VIII. Creeping Inflation and Intellectual Honesty

One may wonder about the present state of mind of the eminent economist: scared, hysterical, alarmed, gravely concerned, or not concerned at all? But his wartime ruminations should not be taken too seriously. At that time, the upside down economics of J. M. Keynes reigned supreme, in particular the theory that the saver is the de structive villain in the drama of the business cycle, the spender the constructive benefactor. 71 • AN INFLATION PRIMER Since rising prices penalize the wicked saver and stimulate the brave spender, it was rather con servative to be "concerned" about such a trifle as a monthly rate of price inflation exceeding one per cent. Professor Paul A. Samuelson 1 of Massachusetts Institute of Technology, author of a widely used college textbook, in an early edition announced ex cathedra that 5 per cent is the desirable rate of annual depreciation of the dollar's purchasing power. He was down to 2 per cent per year in the 1958 edition, with no explanation for the change of heart. At this rate of progress of his own theory's depreciation, he may land-on the gold standard.

So far as the public is concerned, the late Har vard Professor SumnerH. Slichter was the prophet of creeping inflation. He seemed to mean a ·3-5 per cent annual rise of prices. The New York Times of April 27, 1959, took him to task for "strange discrepancies between the Professor's statistics and the conclusions that their author draws from them," intimating that, hav~ng built up a clientele by forecasting perpetual inflation, he had acquired a vested interest in his own fore casts. (He propagandized spending and debt monetizing policies that would have helped his forecasts to come true.) Slichter, in the Commer cial & Financial Chronicle of July 23, 1959, re acted with intellectual somersaults. Instead of 72 CREEPING INFLATIoN blaming the Federal Reserve for "creating unem ployment," as he did only a few months earlier, he became its defender, putting the blame on the pressure groups, meaning the farmers and vet erans. He still glorified the inflation that did marvels at the ,modest rate of 8 per cent in nine years. In other words, less than 1 per cent infla tion per annum is sufficient to maintain prosper ity, according to Slichter's last turn. We would not venture to divine the next turn. of his famulus at Harvard, Professor J. Kenneth Galbraith.

CUTTING THE DOG'S TAIL PIECEMEAL The answer to the first question, "How much i~ a little?" is anyone's guess, and the propagators of creeping inflation are not even bound by their own estimates, which have no scientific rationale whatsoever. The second question should be equallyembar rassing to the creeping inflationist. He posits some annual percentage rate of the moriey's future depreciation. Does he mean the same rate each year? That, of course, would be contrary to all experience. But a long-term average may be ar rived at by a practically infinite number of com binations of annual rates. The sameness of the arithmetical result is no proof of identical eco nomic meaning. Annual averages over a· decade may take us back to the ups and downs of the old-fashioned boom-and-bust cycle. 73 AN INFLATION PRIMER Slichter admitted the obvious, namely that periods of boom alternate with years or months of recession. But then his creeping inflation boils down to short cycles of over-and underemploy ment, with a long-term bias in favor of higher prices.

Our third question also implies a test of the inflationist's intellectual honesty. How long is the "perpetual" creeping supposed to go on? For a limited period? Indefinitely? Forever? The answer, if any, is vague, evasive, noncommittal. Yet, this is crucial. If there is a reasonable time limit, the "fun" is spoiled. If there is none, peo ple will notice sooner or later what they have to expect and will hedge against it by rushing to buy things before the money loses much of its purchasing power. Would that not turn the creeping inflation into the runaway or self-in flaming kind, a contingency to which our infla tionists are opposed tooth and nail? According to Dr. Slichter, there is no such danger. Experi ence shows (to his satisfaction) that people take a cleverly planned or dosed inflation in stride and scarcely notice it, like the proverbial dog that would not suffer if its tail were cut by small pieces only.

On what assumptions is this diagnosis of human behavior based? On the ability of economists and politicians to bamboozle an ignorant public? But the propagandists themselves, of all people, are 74 CREEPING INFLATION guilty of making people aware of the inflation. This is an extraordinary case of a forecaster whose forecast is doomed by his own efforts. If he con vinced many of us that perpetual inflation is in the cards, we would be anxious to act on that knowl edge-to buy, borrow, and speculate on further rising markets, spelling finis to the slow inflation. S~ichter might have had a better chance of being proved right if he had stopped tooting his prog nostications from the literary housetops. The unions understood that the dilution of the currency creates a redundancy of demand . . Supply cannot catch up at once. A prime limit ing factor is the relative shortage of qualified labor; on that, labor "bargaining" thrives. But ris ing wages unleash vicious spirals, which in turn upset the neat calculations of the planners. Small wonder that Slichter was growing increasingly critical about the unions. They were ruining his balderdash-by acting on his theory of slow in flation. Instead of recognizing the effect of his own mischievious and inconsistent propaganda, he cried out that the community should not "tolerate this topsy-turvy system of distribution"

