PRESIDENT CARTER faces an unattractive choice on pay guidelines for the coming year. The White House is gloomily pondering a recommendation to raise the guideline significantly, in recognition of the rising rate of inflation. If he rejects that recommendation, he will risk an open rebellion by labor unions. The guideline is, after all, only voluntary and is suspended on a fragile thread of good will. But, if he accepts the recommendation and lets the standard float upward another couple of percentage points, he will merely be ratifying the next surge of inflation. That is how inflation has been perpetuating itself: higher prices justify higher wages, which then cause higher prices, around and around the circle.
If Mr. Carter wants the country -- and the world -- to take seriously his administration's struggle to restrain inflation, he is going to have to reject the proposal for a higher pay guideline. That could well prove costly to election-year cooperation with labor. It will certainly increase the difficulties in persuading people to comply. But to do otherwise would signal a devastating retreat from the campaign against inflation.
The present pay standard, setting a maximum increase of 7 percent a year, was established in late 1978. But it was calculated on the assumption that inflation would fall in 1979. Instead, notoriously, the inflation rate accelerated. Working people's purchasing power was eroded, and pressure began to build for much faster pay raises. To try to head off that danger, the White House set up an advisory committee, with union representation, under former secretary of labor John T. Dunlop. In January, that committee proposed raising the guideline to an average of 8.5 percent with a range of permissible increases up to 9.5 percent in special circumstances. At the time, many observers -- ourselves included -- accepted the higher figures as the best that could be expected. But the dismaying acceleration of prices since then requires, we now believe, a different and less relaxed view.
The actual increase in average hourly wages last year was 8 percent -- one percentage point less than it would have been without the guidline, the administration contends, but also one point higher than the guideline. Under present circumstances, moving the guideline up to a range around 8.5 percent implies actual wage increaes over 10 percent a year. That's too high.
It's true that wage increases within a 7 percent guideline will not keep up with inflation. It's also true that the attempts to compensate everyone for inflation are the mechanism that keeps inflation going. The pay advisory committee would probably argue that a guideline is worhtless if labor considers it unreasonable. But it is better policy to argue that a guideline is worthless if it merely legitimizes faster inflation.