Contradictory Goals

August 5, 1957

Last January the Guaranty Trust Co. of New York, in its monthly Survey, discussed a problem that has engaged the attention of leading European economists and is now becoming urgent here. This involves the clash in the economic objectives of governments which assume “responsibility” for the achievement of certain “goals.”

Our own government, for example, now follows Britain and France in pursuing three mutually contradictory aims. These are (1) constantly rising wages; (2) stable prices; and (3) full employment.

It should be obvious that these goals cannot all be achieved at the same time. Even in the short run, any two of these goals can be achieved only at the sacrifice of the third. Thus if we try to have constantly rising wages (regardless of productivity), we can have full employment only if we are willing to allow prices to go up to maintain profit margins, and only if we increase monetary purchasing power enough to enable consumers to pay the higher prices. But this is another way of saying that we must give up the goal of stable prices and encourage a continuous inflation.

If we try to have both constantly rising wages and stable prices, we can have them only at the cost of unemployment, and eventually of mass unemployment. If we want both stable prices and full employment, then the constant annual “rounds” of wage increases, as a result of strikes or strike threats (and regardless of what has happened to productivity), will have to be abandoned.

CAN INFLATION CREEP?

But given the pressures from union leaders and other pressure groups, and given the prevailing obsession that government “must assume responsibility” for everybody’s economic welfare, the de facto choice of Western governments in the last decade or two has been constantly rising wages and full employment financed by a so-called “creeping” inflation.

There are not lacking, indeed, rationalizations of this very course, among the most candid of which is that of Sumner H. Slichter of Harvard. Professor Slichter seems to think that a “creeping” inflation of some 2 percent a year would be just fine. It has already been pointed out by Dr. Winfield Riefler of the Federal Reserve that, even if we assume we could control an inflation to a rate of 2 percent a year, “it would be equal to an erosion of the purchasing power of the dollar by about one-half in each generation.” The legalized robbery that such a “solution” would involve of millions of savings-bank depositors, life-insurance policyholders, bondholders, and of everyone dependent on a fixed or sluggishly responsive income, is itself sufficient ground for rejecting it.

IT WOULD NOT WORK

But it would not even work. The moment an inflation is planned, acknowledged, and foreseen, the game is up. Inflation is a swindle. You cannot tell your intended victim in advance that you intend to swindle him. Slichter proposes his plan mainly in order to meet annual wage demands. But union leaders, if the plan were put into effect, would simply add 2 percent (or whatever the planned annual inflation was) on top of the demands they would have made anyway. In fact, lenders, investors, merchants, speculators would all mark up their demands or change their operations to beat the inflation, which, out of control, would race to a crack-up.

What is still understood only by an appallingly small minority even of the “experts” is that prices, in the early stage of an inflation, usually rise by less than the increase in the money supply, but in the later stage of an inflation always rise by more than the increase in the money supply.

Yet there is one way in which the three goals of rising wages, stable prices, and full employment (when these goals are properly understood) could all be achieved. This way is through the restoration of a sound currency and a genuinely free economy. In such an economy, it is true, wages could not for long rise faster than marginal labor productivity, but they would rise as fast as marginal labor productivity, though the rise in their real purchasing power might be reflected more in lower prices than in higher wage rates.