An Opposing View

Apart from its inequity, persistent price inflation results in economic inefficiency. It weakens the average person's incentive to save money for future use and thereby retards economic growth. It encourages rampant speculation in future values and diverts peoples's efforts from productive activities. It discourages efficiency in business management, as swelling costs are easily passed on to buyers through price increases, and profits come easily without managerial effort. It reduces the efficiency of labor: marginal workers are pulled into employment, jobs are easy to hold, and gains in productivity are not a necessary condition of higher wages.

Inflationists usually overlook these important losses in production caused by inflation—losses which may be much greater than those involved in the temporary unemployment caused by a tough anti-inflationary policy.

There is hope that, in the future, Americans may acquire a greater interest in maintaining the purchasing power of the dollar than they have displayed in the past. More and more families have increasing amounts of savings and retirement benefits, payable in dollars. Today, 54 million workers are covered by Old Age and Survivors' Insurance; 12% million workers are covered by private pension plans; 106 million individuals are estimated to hold insurance and annuity policies; millions more have bank deposits, savings and loan shares, and United States Savings Bonds. While it is true that 60% of American families (29.3 million) own an equity in the homes they occupy, and an estimated 8 million individuals own common stocks—assets that would appreciate during a general price inflation— the number of families having a significant (for them) amount of dollar assets appears to be on the rise, both absolutely and relatively. This will give an enlarging circle of people a personal stake in a stable dollar.

Flaw in the Escalator Clause. Millions of union members now work under contracts containing an escalator clause. This requires that their wage rates be adjusted proportionately to changes in the index of consumer prices. Because public policy and accepted practice generally condone cost-of-living adjustments in wages and salaries, more and more people are getting on the escalator. It has been proposed that the redemption price of United States Savings Bonds should be made subject to a cost-ofliving adjustment. (France has already issued such bonds.) Governor

Harriman has suggested that automatic cost-of-living changes be written into unemployment and other New York State benefits. If all wages and salaries—in fact all future money payments—are put on an escalator, will anyone need to worry about inflation? The critical flaw in the escalator clause is that it can benefit only a limited group. If applied universally, as it is coming to be, it affords the individual no means of beating the inflation game, while everyone's real income is reduced by the waste and inefficiency of inflation. When the family's taxes, mortgage payment, utility bills, insurance, and the goods and services it buys are produced under escalation, the fact that its own income rises equally leaves it no better off than it was before in real standard of living. (Of course, escalator clauses are harmless if price levels remain stable and they are not used—but then they are not needed.) The greatest danger in escalator clauses is that they cultivate the illusion of individual protection from the waste of inflation, and thereby inhibit people from supporting anti-inflationary government actions.

Illusion of the Harmlessness of Slow

One of the most pervasive current ideas is that a slow rise in price levels is harmless or even beneficial, and should therefore be sought or at least tolerated by government. A rise of only 2% or 3% a year in the consumers' price index, it is said, does not produce the evil consequences previously described. In an economy that has many floors under prices and incomes, such as farm price supports and unemployment insurance, the particular price adjustments that are necessary to shift productive resources are more easily made upward than downward. With many individual prices rising, and few falling, an upward drift of the general price level is necessary.

But the inequities and inefficiencies generated by a rapid price inflation do not change their character when the inflation is slow; they are merely of lesser degree for the time being. Those who think this really makes the situation any better forget how rapidly time passes. A 2% annual rise, compounded, doubles the price level every 35 years. A 3% annual rise doubles prices every 23 years, and cancels out completely the real return from United States Savings Bonds. These are short enough periods to be within people's personal experience and consequently to influence their behavior.