EX-FOLKRINGER
university forum
Inflation: the ill-defined economic bogey man
Inflation is the bogeyman of economics, an ill-defined and much bandied about term that conveys a feeling of impending hardship if not actual economic catastrophe. Because of the difficulty of defining inflation with any degree of exactitude, some economists have suggested that the term be completely avoided. Since the public taste for the word shows no sign of abating, perhaps it is better to formulate a concept, although admittedly nebulous and inadequate, rather than allow the nonprofessionals to preempt the field.
Economists generally define inflation as a chronic "across-the-board" increase in prices. This is merely a description of the consequences, the overt evidence, of inflation; it is not a description of causes.
ECONOMISTS, being "wordsmiths" by trade, also have a whole lexicon of terms to describe types of inflation or inflation processes. We are advised that there is: creeping and hyper inflation, reflation, disinflation, deflation, and of course just plain inflation. Explanations of inflation are given in terms of the wage-price spiral, the price-wage spiral, cost-push and demand-pull.
From this melange of terms, which describes both nonexistent as well as existent phenomena, the economic rationalizers are able to obtain professional sanction for almost any variety of bias or ignorance. By appropriate selection it is possible to "pin the monkey of inflation" on almost anyone's back. The "back" selected depends on the particular group in the community the rationalizer wishes to discredit.
Thus businessmen are prone to discuss inflation in terms of the "wage-price spiral"; while the AF of L—CIO people emphasize that it is the "price-wage spiral." Politicians, not wishing to alienate either group, find the "cost-push" explanation handy.
TO AVOID THE ills and pitfalls of inflation we are incessantly advised to take a whole spectrum of "cures," the remedies recommended depending on the particular collection of prejudices and the degree of ignorance the advocate is laboring under.
Remedies for inflation (some of which actually have validity under certain circumstances) include: raising taxes (sales taxes if you are rich, income taxes if you are poor), holding the "price-line" (labor), keeping wages down (management), raising interest rates (bankers), lowering interest rates (non-bankers), balancing the budget (nonoffice holders), balancing the balance-of-payment (almost everybody), eliminating foreign aid (Republicans), expanding exports (businessmen), cutting down on imports (businessmen), expanding imports (consumers), raising particular tariffs (on the goods you have to sell), lowering particular tariffs (on the goods you have to buy), increasing depreciation allowances (businessmen), increasing profit margins (businessmen), reducing profits (labor), and so on ad nauseam.
Actually there is no such thing as the "wage-price spiral"; the "price-wage spiral," or the "cost-push spiral" in the sense that increases in wages, prices or costs are causes of inflation.
UNLESS EFFECTIVE demands (money times its velocity) are adequate to prevent a cut-back in sales, or a diversion of purchasing power to the price raisers, any administered increase in prices will result in less sales, smaller outputs, less employment, lower payrolls and less demand for products—in other words, depression and deflation in due course.
Similarly if a strong union is able to force wage rates up, this will not have inflationary effects. In fact quite the opposite will happen unless the increase in wage rates is accompanied by increased productivity. Given such an increase in productivity there would be no increase in costs or necessary price increases. Thus is avoided the deflationary impact which would otherwise ensue from an increase in prices generated by an increase in labor costs.
If an increase in wage rates, prices or costs (including interest costs) is not a cause of inflation, then what is? Before responding to this question let us first examine in more detail the nature and implications of inflation.
Inflation, as noted, is evi-
dened by a chronic increase in prices. As such it produces injustices as well as harmful economic effects. Due to the depreciation in the purchasing power of the dollar, those whose savings are held in a fixed number of dollars are, in effect, being robbed. And those whose incomes are relatively fixed suffer, in effect, a reduction in their incomes.
Fluctuations of specific prices, however, are not an evidence of either inflation or deflation. In fact price flexibility is a necessary attribute of a healthy market economy. Nor is a short-lived general movement of prices up or down inherently harmful. This too may be necessary to bring about needed adjustments in the economy.
