Business: Search for Stagflation Remedies

Economists today generally agree on one point: many of their old ideas do not work well in controlling that endemic modern problem, stagflation. A stiff dose of Government spending, prescribed by Britain’s late Dr. John Maynard Keynes to cure depression, often leads to an inflation high. The monetarist medicine formulated by Dr. Milton Friedman —take a slow, steady increase of money supply—often produces the economic blahs. The radical surgery of wage-price controls is widely recognized as a palliative at best or, at worst, counterproductive quackery.

Small wonder that economists are looking for some new treatments. The most imaginative thinking on how to ease inflation without causing dangerous side effects centers on two plans known by the acronym TIP, for tax-based incomes policy. Both call for a system of federally set guideposts,* and would use federal taxes as a means of discouraging large wage settlements. The main difference between the two plans is that one would employ a stick, the other a carrot.

The stick proposal was conceived by Federal Reserve Board Governor Henry C. Wallich and University of Pennsylvania Economist Sidney Weintraub. In essence, they recommend that any employer granting wage increases of 1 % or more above certain federal guidelines be forced to pay the same amount in penalty taxes. The guidelines would be reckoned by taking the annual rate of productivity increase in the employer’s industry and then adding one-half of the nation’s prevailing inflation rate. By that formula, the guideline for overall industrial wages would be about 5% (that is, the rate of productivity increase added to one-half of last year’s 6% inflation rate). The plan’s authors reason that a hold-down on wages would be the surest means to reduce the inflation rate. As Wallich told Congress’s Joint Economic Committee in February: “A considerable body of research indicates that prices in the long run are basically determined by wages.”

The TIP plan that offers a tempting carrot was conceived by Arthur Okun, a Brookings Institution senior fellow and a member of TIME’S Board of Economists. In April. Brookings will hold a two-day closed-door seminar of economists to debate the Okun proposal; an open meeting of business and labor leaders is planned for midyear. Participation in his plan would be voluntary, but companies that held wage increases to 6% or less and price increases to 4% or less would be granted a 5% rebate on their federal income taxes. As an inducement for their cooperation, employees in such firms would get a yearly tax reduction of 1.5%, up to $225 per person.

Okun’s plan was seriously discussed by the Carter Administration. At first, Charles Schultze, chief presidential economic adviser, wanted to adopt it. But then the Business Roundtable, which is composed of corporate chief executives, denounced it as unworkable, and labor leaders argued that it placed unfair restraint on collective bargaining. Thomas G. Moore, a senior fellow at Stanford’s conservative Hoover Institute, dismisses both TIP plans as “gimmicks.” Says he: “They are just a hidden form of wage and price controls, pure and simple.” Barry Bosworth, President Carter’s chief of the Council on Wage and Price Stability, complains that the Okun plan would require a whole new bureaucratic machinery and floods of forms: “It is too much control for the corner grocery store.”

Okun concedes he has not worked out all the details, but he argues that his plan is not a form of concealed controls. Further, he maintains that the reporting procedures would not necessarily be more complex than those envisioned for the home-insulation tax credit. “TIP would be better,” he says, “than the inequity and inefficiency of continued stagflation.”

Stagflation contributes to high unemployment; many economists are seeking new ways of coping with the hard-core aspects of that problem, which is concentrated among the often unskilled young, blacks and Hispanics, and housewives seeking to supplement their families’ incomes. In his budget proposal, President Carter asked for $400 million in grants to firms that hire and train unskilled people, mainly in the 18-to-24 age bracket. Even conservative business leaders have told the President that the sum is too small to make much impact.

Instead, M.I.T. Economist Lester Thurow proposes that the Government reduce the size of the proposed tax cut from $25 billion to $15 billion and use the $10 billion differential for direct subsidles to companies that hire and train unskilled youth. Thurow’s program has the virtue of concentrating on the trouble areas without pumping up the whole economy and fanning inflation.

Going a step further, Harvard’s Martin Feldstein suggests that the Government give what he euphemistically calls “youth employment scholarships to the unemployed and unskilled.” Recipients would get 1,500 vouchers, which an employer could turn in to the Government in exchange for $1 each. The firm hiring and training the young person would collect one voucher per hour, thus substantially offsetting the burden of the rising minimum wage, which climbed from $2.30 to $2.65 an hour this year, and will increase to $3.35 in 1981. In the future, the vouchers might have to be worth well over $1. Says Feldstein: “We’ve got to get the effective cost of hiring those people down to $1 or $1.25 an hour.” He thinks a voucher system, or some similar device, is necessary in order to make politically acceptable the tighter money and tougher fiscal policies that can reduce inflation.

The employment proposals by Thurow and Feldstein have much the same problem as TIP; they would be hard to administer. There also would be serious difficulties in defining who was qualified to receive the job subsidy and in guarding against fraud. The plans have run into stiff opposition from union leaders, who fear that federal subsidy for young workers would tempt companies to lay off older, more experienced hands in favor of hiring the cheaper young.

The Administration may have sound reason to dismiss these bold but admittedly untested ideas, but so far it has produced no convincing alternatives. The anti-inflation plan of Carter and Co., based mostly on friendly persuasion, is so weak and ineffectual that even White House insiders mock it as “wishboning.” That is a category of soft talk inferior even to the old “jawboning,” which other Presidents used—with distinctly mixed results —in the crusade to hold down wage and price rises.

*During Phase II of President Nixon’s economic stabilization plan, from October 1971 through December 1972, wage increases were limited to 5.5%, price rises to 2.5%.