AN OPPOSING VIEW by Neil H. Jacoby "In a prosperous period the principal threat to the efficient functioning of a free enterprise system is inflation."—President's State of the Union Message to Congress in January 1957. In these words President Eisenhower drew attention to a fundamental truth, and put his finger on what is likely to be our major economic problem during the next decade. It is becoming clear that stabilization of the cost of living and protection of the purchasing power of the dollar will be the recurrent problem of the prosperous 1950's and 1960's, just as overcoming chronic unemployment was the persistent problem of the depressed 1930's.
The reason for President Eisenhower's concern about price inflation is that, after three years of stability, the index of consumers' prices rose almost 3% during 1956. The all-commodity index of prices in wholesale markets began to climb after mid-1955 and rose % during the ensuing 18 months.
In his Economic Report of January 1957 the President analyzed the cause of the ominous lift in price levels. He found that "rising costs became an increasingly pervasive factor," and that the general rise in costs during 1956 was "in response to higher raw material prices and advancing labor costs." Average hourly earnings of production workers in manufacturing and construction rose 6% and in retail trade 4%, but improvement in productivity (output per man-hour) was slight.
The result was higher wage and salary costs per unit of product, part of which was of course passed on to purchasers in the form of higher prices.
These demand-generating forces promise to be potent for many years to come. The vast expansion of scientific research and development, the forward surge of technology, the booming population, the rising horizons of consumer wants, the world-wide demand of newly independent peoples for capital goods to improve productivity and living standards, and the global political and military commitments of the United States—all combine to produce aggregate demands on the United States economy that will, from time to time, press its physical capacity. Deficient demand
and mass unemployment are unlikely to trouble our country as often as an excessive aggregate demand for goods and services.
I am referring to the recurrent long-run problem of the next decade or so, not to the short-run course of price levels. During the months that lie immediately ahead, wholesale and retail price levels will probably not rise much, if at all. Business shows signs of softening. Prices of such basic commodities as steel scrap and copper have already fallen sharply. Retail sales are only moderately ahead of a year ago; inventories are ample. New equipment in industry is raising efficiency and cutting costs, and productivity seems to be on the rise. The restrictive monetary and fiscal policies followed during the past year have caused many construction projects to be deferred. The chances are that price indexes will move more nearly sidewise than upward for some months.
Yet the long-run problem of preventing inflation remains. Sooner or later, the basic forces of demand will combine to threaten a resurgence of prices. And when this occurs, will our federal government be prepared with a set of economic policies adequate to keep the cost of living stable? What Are the Basic Issues? Adult Americans have seen the United States dollar lose half of its purchasing power during the 17 years following the outbreak of World War II. Although price levels have moved sporadically, this represents an average rise in living costs of 4% per year. Many people are naturally concerned about the future cost of living and the value of money. Among the questions in people's minds are these: Is a slow rise of prices not only inevitable but also desirable? Is inflation an inescapable cost of steady economic growth—an alternative to business depression and unemployment? Is the kind of fiscal and monetary policy that will stop inflation intolerable? Is its impact unduly severe on such segments of our economy as small business firms, home builders, and municipalities? Is the federal government powerless to stop inflation in the face of aggressive wage-raising efforts by labor unions which result in progressively higher costs and prices? Of course no one in the United States advocates a runaway inflation of the kind that has wrecked many a European economy in the past, but this leaves room for at least three different schools of thought about inflation.