THE CENTRAL intellectual question in the Western World's politics now is how to create jobs without sending the inflation rate shooting upward again. Both North Americans and Europeans have built economies over the past generation that are poorly adapted for the present strains on them. When output rises, measured in money, most of the rise goes into inflation and very little into the real growth that produces jobs and higher standards of living. But when output falls, most of the decline is in real growth, with a disappointingly small impact on inflation.
While the United States is in trouble, the trouble is substantially deeper in Europe. The European Common Market recently published a useful analysis in its annual economic report, a document startling in its candor. The European recession is now in its fourth year, and the authors of the report, the Common Market's Commission in Brussels, speculate that the unprecedented interest rates, together with "the general climate of uncertainty and pessimism," may have derailed the normal dynamics of recovery in the business cycle.
The signs of recovery visible a year ago have faded. The rate of real growth in the Common Market will be around zero this year, and the forecast for next year is a meager 1.1 percent. Western Europe's inflation, twice the current rate in the United States, would drop to perhaps 9 percent next year, while unemployment rises to more than 10 percent. The Common Market's Commission speaks of "the possibility that the European economy is entering a long period of slow growth, or even depression." One reason is a series of external shocks, like the oil crises. Another is that "the increased structural rigidities in our economies and social behavior" have profoundly changed the way that Europe works.
In the decades since World War II, the hunger for security has understandably been even stronger in Europe than here. As societies got richer, security was what they bought--and that is what has produced the whole system of subsidies, stabilizers, social insurance and publicly guaranteed benefits that make people's lives, as individuals, far more secure but also make their society, taken altogether, far less flexible in response to those shocks and changing circumstances.
In Europe as in the United States, the structure of the economy now responds to a downturn by protecting personal consumption at the expense of everything else -- especially at the expense of business profits and investment on which long-term growth depend. In this country, personal income -- per capita, after inflation, after taxes -- has held steadily at a historical record high throughout this past year while profits and investment dropped fast. Protecting consumption worked well in recessions until the past decade, but, as the European Commission suggests, social protection now seems to have reached a scale at which it prevents precisely the adjustment that is now crucial.
The remedies? First, the Europeans say, interest rates have to come down, and that requires governments to bring down their huge deficits. It's essential to get more money going into investment in productivity and new industries. That, in turn, requires limiting some of the social benefits, and making the pensions -- i.e., Social Security -- self-financing. Further, the expansion of open international trade has to be continued despite the pain it inflicts on older industries. The cause of free trade got a welcome endorsement over the weekend from President Reagan, but there has been some disquieting backsliding in the administration's actual performance.
The Europeans are giving themselves good advice -- if only they have the political stamina to follow it. It's good advice for Americans as well -- if only this country also has the stamina for it.