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There are grounds, though, for taking a hopeful view. By far the most important of these is the fairly steady, though irregular, drop in the inflation rate from its frightening peaks of 1979-80. During the 1970s, surges of inflation eventually undermined every economic upswing and led to new slumps, which brought about only temporary slowdowns in price rises. But many economists believe that the length and depth of the present recession have wrung inflation out of the economy more thoroughly than the preceding busts.
Says Mickey Levy, vice president for corporate planning of Southeast Banking Corp. in Miami: "Every economic recovery the nation has had since 1949 has been accompanied by an ever increasing rate of inflation. I think that that kind of upward ratcheting will be broken this time around." Walter Heller, a liberal Democrat and sharp critic of Reaganomics, asserts, "I'm an optimist about inflation. I think that at last there has been a lowering of expectations," meaning that people no longer believe prices must rise faster and faster forever. Heller and others cite structural changes in the U.S. economy as another factor behind the high hopes for stable prices. These include: increased foreign competition in industries like autos and steel; deregulation, which has led to more price competition in airlines and trucking; and, of great importance, prospects for renewed growth in productivity, or output per man-hour.
The more a worker produces, the higher his wages can go without forcing an increase in prices. For three years, 1978 through 1980, productivity actually declined; 1981 saw only a small increase. But productivity rose at an annual rate of 2.6% in this year's first quarter, and a further .5% in the second quarter, though it usually drops during recessions. That was partly because employers in this downturn have been more ruthless than in the past about laying off workers rather than keeping them around with little to do. This gives those who remain a particular incentive to protect their jobs by being more efficient. But economists see other reasons why productivity may continue to gain, and faster. Among them: increased skills acquired by the youths and women who flooded into the job market in the 1970s, and greater use of computers by business to plan operations efficiently.
There seems to be growing confidence in the business and financial communities that inflation can be held to about 6% during the next year, and perhaps even reduced below that. Such an accomplishment would permit interest rates to continue declining, thus helping to revive industrial output. Reason: lenders would no longer feel that they had to demand high rates to guard against having their returns eaten up by renewed price boosts. In fact, the drop in inflation seems to have been one reason for the interest-rate slashes that have already occurred.