In its treatment of economists is this nation’s true compassion revealed. Five centuries ago physicians were put to death when pestilence persisted. Today we coddle our economists, call them forth in swollen ranks to confront our economic plagues. Only strangers to the laws of supply and demand can be surprised to learn that the experts have done more describing than solving. In a world of economic perfection, could nearly a dozen books about inflation make their way onto the publishers’ fall lists?
Of the current harvest, Robert Lekachman’s Inflation: The Permanent Problem of Boom and Bust is one of the most appealing. Not only is Lekachman that rare academic who can write without resort to jargon (or except when necessary even to numbers), but also his book is modestly priced. While it has a few regrettable defects, Inflation is an excellent brief summary of why President Nixon’s Phases may come and go but inflation is with us forever.
Like others of his brethren who have taken to print, Lekachman makes excuses for his craft. Economists, he tells us, are no more responsible for inflation than priests are for sin. They know the answers, but can’t convince others to listen. But unlike Irving Friedman, who in Inflation: A Worldwide Disaster heaps the blame on a race (presumably human) grown too fond of material possessions, Lekachman chooses a more attractive target: the politicians.
Lekachman makes his case against the nation’s leaders in the course of presenting a solid historical explanation of the inflationary process. Ten years ago we had relatively full employment with stable prices; now we have neither. In describing the transition, Lekachman has produced one of the best popular accounts of the two theories of inflation: “demand-pull” and “cost-push.”
The descent from what Lekachman portrays as the Garden of Eden—the happy boom times of the early sixties—began with the onset of the Vietnam war. By trying to pay for his soldiers without raising taxes or sacrificing the Great Society, Lyndon Johnson created the classic demand-pull situation. People were being paid to produce goods (rocketry) and services (craters) that could not be consumed on the market. More money was chasing a static amount of goods; naturally, prices rose.
So far this theory could have been taken whole from the pages of any standard economics text. From there, the process became less conventional. Come tax rise or recession, prices never went down. The economy had developed a one-way valve that allowed prices to rise whenever the demand pressure stepped up but which prevented them from ever falling.
Lekachman is not the first to explain this “cost-push” feature of the economy, but he does it in an admirably even-handed way. John Kenneth Galbraith has been telling us for years that large companies can set their own prices; businessmen and the political right have made similar observations about organized labor. Lekachman’s insight is that increasing numbers of us are in on the anticompetitive deal, safe in our monopolistic enclaves:
Universities and professional societies…operate less in the public than in the private interest, and according to the model of the more exclusive construction crafts. Doctors and, university professors raise ever higher credentials barriers to protect their own income. No-fault liability has been delayed for years by trial lawyers who have profited … These are a very few examples of an army of restrictions upon entry into the unions and professions…. lt is not an exaggeration to assert that wherever an observer’s eye falls, it registers a situation of market control or actual domination by a small number of individuals, corporations, health insurers, trade unions, business associations, or professional societies.
What Lekachman is describing is the creation of a class of people with no interest in containing inflation. Each year more and more of us are protected against inflation by special “cushions.” These range from provisions as definite as a cost-of-living clause in union contracts to the tacit assumption among members of trade associations that they will be able to jack their incomes up in pace with inflation. The national government offers the most grotesque illustration. Thanks to the efforts of Rep. Morris Udall, father of the so-called “Udall Amendment,” millions of federal employees are guaranteed a pay increase whenever the cost of living rises. This may explain why the two bedroom counties bordering Washington, D. C. are the two richest in the country, or why the District of Columbia, which contains a staggering proportion of poor people, has a higher per capita income than any state.
One may have more sympathy for attempts to cushion other groups—the social security pensioners or recruits for the volunteer army—but the overall impact is disastrous. The greater the number of people who think they can laugh in the face of inflation, the smaller the resistance to wildly inflationary policies.
