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The economists argue that instead of providing the right incentives, government policy has been coming up with all the wrong ones. They assert that Government has motivated Americans to spend too much and save too little. They charge that federal tax, budget and monetary policies have promoted immediate consumption instead of investment for the future. Their fundamental warning: America has been living off, and eating into, its capital stock. Many of its factories and machines have become outmoded; its old industrial cities have become rundown; its work force has become less productive; real growth has swung low while demand has remained high. The nation is, in short, losing its economic edge in the world, and the hour is late—very late.
The price that every American pays for these failures is a decade-long inflation that is the most pernicious price spiral since the Korean War, and certainly the most alarming one in the nation's history. Because competitiveness and efficiency have declined, and productivity growth, that most basic yardstick for measuring a nation's economic vitality, has slowed, the real cost of producing goods has jumped. Meanwhile, to keep demand up, the Government has created money and credit at far faster rates than businessmen can turn out products and services. The result: too much money chasing too few goods, which is a classic inflation. Largely because of the rapid expansion of money, the average household income is more than twice as much as it was ten years ago, or $16,100. Yet because of inflation, real purchasing power is up only 11%, and for millions of Americans it is now only the second income from a working wife that enables families to make ends meet.
Inflation has spread a financial virus of unwanted dollars to the economies of the nation's trading partners, turning the once mighty greenback into the sick man of international finance. Since 1970, some $650 billion has piled up in so-called Eurodollar accounts in banks overseas, and the threat is ever present that holders might stampede to sell their dollars. Since 1971, minipanics have led to the collapse of worldwide fixed exchange rates against the dollar, the slide of the dollar against gold and other precious metals, and the progressive disintegration of global confidence in the dollar itself.
The Federal Reserve Board over the years has jumped back and forth capriciously from tightening the nation's money supply in an effort to slow inflation, to running the printing presses full blast when the economy seemed in need of a lift. But its new chairman, Paul Volcker, seems committed to a more consistent and tougher policy. Last week the Fed lifted its discount rate, the amount that it charges for loans to commercial banks, from 10% to a record 10½%, suggesting that even in the face of a business slowdown the board is at last determined to halt the excessive expansion of money and credit.