How Much Inflation?

If the chief political argument of the year concerns defense and the budget, the chief economic argument is about inflation. Last week, echoing his stern budget-message warning, President Eisenhower set up a special Cabinet committee to study the extent to which inflation is heightened by Government spending and federal activities.

The news last week was that price levels are holding steady (see NATIONAL AFFAIRS). But the real measure of inflation's dangers lies in what the U.S. may expect over the long trend.

"Normal" Inflation. In arguments, most speechmakers fail to distinguish between runaway inflation of the sort that swept Germany after World War II, and that now has Chile and Bolivia in its grip, and the so-called "normal" inflation of 1% or 2% a year that has usually accompanied times of prosperity. Nobody wants runaway inflation. But many economists believe that the U.S. economy cannot grow and prosper without some measure of "normal" inflation.

The history of the U.S. economy supports this view. Through times of tremendous growth and prosperity the U.S. economy has always had "normal'' inflation -and the alternative has too often been depression. The best long-range measure of inflation is the wholesale price index, which has been recorded conscientiously by the Government since 1890 and projected back as far as 1749. The index shows that prices have generally risen in times of prosperity or of war, fallen in times of depression. During the severe depression of the early 1890s U.S. prices hit their lowest level in history.

Since then, as the gross national product has grown from $10 billion to $430 billion, prices have increased at a modest rate -an average of 2 1/3% a year (see chart-). From 1897 to just before World War I, the average rate of increase each year was 2 1/2% as the nation went through a period of peacetime prosperity. Yet from 1951 to 1956, when the gross national product bounded from $329 billion to $414.7 billion, wholesale prices increased only 1 1/2% over the whole period, a remarkable stability indicating that "normal" inflation need not run away with prosperity. And whatever inflation the U.S. has had has been offset for most people by a steady rise in income.

From such figures, many economists conclude that the uproar about inflation is overdone. Says a top Administration economist: "The school that says that any degree of price increase at all is sinful and wicked per se is being dogmatic and doctrinaire. Relative stability is the proper goal, and you must have the adjective with the noun."

Low Priority. Everybody agrees that there is no economic growth in times of deflation. But some economists worry that accepting inflation as inevitable may create great dangers for the economy. "The trouble with a little inflation," says a high Treasury Department official, "is that it tends to accelerate because people will count on it as a way of life. If people resign themselves to it, that makes for false decisions, distortions of value, and an overbuilt, overbought economy that will end up in collapse and controls."

Today there is an increasing number of economists, notably Harvard's Sumner Slichter, who believe that inflation can be prudently kept in check by Government fiscal policy and a close watch on spending. But inflation should not be made into a hobgoblin that obscures the fact that the U.S. has already expanded enormously without serious inflation -and can do so again. Says a top congressional staff economist: "Inflation really represents one of the most inconsequential economic problems. It should be given the lowest priority, behind such important things as improving our industrial capacity and total production."

This file is automatically generated by a robot program, so reader's discretion is required.