. But the see-saw got broken in the early 1970s, along with a lot of other intellectual furniture. The past five years have demonstrated with brutal clarity that rapid inflation dampens business activity and actually creates unemployment. If Mr. Okun is right in suspecting that inflation will rise over the next two years, the Carter administration does not have much time to devise a response.