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Show $A The Salt Lake Tribune, Sunday, October SI, 191 Iaissez Faire? Strict Controls? 4If is Note: Paul A. Samuel- of the Massachusetts Institvit Bt Khncloov is Nobel Prize wm- -' economics. In this article, Jner Jk 'ttten for the West German news Oer Spiegel, Semueison Vupgizint " tK&sses Inflation and ynempiov- in present-daAmerica. In t second article of fhts Helmut Arndt, a noted West i Neerrian economist, explains why h.s 'Uftlry emoys a low unemployment "erte.aind high price stability. I'' braithian giant corporations A raises prices. directly inflation symptom of is the remarkable fact that wages and prices begin to rise long before full employment is reached. Even while labor markets are still slack and considerable unemployment prevails, union and money wage rates begin to rise faster than the average increase in labor productivity. Must Go Up The higher wage costs do not come out of the profits of the corporate share owners. The corporations have the market power to raise their prices. It is an arithmetical truism that the price index must climb when all the elements of money cost rise faster than the volume of physical output. What should be done about inflation? Those economists who still cling to the textbooks say: Inflation is inflaton Fight it by clamping down on the money supply. When you have created enough unemployment and industrial excess capacity, prices and wages will be bid flexibly downward. Then with the right dosage of policy, you can live forever afterwards with stable prices and vigor-- c as real growth. It Wont Wash cost-pus- alas it appears that it cannot have both. Economic seminars all over the world have been disPhilcussing the lips Curve problem, which involves the statistical measurement of bow much each reduction in unemployment serves to increase the growth-rat- e of prices and wages. In recent years, though, the problem has become more acute. Wage explosions are h non-unio- n By Paul A. Samuelson Early in the last century iomas Carlyle could call ni i c s this dismal Today, when the jM'ience. iyed economy 4forming anything is outperseen in the Historic days of pure capitalism or in the eastern economics, econom-JwiB the cheerful science. No one worries any longer underconsumption : in s era, we have TTie'tools of monetary and fiscal 'policy to create the purchasing power needed to avoid great depressions. No one, that is, no person, worries any longer ahijirt the size of the public deWj as long as the total Grfcts National Product and facile capacity of the nation grotfs pari passu with the grvth of the interest pay- - T jfe post-Keyne- d --y- A fprst of mqts on the public debt, that problem gravitates down to order of magnitude. thj7th I consider pollution of the enwjonment to be a prime But it is not a prob-lenlose sleep about at nifjht. It is not that we have friJ; to solve that proLlem anijiave failed. It is that no ever seriously himself to the prob-lerlthere is no penalty for ruigwg the Rhine River or -- onhas lf ifgisider pollution of the environment to jtea prime so&al evil. But it t a problem I sleep about. Lake Erie, Laissez faire profit seekers will get rid of wastes at the expense of environment. general otherwise? And Why why itaq-ec- t not use the full power of the state levying effluent taxes and passing restrictive ordinances? could continue listing Issues that send fears down the spine of the ordinary citizen,?-, but which the modern economist understands the solution to. Automation, business-cycle oscillations, cold war expenditures. cessa-tiife-t- r for all our smugness the accomplishments of ihe mixed economy and the ticjiphs of economic science, there remains one spectre to But, a Creeping non-unio- n found everywhere. (Incidentally, this shows how superficial the simple view that inflation, like syphilis, is imported What from the abroad. pre-191- 4 cost-pus- character, Pogo, said, holds true for the problem of inflation in the mixed We have met the economy: comic-stri- p and he is enemy 1969 A years us!) in these lidity. Why should sensible people listen to their unrealistic advice? Presidents, prime ministers, and chancellors pay heed to the preservers of deflationary policies because their diagnoses are so optimistic and their prescriptions are so pleasant. inOstrich-like- , politicians dulge in wishful thinking and listen to the economic medicine man who proffers the most soothing nostrums. Statesmen of experience know that all the mixed economics that the U.S. and the U.S., Sweden and Switzerland, France and Italy, Belgium and Holland, Western Germahave in varyny and Japan ing degrees faced a cruel tradeoff between full employn ment or price of the inflation has been the deterioration of the Johnson-Nixo- notorious example of the ccst-pus- h 1969-197- Dollar Declines of the casualties One Plan Fizzles U.S. inflavirulence of tion is recent American experience. President Nixons 1969 economic game plan has been a conspicuous fiasco. According to it, contriving a small amount of unemployment would purge the system of its inflationary evils. But terms are fossils, living long beyond the time when their notions possess