IN WEIGHING strategies to hold down inflation, it helps to keep in mind the political reasons for its rise. Throughout the 1970s economic growth put unexpected and deeply divisive strains on American society. Twenty-five years of the most rapid economic expansion in history had resulted, by 1970, in rising living standards around the world, vast increases in international trade and great pressure on natural resources. This country, like most others, entered a time of profound change in its economic structure.
Structure change means that traditional patterns of wealth change fast; some people suddenly start getting richer, or poorer, relative to others. The oil and grain states began getting richer relative to the industrial states. The computer industry and the coal industrial got richer in relation to the steelmakers and the shoemakers; computers and cola were exported while the steel and shoe companies cried about foreign competition.
To hold the inflation rate at zero, the average of all prices has to remain stable. To keep the average stable, each rise in one price or wage has to be offset by a fall in some other price or wage. When the price of imported oil went up, some other price would have to come down -- taking somebody's wages down with it.
But to most Americans, actually cutting people's wages and forcing down prices seems intolerably cruel. To suggest that steel workers should meet foreign competition by taking wage cuts is regarded as grotesquely unreasonable. Because of this consensus, very few wages or prices ever move downward in terms of dollars. As result, all of the movement and adjustment has to be upward. That is where inflation comes from. But inflation has reduced nearly everybody's wages, in real terms, by letting those dollars depreciate a little -- and then a little more.
Inflation, for the past decade, has been the alternative to policies that would have enforced extremely harsh cuts in some people's wages and prices. It is fair to say that inflation greased and smoothed a dangerously rapid process of structural change in the American economy that would otherwise have set regional and industrial interests against each other most bitterly and perhaps violently. But spreading its costs very widely throughout society, inflation softened the impact of change on the people who were the losers in it. But the trouble with inflation is that it quickly becomes a habit and an easy out. Then it begins to accelerate.
If Americans generally accept Mr. Carter's warning -- if they turn down their spending a little, and accept some further erosion of their wages -- inflation will slow down. If they continue to try to beat each other at the inflation game, it will speed toward the disaster that is now fully in view.