While a national policy of muddling along is no solution to our dilemma, let us recognize that the path back to stability is fraught with pain and unquantifiable risks. We now have built into our system structures that accommodate inflation. These range from cost-of-living adjustment clauses, to automatic increases in response to wage demand, to financial instruments adjustable to inflation. Even at the current high rates of inflation, how deep is the suffering? Most Americans are still coping reasonably well, although at a price, to be sure. Most employers must provide some form of cost-of-living adjustment, even without a contractual agreement, if they wish to retain skilled help. Successful young entrants into the labor force try to use financial leverage very early in their careers by buying homes. Others, who have built up sizable equities in homes bought years ago, have acquired precious metals, or have benefited from the spectacular price rise in the non-institutional equity market.
Of more fundamental importance in assessing how to deal with our inflation are the problems associated with the extraorinary over-hang of debt, which has ballooned within the last decade. In 1960, credit market debt totaled $750 billion. It rose to $1.5 trillion in 1970 and to an estimated $4.2 trillion last year. A high proportion of this debt has not financed real growth but inflation -- and, therefore, inefficiencies. As a consequence, the group today with a vested interest in perpetuating inflation is larger than in the past.
Moreover, it must be an inescapable conclusion that in the aggregate the quality of debt has deteriorated. Credit terms have been liberalized and the creditor-to-debtor relationships have been modified. For example, a goodly portion of outstanding commercial paper and short-term bank loans today is financing permanent business needs. They are legally classified short-term but, operationally, it just isn't so. Thus, deflating as well as inflating the credit balloon, considering the fragility of the credit system, is risky.
Muddling along is, of course, my terminology for the present national policy approach. Others would be more charitable. They would say that we are pursuing policies of gradual disengagement from inflation or of monetary steadfastness. These more dignified definitions are not new. The fact is that the widening gap between the promises and accomplishments of policies of gradualism have induced many Americans to incorporate expectations of rising inflation into their decisions and, in so doing, the money illusion has been exposed. To believe that a small recession is all that is necessary to bring us out of our dilemma is contrary to all the powerful inflation forces in place today. A deeper recession, to be sure, is an alternative but, if it does come, it is likely to be triggered by either an external challenge or some unforeseen domestic malfunctioning.
America's economic and financial dilemma is with us now. We are lurching toward a national economic emergency. We must begin to resolve this dilemma if we want to avoid an increasingly harmful fallout leading to catastrophe. Let me be candid. There is no easy and painless way out of this dilemma. At best, I can only offer some barebone suggestions. Whether they will work or be effectively implemented will depend on the shedding of complacency toward inflation by us as individual citizens and by our government. The real question is, "Do we have the will and the wisdom to face down inflation?"
My seven points are:
The government should declare a national emergency to deal with inflation and energy. The declaration should spell out dilemma, a series of emergency measures to limit the drift toward economic disarray and a set of fundamental measures that will keep us on a stable track in the longer run.
One of the emergency measures should include an immediate sharp slowing in the growth of non-defense expenditures. Currently, non-defense expenditures are officially projected to increase by $62 billion or 16 percent in this fiscal year, and by $38 billion or 8.4 percent in the next. I would suggest that these expenditures grow by about 6 percent or 7 percent annually for the time being. This would require the repeal of some prior legislation and a reduction in current entitlements programs.
The Federal Reserve should buttress its present monetary targets by limiting the creation of domestic credit. In this connection, it would be appropriate to cut the growth of bank credit and to impose capital-to-asset or liability ratios for all major financial institutions.
Tighter and more definitive standards should be set for private short-term open-market financing. We should also control and limit more closely the issuance of debt by the various federal credit agencies.
If the United States is to step up its global military commitment, it is time to alleviate the role of the dollar in international finance; otherwise, we are heading for a particularly nasty and acute monetary problem. We must press this point home with our allies in the industrial world. We should clearly define each other's roles in light of the new U.S. military requirements, the huge deficits of the developing nations and the huge foreign dollar holdings. The burden is too great on the U.S. dollar. It would be better to act in correct to ease it, but if this is not possible, one way or another, access aboard to the U.S. dollar will probably have to be restricted.
A National Commission for the Revitalization of America should be established by the government. The commission should consist of a small group of full-time individuals representing key economic sectors. They should be charged, among other things, with formulating a series of urgent steps needed to enhance technological growth, improve cooperation among business, labor and government, find a way to enhance the international trade position of the United States, making specific proposals for lifting the regulatory burden and recommending other measures that will get us out of our current producitivity entrapment. Their most important charge should be to resurrect the marketplace as an effective mechanism for achieving economic progress.
Only if the gist of most of these six proposals is implemented do I believe that a temporary wage and price freeze or a simple mandatory controls program would be of some marginal transitional help toward a better economy.
I fear, however, that the official recognition of an emergency will be delayed. While our economic and financial dilemma will be intensifying, government attention will be mainly focused on the politicking nature of 1980 and not on such thorny and vexing issues as inflation, productivity, energy and the increasing distortion of American economic and financial values. Unfortunately, too, political leadership prefers to initiate measures when a crisis is in full bloom rather than when the warnings flags have been hoisted.