A High Price for Full Employment

Has the U.S. economy entered an unchartered new era in which the old rules no longer apply? That question has been nagging many businessmen and policymakers who are concerned and puzzled about the persistence of relatively high inflation at a time of expanding employment and steady recovery. One man who thinks he has the answer is Dale Jorgenson, a Harvard economist whose thinking about the mid-1970s American economy is attracting increasing attention.

Jorgenson, 44, argues that the explosive rise in world oil prices has wrought a fundamental change in the U.S. economy--one that bodes well for jobs but holds out dim long-term prospects for curbing inflation or boosting growth. Traditionally, says Jorgenson, businessmen faced with investment decisions have chosen to emphasize spending on machines and other capital equipment over manpower because capital was always 1) cheaper to use than labor and 2) more productive. But machinery burns energy, and thus the quadrupling of oil prices by OPEC since 1973 has sent the cost of using capital through the roof, while wages have risen much more slowly. Result: profit-minded businessmen have had less incentive to substitute machines for manpower and are hiring more workers than usual.

For example, a company might hire three men for warehouse jobs instead of one man and a forklift. Under these conditions, says Jorgenson, "more new jobs are created and fewer are wiped out by technological change. As a consequence, we are going to have a more rapid return to full employment than people expect"--that is, when all but 4.5% to 5% of the work force have jobs.

Greater use of less-efficient labor, however, will slow growth. By the end of the century, Jorgenson forecasts, "there will be a reduction in gross national product of 10% below what it would have been" had the pre-OPEC balance between the costs of utilizing labor and capital continued.

Slower growth, in Jorgenson's view, will cut into tax revenues and increase Government budget deficits, which will continue to stoke inflation. Moreover, anything that raises energy prices, including President Carter's proposed combination of increased oil taxes and conservation measures, will only make investment in capital less attractive and inflation worse.

One sure casualty in Jorgenson's scenario: the President's hope of balancing the budget by 1981. Without exuberant growth, he says, "there's no way that goal will be realized."

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