Lekachman takes a they-know-not-what-they-do tone in surveying this mess. Someday Nixon and his big-business backers will be sorry, he says, for their boom is headed for an inevitable bust. This is not only unfortunate, but also unwise. While Mr. Average Joe will suffer more than Bob Abplanalp during the recession, it is the rare tycoon who welcomes lean times. The Nixon Administration is trying to serve the upper classes, Lekachman concludes, but it is suffering from terminal myopia.
To repeat: this book is commendable for its clarity and information. But the perspective conveyed in this last passage—a smug equation of Nixon’s economic policy with the shortsighted greed of Republican businessmen—illustrates a major flaw in Lekachman’s presentation.
Instead of commenting on economic politics generally, Lekachman carries out a vendetta against Richard Nixon and the Republican Party. He hauls in Harold Geneen, money-stuffed suitcases, Dita Beard, and the CREEP, both to provide pizazz and to confirm his own admission that “it is hard to be fair to Republicans.” Now and then, Lekachman’s wisecracks on current affairs let him get off a good line: “Mr. Nixon had plans to visit Peking and Moscow. In spirit he now reached out to Cambridge, Massachusetts, and recruited John Kenneth Galbraith.”
More often they smack of gratuitous partisanship. Can the man who writes, “Phase II controls. . . featured one of those bureaucratic inventions of which Republicans seem particularly proud,” ever have heard of the Great Society, let alone the New Deal? How confident can we feel in either his literary taste or his sense of political relevance after reading, “The Administration’s plan to scotch the snake of inflation without unleashing the dragon of recession proved as secret as the famous blueprint for ending the Vietnam war”?
This irritating patina would be trivial did it not arise from the same bias that leads Lekachman to a deeper analytic mistake. As presented in this book, Lekachman’s theory of inflation is similar to Arthur Schlesinger’s attempts to explain Vietnam as a “quagmire.” The story in each case is one of blunder and imperfect understanding. Before they knew it, the politicians were nostril-deep in the mire, without any good ideas for escape. Each step along the way had seemed so necessary, so wise; there was always the chance of victory and rarely the opportunity for calm consideration of the basic issues.
To accept this theory as it applies to inflation requires a major leap of faith: believing that Nixon and his planners thought their patchwork remedies would actually solve the economic troubles instead of just buying time. It is not a question of stupidity on their part, but of a perverted kind of logic.
In his famous essay, “The Quagmire Myth and the Stalemate Machine,” Daniel Ellsberg explained why this reasoning could not adequately account for the war. American policy in Vietnam was not a “mistake,” he said, because at each point the Presidents’ decisions were perfectly rational. Given their priorities—namely, not to have Communists running through Saigon on election day in America—everything from the Diem coup to the Hanoi bombings made impeccable sense. The choices may have been immoral or historically wrong, but that was another issue. With the gelid logic that has made the Rand Corporation famous, Ellsberg outlined a “Stalemate Machine” that went a long way toward explaining the Presidents’ decisions:
Rule 1: Do not lose South Vietnam to Communist control—or appear likely to do so—before the next election.
Rule 2: Do not, unless essential to satisfy Rule 1, in the immediate crisis or an earlier one:
Bomb South Vietnam
Bomb North Vietnam
Commit U. S. combat troops to Vietnam….
Invade North Vietnam
Use nuclear weapons.
One way to improve our understanding of national economic management may be through a similar model of the “Stagflation Machine”:
Rule 1: Do Not Allow Noticeable Unemployment Before the Next Election. This rule applies with special potency to members of Herbert Hoover’s party ; it has been seared onto Richard Nixon’s brain. During the 1960 campaign, Nixon pleaded with Eisenhower to kick the economy out of its recession before unemployed voters went to the polls. Eisenhower was probably the last presidential exception to Rule 1: all of his advisers except Arthur Burns opposed the intervention, and Ike didn’t believe in deficit spending anyway. He turned his Vice President down. The lesson was not wasted on Nixon; when he finally reached the White House, one of his first acts was to appoint Burns as a presidential counselor.