empirical va- h n balance of payments. Un- like most international trade experts, from 1959 on I have been convinced that the American dollar is overvalued. But I was willing to that hope, in the years 1960-6the situation was gradually being improved by virtue of the fact that inflation in Europe was outpacing inflation at home. The Vietnam eszalation ended all such hopes. In the half dozen years since 1965 the American dollar has not recession involved more unemployment than the plan envisaged: and after, three years in office, Richard Nixon can discern scarcely any improvement in the rate of inflation. I do not wish to be misuntime, it has lost derstood. President Nixon ground. Our current surplus inherited from his predeceshas dwindled away to almost sor an inflation in being. The nothing. approximate cause of the Forced Action American inflation was the I am delighted that the inescalation of the Vietnam war by President Johnson in the ternational crisis has been a firecracker under the Presisummer of 1965. dent to force him to a new doGave Warning mestic policy.-H- is game ulan New economists, like myself of no action was a lis'ish'r. and Johnsons own Council of President Nixon has de facto Economic Advisors, warned devalued the American dollar. His hand was forced by specuhim that adding a new mililation. But speculation was tary burden upon an economy whose resources were already the effect, not the cause. The was the long-terpretty much fully employed could have only one conseovervaluation of the dollar. inflation. quence Every mixed ecoio.ny is incomes President Johnson spurned clamoring for an the advice of his economists policy which, supplementing to recommend a tax increase fiscal and monetary policy, to pay for the war in a non- will enable it to have grea.er the 1970 marked cause One Or Other No mixed economy been able simultaneously enjoy full employment stable prices: It can have or it can have the other, price stability at high tr no ju,Alas, informed economics can mulate an agreed-upocomes policy. Would Be Nice plov-men- t. of forin- Milton Friedman oi the University of Chicago, and Dr. Jacques Rueff of Paris, think that no incomes policy is needed. II the money supply is kept in check, laissez faire can be counted on to give us If inflationless prosperity. only I could believe their comforting fairy tales! Move Stop-Ga- p has to and one, but On the other hand, John Kenneth Galbraith of Harvard University is confident that the prices of the hundred corporate giants, and the wages large they negotiate with unions, can be easily frozen by government. A dozen of his gr Juate students, with a few secretaries and some help from Ralph Nader volunteers, can keep the lid on the price level as effectively in peace as was done in war. If only I could believe in this fairy tale! Experience shows that government wage and price controls are extremely effective in the short run. They do work to check an inflationary spiral. But, as time passes, they become increasingly ineffective and inequitable. Fi-- n a 1 1 y, populist democracy, weary of regulations, jettisons the whole effort. For these reasons I would reserve the A voluntary price-wagfreeze will not provide the final solution to inflation but I applaud it as a first step loward an activistic "incomes to supplement monepolicy tary and fiscal policy. The alternative is stop-gdriving of the economy; contracting fiscal and monetary policy when inflation is pinching hardest, in order to contrive a slowdown and a cool- infla-yin- o period; stimulative ing off fis- cal and monetary policy when and stagnant unemployment growth is pinching hardest. Unfair Burden Stop-gdriving is inefficient driving. It puts the heaviest on of stabilization burdens those who can afford burdens the marginal and least unskilled workers, the poor, and no one escapes its burden as profits languish and living standards rise less rapidly advance than technological permits. When we draw up a balance sheet for the mixed economy, its assets are many. But one blemish remains: its inability to cure the problem of creeping inflation. A good scientist must admit to his ignorance. Certain cancers encountered in the clinic are incurable in the present state of medical knowledge and the best physicians do not pretend otherwise. This is in the softer science of political economy. We know o a canter, canter to a of how to avoid chronic slump and how to create needed agecogregate spending, but nomic science must admit that ii has not yet knowledge to cure sellers inflation without having the cure harm the economy almost as much as the disease. In conclusion, what seems to follow for Germanv? Here a are a few tenative thoughts offered as mere speculations. First, that part of inflation a surplus country which imports from abroad can be minimized bv currency appreciation. I know this is a frightening process to the man in the street, but he should note Canada, in 1970, was spared the full ravages of the U.S. inflation by letting her dollar float upward relative to ours. And every German should compare the deterioration of the purchasing power of the franc and lire with that of the mark since 1961, 1969, and tne