Ten Ways to Cut Inflation

By Marshall Loeb

The most distressing thing about last week's news that consumer prices swelled at a 7.4% annual rate in February was that Washington's policymakers were relieved. They had expected the rise to be worse. Indeed, many of them take high inflation for granted, which is the first step toward giving up the fight. They forget too easily that not too long ago 3% inflation was considered to be steep, 4% dangerous, 5% intolerable. Now experts chorus that the U.S. has an "underlying" inflation rate of at least 6%--intractable, indomitable, unassailable.

In fact, the inflation rate can--and must--be brought down. There is no mystery about what causes inflation: too many demands by too many people upon a limited amount of national wealth. The cure is more difficult to prescribe, but surely it involves discipline, limits, sacrifice. The means to retard inflation are economically feasible, but they are thought to be politically impractical. We know many of the ways; all we lack is the will.

The will is notably absent during election year, since any attack on inflation would hit at the privileges of specific interest groups, who threaten their fearsome counterattacks at the polls. But perhaps some politicians would be brave enough, and wise enough, to advocate steps that would earn the outrage of specific interests in the short run but gain the support of the inflation-strained majority over the longer haul. Among the steps that, taken together, could cut inflation:

Reduce the Budget. President Carter emptily claims that his budget for the next fiscal year is "tight," although it has soared since 1974 from less than $270 billion to more than $500 billion, and the planned deficit will run an inflationary $60 billion-plus for the second straight year. With the economy rising and unemployment falling, even Treasury Secretary W. Michael Blumenthal and the rest of Carter's closest economic advisers believe that the deficit should be contained. Wisconsin Democrat William Proxmire, one of the Senate's best economic thinkers, argues that the budget should be shrunk to $465 billion. At the very least, it could be reduced to $480 billion by selective paring. If spending is brought down, the Government will be able to further cut personal and corporate taxes, which would offer the double benefit of strapping inflation and stimulating the economy. For invigorating the economy, lower taxes are more effective than higher Government spending.

Curb Regulation. The spreading powers of the Environmental Protection Agency, the Occupational Safety and Health Administration, the Equal Employment Opportunity Commission and hundreds of other regulatory agencies aggravate inflation by adding to the budget and, more important, swelling the costs of doing business. One significant step would be to hold down the EPA's "enforcement" spending, which is budgeted to jump from $73 million to almost $95 million. Every dollar devoted to EPA "enforcement" obliges U.S. business to invest many more dollars on nonproductive machinery, which then raises prices, reduces productive capital spending and retards hiring.

Restrain Social Security Benefits. They are scheduled to rise fast in the years ahead. By trimming the benefits, the nation can also pare the scheduled increases in Social Security payroll taxes.

Limit Federal Pay. The Government's workers commonly collect more salary and fringes than private workers in comparable jobs, and federal pay is budgeted to increase 6% in the next fiscal year. If Carter succeeded in cutting that back to 5% or less, he would both reduce inflation in the federal payroll and gain moral authority to advocate similar restraint in private wages.

Hold Down State Wages. Having urged a reduction in federal pay increases, the President then could ask states and localities to hold raises for their employees to 5% or less.

Cut Local Taxes. If their projected wage increases were reduced, the states and cities could trim their sales, income or property taxes. Another reason for reduction: many states and localities are enjoying budget surpluses.

Chop Farm Subsidies and Controls. Federal farm aid has grown fourfold in the past two years, to an estimated $7.9 billion, and the Senate passed a farm bill last month that will add $120 to $170 to the food bill of a family of four in the next fiscal year. As a counter to that expensive bill, President Carter last week recommended higher wheat subsidies and for the first time since the early 1970s offered corn and cotton subsidies to farmers who reduce plantings, which will surely raise food prices. There is no excuse for subsidies, despite some farmers' noisy threats of "strike." Farm prices have risen 13.9% since last September, and some food prices will shoot through the roof this spring be cause foul weather has badly hurt harvests of Soviet wheat and Brazilian soybeans.

Repeal Inflationary Special-Interest Laws. The Jones Act, which requires all goods moving between U.S. ports to travel aboard high-cost U.S. ships, has many inflationary consequences, including raising the price of Alaskan oil shipped to the West and Gulf Coasts. The Davis-Bacon Act, a relic of the Depression, swells construction costs by requiring, in effect, that union wages must be paid on all federally aided projects.

Hold Back the Minimum Wage. It jumped from $2.30 to $2.65 last January and is scheduled to rise to $2.90 next January and $3.35 in 1981. Besides being inflationary, the increases discourage hiring of the unskilled and the young.

Freeze Executive Pay. Federal Reserve Chief G. William Miller, who took a cut from $400,000 to $57,500 when he left the chairmanship of Textron, recommends that "top business executives demonstrate their leadership in the fight by holding down their own compensation." A one-year moratorium on raises by people earning, say, $100,000 or more would not make much economic difference, but it might be worth something symbolically.

The weak and perilous course would be to surrender to inflation on the presumption that interest groups are just too strong and the nation's will is too weak to fight it. In fact, President Carter has given in to many of the constituencies, firing up inflation by calling for large jumps in welfare and urban spending, in farm subsidies and tariffs on imports as varied as sugar, TV sets and, just last week, CB radios. So long as the Administration appears to have round heels, self-seeking groups -- from coal miners to steelmakers -- will continue to press their inflationary desires.

The President has said that when he returns from his over seas trip this week, he will produce a comprehensive anti-inflation plan. His economic advisers urge him to take a tough stand by calling for a reduction of subsidies, regulations and the growth of spending. Clearly, the immediate risks would be out weighed by the ultimate rewards. If the U.S. reduces domestic inflation, the dollar will rise, import prices will decline, purchasing power will expand, interest rates will fall, housing will climb, profits will increase, the stock market will turn up, capital spending will swell, more jobs will be created and business will flour ish. In sum, the small sacrifices made by special groups will lead to big benefits for all.

-- Marshall Loeb

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