Social Inflation; P.L. Poirot

PAUL L. POIROT A PECULIAR tendency of thinking human beings is to behave, not necessarily in response to the facts of a given·· situation, but in re sponse to what they believe is the situation. Men who believe there are dif ferent kinds of inflation may be convinced that different cures are needed. For instance, if it is a "cost push" inflation, and high wages are believed to be the cost of production most responsible for the extra push, then the obvious cure would seem to be a rollback or other control of wage rates. Or, if high profits are believed to be responsible for pushing prices upward, then the most like ly cure would be an "excess-prof its" tax or some such limitation of profits. The latest new kind of inflation is alleged to be "social inflation" - due to the extra expense of cleaning up air and water, foster~"'A ing "consumerism,"· meeting other social goals. And when the doctors of the sick body politic get around to it, they might possibly come to believe that the cure for social in flation is to clamp a lid on Federal spending.

In view of the widespread dis agreement about the facts con cerning inflation in the United States of America in 1972, let us imagine a comparable situation at some other time and place. Let's say it's the year of the millennium in Utopia and see if we can visu alize the facts. Let's further imagine that the residents of Utopia are as bright on the whole as weare, living under what is generally described as a free mar ket economy with quite a lot of government intervention. For the sake of simplicity let's say that about a. third of the la borers in Utopia are members of a union under the leadership of Mr.

1972 SOCIAL INFLATION 675 Goody. And Mr. Goody says to the boys, "Let's have some inflation; instead of the going wage of $3.00 an hour, we'll demand $6.00." But in Utopia there is no way to force an employer to hire anyone at $6.00 an hour if' he doesn't want to; ther'e's no way to force a con sumer to buy labor or its product at $6.00 an hour. So Mr. Goody might have some $6.00 unemploy ment, but no $6.00 labor; and there's practically nothing labor ers can do to bring about wage push inflation. In Utopia, when a businessman decides to have a little inflation, rai~e his prices 5 per cent to double his: profits, a funny thing happens. Consumers decide they'll buy from other suppliers instead, at the old price; and some businesses change ownership, but there isn't any' in flation. However, when the people of Utopia ask the government to pro vide additional services without increasing taxes, and the govern ment finances its deficits by print ing additional money, then there is inflation in Utopia, "social in flation" caused by pumping noth ing but money into the market.

Inflation in Utopia is strictly a monetary phenomenon. If the gov ernment prints the money, it is called social inflation. If anyone else prints it, it is called counter feiting. And that's the fact, the only relevant fact pertaining to in flation - in Utopia, that is. We mentioned earlier the possi bility that once we've identified this new kind of "social inflation" that plagues the United States in 1972, then pe'rhaps one' of the doc tors might find a workable cure. Not bad for a, start is advice from Andrew F. Brimmer, mem ber of the Board of Governors of the Federal Reserve System: "Despite our obvious affluence as a nation, we do not have the capacity to produce enough so that' households can 'maximize their consum ption while minimizing taxes; so that an adequate volume of housing can be built; so that businesses can expand their production facilities, at a maxi mum rate - and also make the invest ment needed to abate pollution; so that governments can meet the in creasing demand for public services while tax revenues lag behind spend ing."!

What the good doctor seems to be prescribing is exercise - of self-reliance and will power. If we don't like inflation then ask the government to stop pampering us and tampering with the money supply and stick to its more ap propriate governmental function of policing the market; otherwise leave us alone. ~ 1 Quoted in U. S. News and World Re port, June 12, 1972, p. 39.