principal countries of the world were to retaliate with exchange controls and a chaotic trade w'ar. Actually, as an American, I 1971 appreciations. Second, I know that Ger- mans are traumatized by the memory of the 1920-192- 3 But, as the hyperinflation. Bible says, there is a time to remember and a time to forget. gallop. In the final decades the Twentieth Century, one mus not be frightened into hysteria and paralysis by terror stories from 50 years ago. Tragic Response tragedy and an unnecessary one if, in fear It would be a of the restoration of equilibrium to the American balance-of-payment- s, Creeping inflation is not galloping. We can't be frightened by terrible stories from 50 years ago. envy Germany its Phillips Curve. For reasons I do not pretend to understand, when wages rise in Germany it is more nearly in rational response to genuine shortages of manpower. More significantly, when insufficiency of jobs begins to appear in Germany, both your union and wages slow down their rate of growth. Count your blessings! non-unio- n Creeping inflation is not galloping inflation. There is no inevitable progression from a creep to a trot, from a trot to (Copyright, 171, Dor SpteptO potent weapon of wage-pric- e controls for more serious emergencies. But that leaves us seeking desperately for an incomes policy that is somewhere between controls Galbraiths and N i x o ns salutary Such a policy will neglect. have many facets: moral suasion by the head of state; occasional pillorying of a business and labor leader before the court of public opinion; antitrust pressures; encouragement of competitive imports, full use of the power of the governments procurement purse, punishing those who take the short view by withholding government contracts from them. An incomes policy aimed at improving a countrys Phillips Curve will also involve manpower training and retraining, proregional development grams, subsidies to worker mobility, and matching of employers needs toworkers skills. ; computer - We neverletanyone keep it before. When Our City Needs A MAYOR Who Is Moture, Stable, Devoted And Has The Integrity To Face Our Problems With The Vision Of Tomorrow And The Leadership For Today "Now Is The Time lKirS GteTi'j Safe new scourge, the 3momists. Every war in involved the printing ,p$vrponey and the inflation of Particularly in the defeat, ifjewash of post-wa- r wnen the very fabric of government and society hr.s been undermined, economists ex-pg to encounter inflation like that" of Germany in 1321-2the American Confederacy in our South in 1865, the hvperin-flaWn- s of Hungary and China after World War II. of ty pre-191- 4 conrad i. harrison Get this machine by Singer! Its The Green Machine, designed to be a g rental model, Singer is our choice" Zig-Za- hyperinfla-IjRw-gallopin- infla-Quirt- trVlJiese are diagnosed by to be In e y if Wasnt Expected dKlwat us. case the economists were all too right. In the three years following 1965 we expeIn any rienced demand-pul- l inflation. These days, when unions get blamed for everything, scer.-tifiobjectivity requires one to recognize That in the years immediately following 1965 it was wages which rose most with union wages definitely trailing behind. But let us make no mistake about it, if a modern economy inflaundergoes demand-pul- l tion for several years, it will reap the harvest of inflation in the following years. And this is what has come to pass in the three President Nixon's game plan ' was a conspicuous fiasco. cost-pus- Those who preach inflationary manner. Perhaps he thought asking for new taxes would be futile politics. Perhaps he feared that this would jeopardize some of his Great Society programs. Perhaps he suspected that if the American people were candidly presented the bill for the widening of the war, they would veto his militery policy. Came To Pass c macro-econom- Two Articles Only I Could Believe in These Fairy Tales demand-puldemand-pul- THIS IS WHY: HARRISON is strong l s infla-tiog- s. infla-th- e causal mechanism is jjjaj of too much money-lendinbeating against the limited supply of physical jgtfOds producible at full emthe with up bidding plovment, of prices being an inevitable IflUSnquence. Along with the tgdding up of prices goes a Jadding up of wage ra'es as labor markets become tight ajid desperate employers jiise their offers to tempt Workers away from other employers. 2 In any case, the economic Yopctors prescribe a dose of fiscal and Jjmtractionary 'rrnonetary poncy to wipe out inflationary gap and bring volume of money spending ypvn to the total value of the vyiods society is able to pro- - open-minde- HARRISON works In this age when we have vjauch better statistical information about the Ranges in the economy, and day-to-da- y hve computer models of the wost sophisticated type to the course of developments, fighting demand-pul- l Reflation would not be so diffi-Md- t. ,What then is this new kind V inflation that is so hard to Ltre? Instead of being inflation, it is seller? inflation. The push of wage costs and maintailed prorit margins by the Gal- - d harmoniously with Legislators to improve Push-Butto- our city. 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