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Considering all the signals of slow down, it is curious that there is so much talk about price and wage controls. Almost nobody wants them. "In peacetime they don't work," says Treasury Secretary Kennedy. Economist Paul McCracken warns that controls would not only require "a large bureaucracy" but put a premium on "string pulling, political pull or on willingness to pay for favorable governmental decisions." Milton Friedman says: "Controls do more harm than inflation it self. If you don't use prices to ration goods, you have to use something else: queues, favoritism or bribes."
Washington's traditional monetary and fiscal restraint cannot squeeze all the inflation out of the U.S. economy. The Administration will do well to shrink price increases to 3% next year and to 2% by 1971; some analysts fear that the timetable will run twice that long. Yet only if the slowdown is gradual will Nixon be able to prevent a steep rise in unemployment. An increase to much above 4% might spell political and social trouble. The aim of fed eral policy is to achieve the "2-4 tradeoff"—2% inflation with no more than 4% unemployment.
The consensus among experts is that the Administration has hit upon the right mixture of restraint—most of it inherited from the last months of the Johnson Administration!—to bring down the inflationary rate. What is needed now, as the Federal Reserve's Martin puts it, is "patience, perseverance and persistence." That means that the Government must extend the surtax, keep money tight and sharply limit federal spending.
Pitfalls are everywhere. It will be difficult, for example, for the Administration to devise a formula to keep electrical workers and other unions from winning wage increases of 6% to 7% a year in important labor negotiations coming up this fall. Harvard Economist Otto Eckstein believes that if 6% wage increases become a pattern "then that will lead to a 3% general increase in costs for three years, and we will be fighting inflation continuously, even if the economy softens."
The economy can fairly comfortably tolerate an inflation rate of 2% yearly, and the Government should aim at that. To do any better, most economists agree that there must be far-reaching reforms. As an obvious starter, Congress should scrap the farm-subsidy programs, which not only cost taxpayers $5.7 billion a year but artificially inflate the prices of cotton, wheat, corn, soybeans and rice. The subsidies also help to drive up the price of farm land, adding another push to the price of produce.
The price of many goods might be reduced if import quotas were abandoned or loosened. Such quotas already pro vide big price supports for steel and oil, and President Nixon is pressing for quotas on textiles. One paramount question for the future is whether labor unions have become too powerful. In such strike-prone industries as printing, shipping and construction, strong unions often whipsaw weak employers into granting lavish settlements. Unions in all three fields also block the introduction of cost-cutting new technology. Two steps would help redress the balance: 1) the creation of larger and better-financed employer bargaining units, and 2) pressures on recalcitrant locals to admit more job-hungry Negro youths, especially in construction trades.
Elusive Goal