by which "labor exploits capital, science, and en gineering. "2 The trouble with planned inflation, slow or otherwise, is that inflation cannot be planned. Planners (technocrats) think of running a social organism as a mechanical contraption. This is a 75 AN INFLATION PRIMER naive concept of the body economic-of human nature. By controlling the flow of fuel, one con trols the speed of the motor. By regulating the flow of spendable funds, the planners propose to control the flow of demand for consumer and capital goods, and this without serious interrup tions. However, the motor does not discount the future intake of fuel; men do anticipate the forth coming action of the monetary authorities if they know or think they know it in advance with rea sonable certainty. This is exactly what slow in flation brings about, once the pattern is definitely established in people's minds. POWER VERSUS FREEDOM In a free or relatively free economy inflation cannot be planned, but a planned economy can not operate without inflation. Even the almighty Soviets live under its constant pressure (inter rupted periodically by brutal deflationary meas ures). The same is true for the patronage state misnamed welfare state-in which maintaining the national budget and the credit system in a sound operating condition and conserving the in ternal as well as the external stability of the cur rency are secondary considerations, at best. Under the rule of the gold standard, the money supply is "disciplined." So is the budget, because the Treas ury's recourse to the printing press is restrained.

Then, too, the politicians' power to plan or to 76 CREEPING INFLATION manage the economy and to pour out patronage is restrained. (The law of corruption: corruption grows in geometric proportion to the volume of public expenditures.) Herein lies the crux of the whole monetary debate. In ultimate analysis, it boils down to the choice between a free) competi tive-market economy and a statist or collectivist system run by political fiat. Currency manipulation is not only a charac teristic of every collectivist society; it is the safest and surest way to collectivize every society. "The issue between individualism and collectivism, be tween internationalism and economic national ism, is settled when a country has decided what kind of monetary system it is going to have. If the government is free to manufacture and mani pulate money at will and arbitrarily, then we cease to have a free society."3 Openly or in disguise, the proponent of col lectivist policies starts from the assumption that the price mechanism fails to perform its essential functions. (See Chapter VII.) If he does not negate the free-enterprise system altogether, he is at any rate highly skeptical about its efficiency or desirability. That system deprives him of chances to exercise real power) power over pro duction and distribution. Hence, the claim that the government has to take over where business allegedly leaves off. Full employment (no-more77 AN INFLATION PRIMER depression) was one patent pretext written into the statutes, if only in vague wording, as the Em ployment Act of 1946. But contracyclical med..

dling turns out to be inflationary, so the next step is to add insult to injury by requesting that price stability should also be guaranteed-by the government. Lately, the public is deluged with the official and unofficial promotion of growth as the overriding value to justify more public spend ing, taxing, inflating, and meddling. The theories and techniques change, but the object is constant: to win many friends and in fluence many voters. Short of military victory, nothing serves the ambitious politician better than the appeal (in humanitarian lingo, of course) to the greed of groups with substantial weight at the polls. Crawling inflation is a very convenient avenue for the redistribution of incomes and wealth, a most effective subsidiary to discrim inatory taxation, political patronage, governmental meddling, and outright corruption. Even the tightrope act of "balancing" the economy between booms and recessions necessitates a host of incisive fiscal and monetary maneuvers. And should the inflation get out of hand, the collectivist stands ready with price, profit, and wage controls, allo cations, rationing, credit controls, foreign-ex change barbed wires, and nationalizations. The greater the calamity brought about by the infla tion, the broader the power he is likely to acquire 78 CREEPING INFLATION to combat the inflation· by "physical" (bureau cratic) methods of repression.

MUST WE FOLLOW THE KREMLIN? A word about the collectivist is appropriate. He is no Communist, oh no! Frequently, he claims to be a believer in economic freedom, with a bit of money management superimposed. But on some basic points his thinking happens to co incide with the Kremlin line. Growth at any price, his ultimate ideal, is straight out of the bolshevist horse's mouth. And (changing the metaphor) he rides that horse for all it is worth. Russia's propaganda about her progress-meas ured in imaginative price data-is being held up for boundless admiration. Never mind that the data are notoriously faked, or that the Soviets know little and care less about their own costs;4 they can always reduce living standards, in addi tion to wasting their own and their satellites' re sources. The sophomoric notion of a Russia that lacks the incentives and a rational price system, the touchstones of efficiency, overtaking us is be ing dangled as a· Damocles sword. (If she did, everyone, including ourselves, would be better off.) For years, she is supposed to be on the verge of flooding the world's export markets, although the dollar volume of her exports to non-Soviet countries never reaches that of Switzerland or 79 AN INFLATION PRIMER Sweden. Such irrational propaganda serves also to justify our foreign-aid outpour.

