The plight of the auto industry presents the Reagan administration with a rare change to hit inflation where it lives. The president will soon be surfacing a package of measures to aid Detroit. In return, he can demand, and get, wage and price restraints from the auto makers. But many signs indicate the opportunity will be missed because of ideological hang-ups about government intervention in setting wages and prices.
The role of wages in the current inflation, to be sure, is not that of original sinner. The surge started when the federal government went on a spending spree to finance the Vietnam War and the Great Society. Outside shocks -- from oil in 1974 and 1979 and from sporadic crop failures -- provided a second stimulus to prices. More recently, inflation has been further inflated by high interest rates.
In sustaining inflation, however, wage bargains have played a central role. During the decade of the 1970s, big unions and big companies negotiated long-term contracts aimed at staying abreast of rising living costs. By that mechanism, onetime increases in energy and food prices were spread through the whole economy. The same mechanism stopped or slowed down price decreases in response to lower demand. Wages have thus acted as the transmission belt of chronic inflation.
The auto industry has figured importantly in that process. In 1970, 1973, 1976 and 1979, the auto workers negotiated with GM, Ford and Chrysler three-year accords that raised benefits by at least 10 percent annually. Those increases not only drive up the price of autos bought by millions of Americans; by the force of emulation they worked to foster similar hikes in other basic industries.
Thus steel wages chased auto wages in 1974, 1977 and 1980. Coal is only now catching up. The contract due to be signed by the miners and the companies at the end of this month will provide wage hikes of at least 12 percent annually for the next three years.
The recent weakness of the auto companies, and particularly their inability to keep pace with Japanese competitors, depends of course on more than wages. The sudden hike in oil prices in 1979 tilted demand very sharply toward the more fuel-efficient autos produced by the Japanese. Expensive environmental and safety regulations imposed additional financial burdens on the American companies. They were especially vulnerable to the general economic slump that hit this country in 1979 and to the damper put on sales by high interest rates.
But labor costs also worked unambiguously to favor the Japanese manufacturers. In the past three years, average hourly compensation of American auto workers rose by about 13 percent. The comparable figure for Japanese auto workers was less than 5 percent. Thus, wage bargains combine with more general conditions to explain why Chrysler is on the edge of bankruptcy and Ford is in jeopardy and GM is suffering record losses.
In the case of Chrysler, the adverse impact of high wages has already been acknowledged. As part of the loan guarantee enacted by the Carter administration, the union agreed to freeze wage increases for the last two years of the Chrysler contract.
The same logic should apply to the aid package now being put together for the industry as a whole. In return for favors from government, the union ought to be showing restraint on wages at Ford and GM.
But the auto workers have already dug in against making concessions on the present contract. Ford and gM, accustomed to playing it cozy with the unions, show no stomach for an aggressive stand on wage restraint. So holding the line is largely up to the government.
The administration position, while not yet finally formulated by the president, has been poured out in a Niagara of leaks from a Cabinet committee on the auto industry. The president's advisers are highly partial to deregulation. They see possible tax breaks. They believe Japan can help by self-restraint on imports. They also favor wage and price restraint by the American companies.
But the administration is leaking these views, not speaking out loud and clear. Why? Because that would be interference in the marketplace. So, for reasons of ideology, the Reagan administration is about to miss the best shot at chronic inflation anybody has had in years. It's getting ready to coddle Public Enemy No. 1.