July 10, 1979
Page 17804
TIME FOR LEADERSHIP ON INFLATION
Mr. MUSKIE. Mr. President, Robert Samuelson recently discussed in the National Journal the fundamental questions this country faces in attempting to slow inflation.
Mr. Samuelson's view parallels my own. His article carries a message I have tried to deliver myself to audiences around the country. It is unpleasant news. But I believe inflation will not come under control until each citizen gets the message, and understands it. The message is simple: Our standard of living goes up only as our productivity increases. If each citizen applies himself only to catching up to inflation, there will be no end to inflation.
Whether it is a businessman using higher prices to preserve his profit margin, or a wage earner who pickets for pay higher than productivity increases dictate, each contributes to inflation. And each, if he restrained his own actions, could contribute to ending inflation.
Each of us, as elected representatives, has an obligation to do our part in the inflation fight by bringing this message to the people we represent. If we fail to conquer inflation, it will be in large part a failure of leadership. If each of us can contribute to a better understanding of the problem and its real solutions, then a victory over inflation is possible, and it will be in part our victory.
Mr. President, to share Mr. Samuelson's analysis with my colleagues, I ask that the reprint of his article published in the June 26, 1979, edition of the Washington Post be printed in the RECORD.
The article follows:
[From the Washington Post, June 26, 1979]
WHO'S TO BE HONEST ON ECONOMIC WOES?
(By Robert J. Samuelson)
The Carter administration's anti-inflation guidelines are collapsing, and unless President Carter is willing to commit his body and soul to curbing inflation — something he has shown no willingness to do — they probably aren't worth picking up.
The settlement between the rubber workers and B. F. Goodrich Co. seems to have put the last nail in the coffin. Even at an assumed inflation rate of 6 percent (used in estimating the effect of a cost-of-living clause), the contract reportedly provides a 27 percent cost increase over three years. At a 9 percent inflation rate, the increase would probably total 35 to 36 percent; there's no way this can be squeezed inside the 7 percent wage guideline.
Nor can the government do much about it. The power to withdraw federal procurement — a power upheld last week in a Court of Appeals decision — is more a feather than a stick. Consider rubber. The government buys about $20 million to $25 million of tires annually, but few — if any — of the purchases exceed the $5 million contract minimum subject to the program.
The price side of the program is also beginning to disintegrate. Initially, the administration had hoped that companies would reduce their average price increases half a percentage point below the 1976-77 average. But companies experiencing "uncontrollable" cost increases could apply a "profit margin" standard. Price increases could exceed the guideline as long as profit margins — profits as a percentage of selling price — didn't increase over those in a "base" period. Though the rule has been toughened, more and more companies (including, recently, the U.S. Steel Corp.) are choosing this option.
Inflation, of course, is the immediate cause of the anti-inflation program's eclipse. For the first four months of the year, consumer prices have increased at an annual rate exceeding 13 per cent.
Oil prices have jumped spectacularly. Food prices — heavily influenced by reduced beef supplies — have risen sharply. Likewise, an unexpectedly strong economy early this year increased many raw material prices.
So both unions and companies passed these costs along in higher prices and wages that, of course, simply perpetuate the inflationary spiral. With cost-of-living adjustment clauses and legislated changes in government programs (Social Security, food stamps) , the process has become semi-automatic.
All this simply highlights the deeper cause of failure. Americans are living a collective fantasy. There is still no widespread understanding that higher living standards ultimately stem only from higher productivity. The fact is that today's productivity gains (less than 1 per cent last year) are tiny, while a number of factors will take more and more output away from the average worker — whether a secretary, auto worker or executive.
These are worth repeating if only because everyone wants to forget them. High energy imports, for example, mean that more of our output must ultimately go to oil countries as exports. Government regulations — to lower pollution, improve product reliability or reduce worker hazards — all raise costs, but not output. There are also pressures for higher tax rates (especially Social Security taxes) to support the growing over-65 population and higher "real" defense spending.
Not all these pressures reduce the nation's "living standard." Environmental controls clearly improve them, as does better care for the elderly. But they all tend to reduce workers' purchasing power, which is what people watch. Unless productivity goes up, wage increases must come down or inflation simply intensifies.
Economic policy today ought to put people more in touch with these realities and attempt to improve the realities. This requires an intellectual grasp of the problem and the political ability to translate it into practice. In short, leadership. Carter hasn't provided it.
His failure, of course, is understandable. The process by which investment and innovation lead to higher productivity and rising living standards is an invisible, imprecise one for which no politician can easily claim credit. Who knows when today's "incentive" will yield results?
Meanwhile, everyone hopes to stay ahead of inflation, and no political leader wants to deliver the bad news that such self-advancement isn't automatic.
Government is caught in contradiction. People correctly believe that their individual behavior has no national impact and blame any collective problem — a recession, energy shortage or inflation — on the obvious agency of collective action, government. But government is not omnipotent. It can succeed at mastering these problems only by influencing collective individual actions.
The government needs to create a sense of collective responsibility. The guidelines attempt to do this. But, human nature being what it is, the guidelines won't work unless backed by threat — recession. The government must declare that it won't print the money to support extravagant wage settlements. Otherwise, people have no real reason to adhere to the standard.
That doesn't mean wage increases should be uniform. Short of wage and price controls, which don't endure except during periods of national emergency, a democratic government cannot police every wage agreement in the country. At best, guidelines can only create a sense of proportion.
Around a general wage standard, larger increases may be justified by higher productivity increases; lower increases ought to result from lower productivity or fierce competition. Labor unions and companies that have the market power to ignore such pressures ought, at least, to be seen as causing both more inflation and lower growth. Only then is anyone likely to ask fundamental questions of why such market power should continue.
The choices cannot forever be wished away: High inflation is now pushing the country into slowdown and recession. Ultimately, someone is going to have to be honest with the public. Carter has not been, but, to be fair, there is not a politician of national stature — not Edward Kennedy, not John Connally, not Ronald Reagan — who is, either.