Share this story
Close X
Switch to Desktop Site

Fair views -- How Reagan can corral the economy; WHICH WOULD YOU PICK IF YOU STOOD IN HIS BOOTS?

When all is said and done, the Reagan plan is fundamentally a tight-money approach to curbing inflation. If, as I have suggested, inflation is slow to unwind, then we are likely to witness a distinctly weaker economy than the rosy scenario suggests.

This does not mean that some of the elements of the Reagan plan should not be adopted. But it does suggest that we should have a realistic sense of what such a program can deliver. We may need, in short, to look elsewhere for some additional anti-inflationary clout.

About these ads

We can begin by avoiding self-inflicted wounds. Overregulation has both raised prices and imparted down-ward rigidity to prices and should be controlled. The government must not give in to pressure groups who demand quotas or other import restrictions to restrain competitive forces. Those tax increases which directly raise prices should be avoided.

Rather, the government could focus deregulation efforts on those areas with a large anti-inflationary payoff, or it could reduce taxes that have a direct impact on the price level. The federal government might try "bribing" the states -- perhaps through grants -- to reduce their sales taxes. an alternative proposal, offered by the Carter administration, would be to cut payroll taxes and thus reduce business costs and prices.

We can also improve our performance in response to supply shocks. While the shocks themselves may be beyond our control, we can foster more flexibility in coping with shocks and react in less disruptive and inflationary ways. For example, intelligent policies to promote the buildup of inventories could cushion the effects of shocks, be they from natural crop disasters or oil disruptions.

Or we could encourage the development of a capability of rapidly switching fuels, so that any one type of energy shortfall would not be catastrophic.

Rather than merely assuming a defensive posture, it would also be helpful to be able to orchestrate a favorable supply shock. Perhaps the most feasible shock of this sort would be provided by an income policy.

Incomes policies attempt to influence directly the setting of wages and prices, thus reducing the cost of fighting inflation by restraining aggregate demand. Income policies range from informal pressure on a few firms to explicit voluntary guidelines for wage and price increases to the extreme of mandatory wage and price controls.

Mandatory controls should only be contemplated in dire straits, and while we might again come to this route, I will focus on volutary policies.

About these ads

Even a so-called "voluntary" program has some sanctions -- especially if it is to work. At the very least, large firms and unions are concerned with their image and find it costly to be unpatriotic violators. Previously, voluntary programs in this country appear to have had some success for a while but were ultimately swept away, either by errors in policy that produced excess demand or by supply shocks.

Most recent proposals for a voluntary program have used the tax system to provide incentives for compliance with wage and price standards. Such tax-based incomes policies (TIPs) come in many varieties, with one key dimension being whether they involve a reward or a penalty.

A simple form of reward wage TIP, for example, would work by granting a tax credit to all workers in a group who complied with a certain wage standard. A penalty version of this would increase taxes on employers who granted wage increases above a standard. Price TIPs are also possible, but experience with earlier incomes policies suggests they are more problematical than wage TIPs.

A reward wage TIP, which appears to be the most feasible, would provide incentives for moderating wage behavior which should moderate price increases as well. The argument against a TIP is that it may pose administrative and efficiency costs. While this is undoubtedly true, the relevant standard of comparison may be the substantial costs of reducing inflation solely with demand restraint

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.