Nixon’s first two years as President proved that fears of the Great Depression could be awakened with surprising ease. As Lekachman puts it, “In the 1970 election the poor Republican showing sharply warned the President that if the economy did not soon display improvement, he was likely to be retired from the White House in 1972.” Shortly afterwards, Milton Friedman and company were chucked overboard so that Nixon could produce at least a small boom by 1972. While fears of unemployment may be the least of the Republicans’ worries now, the same pattern is beginning again. Even though we may see a recession in 1974, we can count on living high in the fall of 1976.
Rule 2: Do Not, Unless Essential to Satisfy Rule 1, Allow Unreasonable Inflation. In the age of innocence, political economists thought they had a choice: either unemployment, or inflation. Now, miraculously, they find they can have both at the same time. The middle phase of the first Nixon term, from the 1970 elections until the 1971 economic manifestoes, drove this message home. Trying to buy full employment with a little payment of inflation, Nixon discovered what the Europeans learned several years back: the price of full employment has risen out of sight. Where a four or five percent inflation rate might have done the job in the mid-fifties, now it may take 10 percent, 12 percent, or more. This revelation led to Rule 3.
Rule 3: Do Not, Until Rule 2 Has Gotten Out of Hand, Take Any of the Following Steps:
a. Impose wage and price controls
b. Create new inflation cushions
c. Raise taxes
d. Break up monopolistic segments of the economy.
These options are listed in ascending order of distastefulness to conservative administrations. So far, Nixon has confined himself to the first two.
Wage and price controls, which the Republicans once opposed most dogmatically, are in fact the mildest irritant to big commercial interests. As applied in the U. S., controls freeze the economic pie as currently sliced; if anything, they allow the share of corporate profit to increase. This is because the corporations that make up what Galbraith calls the “planning system” of the economy have long been setting their own prices. When a general freeze comes, it ensures that their expenses will not rise. The only ones to suffer are the entrepreneurs in those parts of the economy still vulnerable to the laws of supply and demand: the pre-freeze prices may have left them no slack to absorb an increase from some uncontrolled item like farm produce.
The best illustration of this was the recent beef tumult. Two years of controls had brought forth few threats of auto or steel shortages, but packing houses left and right were closing down when the freeze on meat prices continued. As Galbraith puts it in his new book, Economics and the Public Purpose, “It was possible for the planning system to live in reasonable comfort with both inflation and the orthodox efforts to control it. . . These last could be painful, but the pain was concentrated on the market system. This the planning system could endure.” The important truth about controls is not that anyone ever expected them to work in a long-run sense. Too many wrecked control systems lie strewn across Western Europe to permit such fancies. Instead, they were an overtly temporary step, necessary to carry out the logic of Rules 1 and 2.
Step (b) is even more crudely designed as a time-buyer. The inflationary cushions created by the Udall Amendment and its counterparts in the private sector are obviously the perfect way to create permanent inflation. A price rise in one area is communicated through the economy at breakneck speed. Only those left uncushioned can complain. As expectations of inflation rise, so does the rate of inflation: a union hoping for a five-percent increase in its real wages knows it must ask for a 15 percent money-wage increase to offset the rising cost of living. In the long-run “cushioning” is disastrous, yet as a means of minimizing public displeasure with inflation it serves a short-term purpose. Under the rules of the machine that is all it is asked to do.
Nixon has not yet taken steps (c) and (d); even the threat of slipping into recession—and therefore of violating Rule 1—may not persuade him to do so. Lekachman stresses the irrationality of such intransigence: the Republican Party will lose big if times turn hard. But his explanation of why the Republicans lumber on toward disaster is wrong.
In Lekachman’s world, men with dollars hanging out of their suitcases lie behind all economic policy. Since big business would be displeased by a tax rise and apoplectic about antitrust, Nixon’s hands are tied. His campaign donors prevent him from taking the steps that might be necessary to reduce inflation and keep his party in office.
