Since the President's latest anit-inflation talk, surprisingly little has been said about the administration's newest economic brainstorm: ral wage insurance. Waythe chairman of the House Ways and Means Committee, Al Ullman, has expressed some mild reservations about the proposal, the rest of the nation has greeted it with a cavernous yawn. Price-plagued Americans have endured inflation for so long that they adopt a weary skepticism whenever a "quick-fix" solution is served up.
But real wage insurance deserves closer scrutiny. Some commentators have already observed that the proposal would be an administrative nightmare for the Internal Revenue Service, but the more fundamental flaws have gone, as yet, unrecognized.
Centred as it is upon the naive proposition that the program will work if everyone cooperates, the real wage insurance plan would be a tax boondoggle, not an economic boon.
Rhe administration views real wage insurance as a natural, if not essential, complement to voluntary wage and price controls. Employees who are certified by their employer to be in compliance with the 7 percent wage guideline are entitled to "inflation insurance." If the price level increase for that year exceeds 7 percent, qualifying workers would receive a tax rebate equal to the resulting loss in purchasing power.
Superficially, at least, the proposal sounds both plausible and fair. If, in compliance with the president's voluntary program, and employee moderates his or her wage demands and prices continue to rise as before, it is only fair that the government compensate the employee for his or her sacrifice in a losing cause.
So far so good. But what if there are employees in distressed industries who next year receive 5 or 6 percent wage increase , not because of some higher loyalty to the president's program, but because of the industry's declining productivity? Should or would those workers receive "inflation insurance"? According to the administration's outline, yes. Those workers would also be covered to the extent that prices exceed 7 percent. In other words, many workers would receive a tax windfall, a sort of guaranteed annual bonus.
How many workers would receive such a windfall? If the first six months of labor negotiations this year is any indication, quite a few. Wage-rate adjustments negotiated during the first half of this year averaged 8 percent for the first contract year, but only 6.6 percent over the life of the contract, compared with 7.8 percent and 5.8 percent respectively for 1977. In settlements covering 5,000 workers or more, one-half of the affected workers received wage and benefit adjustments that averagedless than 7 percent over the life of the contract. In other words, if the present trend in labor negotiations carries over into 1979. half of all workers in major contracts might qualify for a tax rebate for illusory compliance with the president's guideliness.
A smaller but signifcant number of employees would qualify for a "partial" windfall. Workers, for instance, who lower their wage demands from 7.5 percent to 7 percent would be eligible-if inflation exceeded 7.5 percent in 1979-for a tax rebate that exceeds the value of the forgone wage increase.
Evidently, a considerable portion of the program's largess would be frittered away on illusory wage moderation. But what about those employees who would ordinarily be expected to demand an 11 or 12 percent wage increase next year? Wouldn't it be worth the possible loss of a few tax dollars to persuade them to hold their demands to 7 percent? Sure, but those workers, or their negotiators, are alert enough to recognize that for them "real wage insurance" is not a paying proposition. If, for example, the workers expect prices to advance 8 or 9 percent next year, they would realize that real wage insurance might keep abreast of prices, but it would not compensate them as much as an 11 or 12 percent pay hike. Compliance, in other wokds, would be lowest in those sectors where it is needed the most. Even more disturbing than this worisome slippage is another curious feature of the president's proposal. The cost of the program is closely linked to the degree of cooperation or participation. In theory, if there is full complicance with the president's wage guidelines, prices will fall below 7 percent, and the real wage insurance program would not cost the treasury a dime.
But in view of the strings that are likely to be attached to real wage insurance, only a fraction of the labor force can be expected to opt for the president's program. If only 25 percent of the nationhs 95-million-plus workforce cooperates, the federal government, even in theory, would have to lay out on the average 75 cents for every dollar of wage restraint; and if participation slips to 10 percent, the government can expect to pay 90 cents for every dollar's worth of restraint. Real wage insurance is, at best an expensive proposition.
But even if all criticism could be dismissed, the fatal flaw still remains: Wage moderation is not the solution to our inflation dilemma. The Canadian and British experiences are illustrative. After three years of wage and price restraints, wage increases in Canada have fallen from double-digit levels to the government's proposed 6 percent standard. Prices, on the other hand, have continued to increase at the 9-to 11 percent rate that prevailed at the outset of the program. In Britain, a tough incomes policy brought the rate of wage increases down to 10 percent last year from the 16 percent rate that prevailed the year before. But price increases, also running at 16 percent in the prior year, fell only to 14 percent.
Here, as in Canada and Britain, the driving force behind inflation is not wages, but inflationary government policies, including the creation of new money to help finance deficit spending.
Infaltion is a critical national probablem deserving of close attention. We should not seek to finesse it with a transparent boondoggle like real wage insurance.
The president would be far better advised to devote administration resources to curbing government spending. Given congressional spending behavior, he will have to expend considerable energy in holding the deficit, as pledged, to $30 billion for fiscal year 1980. And given the enormity of that task, the president must be careful not to squander administration influence on a real wage insurance proper administration influence on a real wage insurance proposal destined to die a slow, agonizing death in the 96th Congress.