The Western ("democratic") collectivist and the Eastern (totalitarian) communist have more in common than either would care to admit. The common concept of monetary and credit manipu lation is but one expression of an ideology that is the very opposite of economic freedom-which means free choice by the consumer. On the free market, the consumer's vote reigns sovereign in determining what should be produced. His satis faction, the rise of his living standard, is the acid test of progress. To that, collectivists and com munists pay lip service; but their fetish, growth, is something else. Their emphasis is not on indi vidual consumer wants, but on collective "public" needs. As is well known, the Soviets give primacy to armaments and capital goods; the average con sumer gets a minimum of benefits, with very limited choice. A superbureaucracy does the choosing. That is very nearly the idea our statists are pursuing, with a difference in degree due to the difference in political climate.

As the pow.ers that be enlarge their grip over the nation's income and resources, they substi tute progressively their own judgments for con sumer choices. Inescapably, "welfare" turns into patronage. The volume of investment, instead of accommodating itself to available savings, is subject to inflationary expansion. 5 All this vastly 80 CREEPING INFLATION enlarges the radius of governmental and pressure group action, arbitrarily confounding, or revo lutionizing, the distribution of incomes and the pattern of industrial development. Whether the rationalization is to overcome the alleged inequities of capitalism and its inherent "stagnation," to create more employment, or to promote growth, the result is to shift the management from the hands .0£ entrepreneurs, who are responsible to the verdict of the market, into the arms of tech nocrats responsible to politicians, if at all. Even under the unrealistic assumption that the planners are incorruptible, mismanagement· is the outcome, unless they are superhuman and know better what is good for the consumer than he does himself and make no major errors in guessing the future of the markets.

Where the logic of collectivist yearning drifts is perfectly illustrated by its recent turn against the "affluent society," meaning the free choice by the consumer. Leaders of the "liberal" intelli gentsia have lately been producing best sellers purporting to show that we (and the British cousins) are living too high on the hog, badly neglecting the poor fellow, the government-who happens to absorb directly up to 30 per cent of the national income and who manages or distorts a great deal more by remote controls, especially by inflation. In the forefront of this neocollectivist move81 AN INFLATION PRIMER ment will be found outstanding "liberals" of the Keynes-Slichter school of inflationism: Harvard Professor J. Kenneth Galbraith, economist of the Democrats for Political Action (the brain trust of the Democratic Party's union-supported left wing), and his British counterpart, Richard Cross man, a spokesman of the Labor Party, or of its Left. This is not accidental. The inflationist in tent is, fundamentally, to stultify the autonomy of the market and to foster the growth of the government's power. Sooner or later, the power motive in the back of the inflationist mind breaks into the open. It may be through the curtain of tears shed for the hungry millions in the under developed countries (and their socialist planners), for whose benefit we are to be forced into involun tary AUSTERITY, a new catchword for the old idea of equalizing incomes (downward).

Creeping inflation and galloping socialism are ideologic brothers under the skin. They comple ment each other in the pursuit of unhappiness of more regulating. and spending authority for the government. "Eggheads" may be inflationists, but collectivists are no dreamers. They know what they want. Inflation, to them, is not self-purpose; it is one instrument among others to gain and hold power. When inflation ceases to make friends, nay, threatens with popular reaction against the collectivist trend, yesterday's easy-going inflation82 CREEPING INFLATION ist turns into tomorrow's stern moralist. 1. During the 1960 presidential campaign, he was a top economic advisor to the Democratic candidate. 2. Virtually in the same breath, Slichter paid tribute to the unions' excessive wage demands as an "independent cause of the [1959] recovery." 3. Philip Cortney, in The New York Times J December 10, 1949.

4. Even by their own inflated figures (their dairy output includes the milk consumed by the calves), the Soviets' rate of growth is declining: from an average annual 14.1 per cent in 1949-53 to 7.7 per cent in 1957-1959. By 1960 it was trailing far behind that year's 12 per cent industrial output growth in the European Common Market. Soviet statistics have been de flated lately by one of Russia's own top-level economists (New York Times, September 11, 1960). 5. "A myth of expansion [is] a way of attenuating, by public intervention, the sterilizing effect of inflation, of excessive tax ation, and of the erosion of savings."- Jacques Rueff, outstand ing French economist. 83 IX INFLATION'S BALANCE SHEET:' THE LIABILITIES PROGRESS BY INFLATION Statisticians compile data which add up to the much-revered figure called the national income. Planners plan by that figure, supposedly, setting targets for its growth. Many economists and many more politicians use it as the infallible yardstick of the nation's progress, wealth, and welfare, To the inflationists, the growth of the magic figure is the supreme objective of policy. It has been rising, indeed, an accomplishment they claim is made possible, if not actually created, by the brim ful money supply. Without that, there would be Stagnation, with a capital S.