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There is some evidence that recession is still capable of slowing inflation by making it hard for businessmen to sell goods at high prices. In the U.S., while unemployment rose to 34-year highs, the rate of consumer price inflation dropped from 12.2% last December to 5% from March through May. It now seems to take a much deeper recession than in past decades to break a price spiral. There are three reasons for this:
1) Powerful unions keep pushing up wages, and therefore prices, even when unemployment is high.
2) Humanitarian programs, such as unemployment compensation, Social Security and food stamps, prop up purchasing power. This maintains the ability of consumers to buy—and the ability of businessmen to resist price cutting—even while joblessness is rising.
3) Service trades account for an increasing share of sales and jobs—54% of all employment in the U.S.—and it is tough for service businesses to offset wage increases by improving productivity. So they keep on raising prices.
Worst of all, inflation increasingly seems capable of directly causing recession. Inflation does so by either pricing many goods out of the reach of would-be buyers, or by making consumers figure that they dare not buy cars or refrigerators because they will need every penny to pay the next round of increases in food, clothing, rent and utility bills.
How can these problems be alleviated? In dealing with inflation-recession, national policy cannot "fine tune" the economy, but must continue to seek limited yet important aims: adjusting tax, spending and money-supply policies to stimulate or restrain the economy. The recent record is scarcely reassuring. But there is ground for hope that economic managers can learn enough from past mistakes to wield their fiscal and monetary weapons more effectively.
Economists generally agree that governments should shun utopianism and aim at reducing inflation and unemployment to bearable rates—to perhaps 5% for both in America. The U.S. should not repeat a mistake of some past years, when the Government continued to stimulate the economy even after the jobless rate had fallen to 4%, in the hope of getting it still lower; that policy fueled inflation. Completely "full" employment is impossible because some people lack skills that can be marketed, and still others take time off while shifting between jobs.
Another prime requisite is that governments should be prepared to change fiscal-monetary policy in the early stages of slump or boom. A mildly restrictive policy in the late 1960s would have done more to restrain price increases than the recurring rounds of supertight money that followed after inflation had gathered powerful momentum. Similarly, a small tax cut and moderate expansion of the money supply last summer would have combatted unemployment more effectively than the heavy stimulus that was applied this spring.
This necessity to change course early poses a