Inflation is especially severe on the elderly, the pensioners, those dependent on social security or welfare, or on life insurance annuities. And it robs all persons who attempt to build up an estate through life insurance, bonds or in any other form payable in a fixed number of dollars.
In fact if the price level were absolutely stable, there could be no increase in per capita real incomes except as wage rates and other forms of service incomes were increased. In other words, if labor productivity is increasing (as it has been in this country for many years), and the price level is stationary (which it has not been) an increase in wage rates is not only not inflationary, it is absolutely essential to the maintenance of a continuous flow of products to the primary consumer markets.
THE UNIVERSITY DAILY kansan
IT IS IMPOSSIBLE to judge the relationship of wage rates to inflationary developments without a thorough economic analysis. Wage rate increases may be the result of inflationary developments, make take place in an entirely non-inflationary situation, and may, if accompanied by increased unit labor costs, produce deflationary effects in the economy.
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But if wage rate increases do take place in a noninflationary environment, this presupposes productivity increases sufficiently, so that product prices fall by an offsetting amount, thus leaving undisturbed the purchasing power of the dollar. In other words the price level (represented, for example, by the Department of Labor's Consumer Price Index) must remain constant.
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This has certainly not been true in the United States since 1939. The dollar has become approximately a 40 cent dollar since the beginning of World War II. This has occurred, in spite of a vast increase in the output of goods and services, because the volume of dollars being offered for goods and services has increased by a
much greater amount than has the volume of goods and services being offered for dollars.
2
Daily Kansan
editorial page Monday, March 7, 1966
FROM THE END of 1939 and up to the end of 1965 the commercial and Reserve banks of this country have been allowed to create a net addition to our money supply of $288.4 billions. This is an increase of 432 per cent over the money supply existing in 1939. During the same period the Gross National Product (in real terms) has increased 191 per cent. In other words we have been manufacturing dollars more than twice as fast as we have been producing the services and final products on which money can be spent.
Further accentuating inflationary pressures has been the increase in the rate at which we are spending our money. In 1939 the rate was 20.2. That is, all of our money turned over (was spent) 20.2 times in the year 1939. Aggregate purchasing power was therefore twenty times the volume of primary money ($38.9 billion) in existence at that time. By 1965 the annual rate of spending had increased to approximately 36 and the aggregate purchasing power exerted in the economy had risen from about $780 billion in 1939 to $6,143 billion in 1965, an increase of approximately 688 per cent. This is the
percentage that should be compared to the GNP percentage of 191.
Had not a vast increase in the dollar volume of financial and duplicative transactions and transfer payments taken place, and $130.5 billion of the new money been impounded in time deposits in commercial banks, the price level would have risen much higher.
The historical record of this and other countries is clear on this point; there can be no chronic increase in the price level without a concomitant increase in the money supply. If we wish to avoid a depreciating dollar we should, therefore, restrict the growth of the money supply.
But in doing so we will create an intolerable level of unemployment. Given the degree of downward inflexibility that exists in our price structure (due principally to more or less inherent monopoly elements) it appears to be impossible to have a low level of unemployment (less than four per cent of the gainful workers) without at the same time enduring the ills that flow from a chronic across-the-board increase in prices.
Leland J. Pritchard Professor of Finance Department of Economics
New in paperback
AN ADMIRABLE new history in paperback is E. P. Thompson's The Making of the English Working Class (Vintage, $2.95). Its period is the 19th century. It is no document of the impact of Marxism; rather it attempts to show the relationship of the emerging worker in Great Britain to the development of the nation itself.
Finally, a play that many KU readers will know. It is Robert Bolt's A Man for All Seasons (Vintage, $1.45), which was on this campus recently, a brilliantly poetic and illuminating story of the conflict between Henry VIII and Sir Thomas More, the latter being the "man" of the title. Students who have read "Utopia" will find this a compassionate and exciting book to read and own.
LITTLE MAN ON CAMPUS
"I'M NOT HERE TO CONDEMN YOU MISS GRAFTON - I ONLY WISH TO KNOW WEERE WE FAILED IN OUR ORIENTATION PROGRAM!"