Business: The Economy: Crisis of Confidence

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has turned into more persistent "cost-push inflation." Excess demand at last has been wrung out of the economy, he believes, but prices are being pushed up now by excessive union wage demands. In a sense, this means past inflation is causing present inflation; union men are angry that past price increases have eaten up their previous pay gains, and they are pressing for extraordinary boosts to catch up and protect themselves against still more price increases in the future.

Economist Martin Gainsbrugh of the National Industrial Conference Board believes that inflation is harder to contain now than in the 1950s, partly because service industries and government at all levels employ a much larger share of the nation's work force. That makes it far more difficult for the economy to offset the impact of rising wages by achieving increases in workers' productivity. The output per man-hour of a teacher, fireman or nurse can scarcely be measured, much less increased. The wholesale price index, which does not include the cost of services, has gone up more slowly than the consumer price index.

At a meeting of TIME'S Board of Economists, Harvard's Otto Eckstein listed a number of other reasons why prices persist in rising despite the Federal Reserve's policy of money scarcity. "The rest of the world is in a very prosperous state," said he, "and demand for raw materials keeps prices rising. The present inflation is so intense that it is difficult to cure−there hasn't been a 6%-a-year inflation in modern times except for a few months after Korea. In addition, the Government is moving toward protectionism in world trade. Finally, there has been an ideological opposition to preaching."

To all that, Dr. Walter Heller, another member of TIME'S board, added a further factor. "Let's face it," he said. "There will be more inflation in our future than in our past because of our bipartisan commitment to high employment. Signs of economic weakness will get a faster Government response than in the past, and both business and consumers know it. This assurance will give an upward bias to wages and prices." In sum, businessmen and consumers will go on spending during a slide because they will take it for granted that the slump will be short-lived.

What Comes Next?

Whatever the reason, the persistence of inflation presents policymakers with excruciating choices. Inflation could be stopped dead if the Administration and the Federal Reserve were willing to push ahead with severely restrictive fiscal and monetary policies to depress the economy. But the toll would be politically intolerable and socially explosive. The Administration, for example, has been counting on rising unemployment to moderate union wage demands, but in the present environment that moderation might well require unemployment considerably higher than the current 4.8%. Economist Gainsbrugh asks worriedly: "How acceptable would such a high body count be, particularly to the militant minorities?"

Even if the Administration's gradual game plan ultimately works, and the Federal Reserve feeds just enough money into the economy to avoid recession, as Burns has pledged to do, the probable results seem unattractive. Eckstein thinks that "business would reach a turning point−followed by nothing in