The salient point is that mild inflation, which is deliberately sought or consciously tolerated by a nation, cannot be kept mild. As citizens come to know that their government is accepting, or even seeking, a slow but steady depreciation of the dollar, more and more of them will become aware that they are losing real purchasing power by holding insurance policies, savings bonds, bank deposits, and other dollar assets. Increasingly, they will bid up the prices of real estate, commodities, and equities. What began as "creeping" inflation will become "running" inflation.
The policy of a responsible government must be to maintain an absolutely stable price level; it is a dangerous illusion to think otherwise. Meanwhile, our national policy should be to aim for greater downward, as well as upward, flexibility in individual prices, so that labor and capital may be shifted from less to more productive uses, within the framework of a stable average of prices. The adoption of the principle of flexible farm price supports has been a helpful step in this regard; other measures toward the same end are also desirable.
Beveridge's concept of full employment is obviously not that intended in the Employment Act. The act calls on the federal government to use all practicable means "consistent with its needs and obligations and other essential considerations of national policy" to maintain full production and employment. Among these "other essential considerations" is the need for maintaining stable money. At the same time, we need a dynamic concept of full employment—one that realistically takes into account the necessity for changes in a free economy.
Any economy with a dynamic technology, in which people are free to alter their occupations and move from place to place, in which consumer demands shift mercurially, in which new products and methods are introduced, and in which seasonal variations of production occur, will have some persons idle at any given time. This "frictional" unemploy
ment, involving an ever-changing group of workers, is a desirable feature of a free economy: it encourages people to seize better opportunities. While frictional unemployment is hard to measure accurately, the consensus of economists is that the United States economy has full employment in a practical sense when 96% of the work force has jobs and about 4% are in the process of changing jobs. (Many believe that the ratios are closer to 95% and 570.) While an annual average unemployment ratio of 4% constitutes practical full employment, monthly ratios may be expected to fluctuate around this level, reflecting overemployment at some times and avoidable unemployment at other times. During the last half of 1956, the idle averaged 3.4% of the work force, denoting moderate overemployment and a national labor market too tight to facilitate efficient job shifting. During the early months of 1957 unemployment has risen, and it may exceed 4% for a time. But recent history shows that, under wise economic management, the United States economy can meet a full employment standard of 96% of the work force employed on the average throughout a year and also maintain stable price levels without direct economic controls.
The difference between an average of 96% of the work force employed and 97% or 98% appears small, but it is vitally important. Inflationists customarily demand a standard of "full" employment too high to permit adaptations, that is, too high to be realized without bringing inflationary pressures into play. Federal officials and citizens should keep a realistic full-employment standard in mind, in order to judge the proper timing and direction of public policies.