Such reasoning is plausible, yet how different would the choices have been under any conceivable Democratic administration? Lyndon Johnson displayed no great eagerness to increase taxes. Politically that was wise: taxes designed to fight inflation inevitably fall hard on the Democrats’ constituent, the average man, because it is his purchasing power the government wants to reduce.
As for opening up larger sections of the economy to free competition, liberals have as many hesitations as plutocrats, but for different reasons. Memories of the raw marketplace make the heirs of the New Deal unwilling to dismantle the many forms of government intervention; for their part, the Republicans profit from what has been created in the market’s stead. Moreover, increasing numbers of Democrats find themselves with as great a personal stake in anti-competitive arrangements (professional associations, labor unions) as the big businessmen.
Of course, political allegiance is of some importance. A government less firmly wed to big business might have chosen a different anti-inflation strategy. It could have slapped on a surtax to reduce inflationary pressure, and then have humanized the results through public works programs and generous compensation for the unemployed.
Yet the proper way to interpret the persistence of inflation is less as a partisan issue than as the victory of short-term necessity over long-term prudence. Under the imperatives of the Stagflation Machine, Presidents from both parties will follow roughly the same course, pumping up the economy and then trying desperately to cope with the results. In evaluating this process one must criticize not its goals—for unemployment is clearly worse than inflation—but its self-defeating nature. Too often the booms do lead to busts. John Kennedy told his friends he would remove the troops from Vietnam, after he was reelected; in 1971 Richard Nixon may have had similar hopes about stopping inflation. But Kennedy died before his promise could be put to the test. In Nixon’s case, we all can watch as political pressures prevent him from carrying out his intentions.
The Stagflation Machine is not to be taken as a universal model. For the last two decades British governments have operated under the rules of a “Stop-Go Machine,” consisting entirely of our Rule 2. Whenever inflation imperiled Britain’s balance of payments, the government of the day would throw on the brakes. In the resulting recession, the other side would take power, and then begin the same cycle. Very little in Britain’s economic performance recommends itself as a model, except this: successive governments have recognized that controlling inflation was an imperative long-range goal, one that must be
served even at the cost of electoral suicide. No doubt all of the Prime Ministers would have preferred to preserve themselves rather than protect some vague national interest, but the country’s terrible vulnerability to the pressures of international trade meant that the only course more painful than stopping inflation was letting it continue.
What American leaders have most obviously lacked is a sense of responsibility for long-term economic consequences. According to Lekachman, a government serious about planning for the future has four alternatives to choose from. One—trying to make inflation tolerable through increasing the use of cushions—is almost certainly doomed to defeat; experience suggests it would lead to a rate of inflation reminiscent of those in Latin America during the 1950s. Some combination of the other three alternatives seems more likely to work: anti-trust and pro-competitive action to introduce more price flexibility into the economy; permanent controls on those sectors most prone to cost-push inflation; and “recession,” in the morally neutral sense of lowering demand through prudent taxation. This last step should be accompanied by programs to make sure that those of average income or below do not bear the entire brunt of the slowdown.
If these alternatives are ignored, policy concocted in the short run will have two consequences: mounting inflation, with its social injustice and economic distortions; and the customary sequel, unplanned, and often intense, recession.
Nixon worked his way out of the Vietnam Stalemate Machine rather than challenging its precepts. He traveled farther down the list of brutal options than his predecessors and then pretended that the Communists had not taken over in Vietnam. Trying to beat the Stagflation Machine at its own rules would also be a costly and drawn-out process. Discomfort would be minimized if we attempt to change the rules themselves so that they look to a time more distant than the next election day. The President cannot do this by himself—although he can set an example of either foresightedness or opportunism. Only with an electorate educated to the long-range dilemmas of economic management can a President feel safe in attacking the causes of inflation rather than the symptoms. Lekachman’s book is a valuable contribution to that education and as such is welcome.