Dr. Hailstones is Dean of the College of Business Administration at Xavier University in Cincinnati, Ohio

Hailstones, Thomas J.

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Southern Business Review Volume 2 Issue 2 Article 5 September 1976 Inflation Can Be Stopped!! Thomas J. Hailstones Xavier University Follow this and additional works at: https://digitalcommons.georgiasouthern.edu/sbr  Part of the Business Commons, and the Education Commons Recommended Citation Hailstones, Thomas J. (1976) "Inflation Can Be Stopped!!," Southern Business Review: Vol. 2: Iss. 2, Article 5. Available at: https://digitalcommons.georgiasouthern.edu/sbr/vol2/iss2/5 This article is brought to you for free and open access by the Journals at Digital Commons@Georgia Southern. It has been accepted for inclusion in Southern Business Review by an authorized administrator of Digital Commons@Georgia Southern. For more information, please contact digitalcommons@georgiasouthern.edu. INFLATION CAN BE STOPPED!! Thomas J. Hailstones A cardinal feature of our free enterprise, competitive system is that over time i~ hould yield more and more and better and better goods and_ services at lower and lower prices. Although we have been gettmg more and perhaps better goods and services they have not been coming at lower prices. Unfortunately, we do not have the high degree of competition in our economy a sumed under a model of perfect competition. A a result of imperfections in the market ystem_, both natural and contrived, we have been traddled over the past 9-10 year with rising prices, and it appears today that the current market mechani m is having difficulty coping with inflation. There are many definitions of inflation. In the simplest sense in-flation is a persi tent rise in the price level. But inflation may be one of four type : (1) demand -pull inflation, (2) cost-push inflation, (3) structural inflation, and (4) ocial inflation. During the past nine years we have been experiencing all of them singly or in combina-tion. TYPES OF I FLATIO Demand-Pull Inflation. Thi i sometime referred to as excess-demand inflation, and it occur when the total demand for goods and ervices exceed the available upply of goods and services in the hort run. Thi u ually happens in a fully employed economy because of the difficulty of producing additional good and services to sati fy an increa ing demand. Competitive bidding among buyer for the relatively carce goods and services forces prices up-ward. The exces demand, or exce s pending, may result from everal cau e . Con umers may dishoard past avings, con umer credit may be liberalized, commercial bank credit may be extended, or th government may run huge d ficit . Generally when the money upply or other forms of purcha ing power increa e fa ter than the productivity of our economy, demand -pull inflation re-ults. Co t-Push Inflation. The second type of inflation i known as cost-push inflation. It may occur in a fully employed economy or during periods of unemployment. It may start with increased wages, higher material co ts, or increased prices of consumer goods. If wages or material costs increase for some reason, producers tend to increa e the prices of their finis hed goo~s a~d services in order to protect their profit margins. Rising prices m effect decreases the purchasing power of wages. As a result, wage earners, especially through their unions , apply pressure for furt~er wage increases. This in turn leads to further increases in the price 28 ( I of mate · ini h d product , whi h in turn lead Lo fur her wag in uch a ion of vent d v lop into wha w g neral age- iral. u h inflation or pronoun ed in Lh pa t f w d wit gth ning of labor union . I al o h a dmini ter d pricing by larg and po ro red pricing i a iluation in which a n u n e on th pric he char [or hi b nc of competition. Although u ua lly t ce-pull inflation, labor union , in orde uenc of wag incr a , call it pric -pull, u . tructural Infla tion . noth r typ of inflation that may o cur with un mployment in th economy i tru tural infla tion . Thi ari . wh nth r i. a ub tantial hift in demand to th produ l of one indu Lr awav from olh r indu tri . It a um _ that lh re i a t rtain amount of inflexibility and immobility among the fa tor of production and, ·p cifically, lhat wage and end to have up-ward fl xibility and downward rigidity due to ad · · er d pricing and labor union pre sure . If th r i ah avy hift mand Lo Lh products of In ry X and away from the produc Indu try Y. for xam , it I production in Indu tr , , or n ar, full 'apacit_ . nd ircum Lane ndin mand could rau pri to indu try a. It of d d pull infla-tion. Thi ill ral pric Lo rL inc it i a.-um d l pri i will n lin h . of infl xi -hilily. In addi . th immobilit v of labor and oth r producliv X may ha to.pay · r wag and mat rial i tract mor ork Thi · \ hol iluation av tionary effect II over into other ind . pric in I try X may actually c ·a in 1 n try h I incr a in ri wa ere a • qu ntly price inc !though uclion and mployment may ull of demand hift away from lndu try Y, c d to pay higher wage. to off. t Lh high r living rt to hold on Lo xp ri n ed and '>kill d worker . In ral inflation, which can occur at full mploym nl or with un mploym nL. contain I m nts of both demand -pull and rost-pu. h inflation. , ocial Inflation . In omi t ha v o growing c<·urr nee of f inflation kno · I inflation . It u d mand for -m nL r i( n r 'uriLy p· nt, d un mploy m b , n of mor lf \ id r h alt, r r· r r nt ub. i and a ho<;t oi· .. oth r ocial ervic . ocial inflation i generated al O by the · · t t . t t . . . . rising co h o p1 nva en et~pn e orig1na~1dng f~om greater fringe benefits, uc as onger vaca ion . more pa1 holiday horter hour bett pen ion , and broader ho pita! and in ura~ce coverage for p(oyee . Moreover, the co t of helping to pre erve the natural en-v_ironm _nt throug_h the u e of expen ive antipollution and depollu-t10n eq~1pment, either by the government or by private enterpri e exerts mcrea ed pre sure on the price level. It i aggravated al by _larg~ financ!al _outla?' required by OSHA and other protective leg1slat1on. ?c1al 1_n0at1on may orcur at full employment, adding to demand -pull mflauonary pres ur , or at other time it may aug-ment co t -pu h in0ationary pres ure . One an " wer to eal'h type of in0ation i incr a ed productivity. In d mand-pull inflation, if productivity can be increa d to provide the additional good . and ervice nece ary to ati fy demand, the in0ationary pre ur will be r moved. On the other hand, the demand for good and service an be moderated by lowing down the growth of th money . upply by reducing pendable income. Cost -pu hand tructural in0ation can be modified if wage increa es ar kepi in line with increa es in productivity. If wage increa e would accelerate in proportion to the increa e in productivity, incomes would tay in balance with the amount of goods produced. Good and ervice would be available when wage earner pent their high r income . ocial inflation can be held in ch ck, of course. by limiting government and pri ate outlay for ocial erv-iceo.; or hy gj,. ing up spendable fund , through taxation and redi-rec·tecl expenditure-,, lo cover th costs of the e "ervices. In our mo t -.t>rious bouts with inflation. some combination of thee types of inflation is generally present. THE CO T OF INFLATION We are all familiar with the di ruption , di tortion , and even in· equities that inflation has caused. particularly in the pa t few year . . The co. t of intlation i. phenomenal. ome analy ts say that in flat ion i not a co t but merely a transfer of income and a ets. However, in thi tran f r ome economic unit will gain and others will lo . Particularly among the lo ers are middle ~nd _lower income group . Moreo er, inflation may lead to disruptwn rn the economy that cau e an aggregate lo . Thi may occur, for exam· pie, if inflation help to precipitate an economic lowdown or rece · ion, a il did in 1974 and 1975. Let u. look at the current impart or cost of inflation. ~hen the price level. for example, increas s a mer one percent. it mean that rnn~um r,, in total ha to pay $10 billioi: mor~ for the good t and ervices Lhey buy; a one percent rate of 1nflat10n mean . tha bu ines men have to lay out ov r $2 billion more for the mach~ne~y, equipment, and buildings they purchase; and a one p rcent pr1ce m-30 er u 3 billion mor o op rat our var io g . That i a lot.al of $15 billion for a on p h' xt nd t hat by ven p rcent or inflation and it m an l ay approximat ly mor for h good and buy · ar. In · imilar to what w did P la ( 1975) how · f approximat ly illi n in current dollar but d 25 billion I good and rvice . . I know l m ma hat. o long a your wa e, or incom , in -r a. e in wil ot lo anything by inflation. But I , to · fla · only af n' inc to rahl d , n n. p va . pur p co · · ation. For pl p<•r d clion or our cur r th 7 billi t.he price th rcha. in s 500 million, and of ·o inflatio avi account in variou,; financ·ial instiluti pe l pric r i e im·r ase.., the r plac· m n · ip , and build ing. by 15 billion or S{Ur by a v n p re nt rate f inflati n. of inflation on cur-r nt incom , and you ('an . otal ff cl of mfla-Lion i'> tagg •ring. Ch er h pa l dernd inflation ha · c ·urr d tn spit of th mark t m t'hani..,m lo hring about any . ub tanlial adju tm nt in th pnc I \. I. :\1or' \. r, \\ <' lnc-d to modify , limit. abnt and lop tn fl at,on \\ ith ·ario • or . fi..,C" al. and p'>yc-hologl<'al polim• . \\'p hav d xati ntan guid s ,, ith dir C'l wag and pr nlr I . th m for f r a-on haH• \\Ork d ..,fully o · ptable. l the u ual gamut of co mea u en in ff o d 1m-pr p rly and wear c• rant ntr I . But it 1s Lim • w r aliz · · · or fall h m c·han1 m to bring abou tion-, i i(· and th mad qua<·y of con mi<' m t inflati narv inferno. In m r min f that. aff tl · all . but . anding around waiting for other guy ov · ab ut it. Inflation i the w at - it hut th re i,, litLI mpl to ch it. acce pt d inflation a ilable or as a matter of co 31 A EW PROPO AL: A WAGE-PRICE TRADE-OFF ince om~ of th current inflation i_ of a cost-pu h or tructural natu_re perm,tt d to occ~r becaus of 1~perfection in the market, pa'.t1cularly that re ultmg from admm, tered pricing and labor union pre ure , let me mak a ugge. tion. In an attempt lo do omething and to get the ball rolling we ought lo larl at the pow_erful colle tive bargaining center . In effect we should turn th m mto con umer bargaining center . Labor union could proc ed to negotiate wag incr ase a u ual. But once a wag increa e had b n won, if lh labor leader and union mem-b r ar r ally eriou about com balling inflation, they hould turn around and offer to trade-off all, or parl, of the wage increase in exchange for a reduction in th price of the final product or rvice. In this way, productivity gain could be channeled into lower pric . In the auto indu. try. for exam pl , the labor co t ratio i 30 percent or le . That i.. labor co t make up le . than 30 percent of the total cost of producing an automobil . Thu. , a 10 percent wage mc-rease in the auto indu, try would increa th co t of the car ap-proximal ly 3 percent. Thi higher co t, however, u ually can be absorbed out of the increa ed productivity per worker in the in-dustry . Theoretically, other thing being equal, a wage increa e could be granted without increasing pric . Conver ely, if a 10 per-<' nt increase were lo be foregone, the company could reduce the price of th car by 3 percent or more without ub tantially affecting it, profit margin. In such an xchange of price d crea e in lieu of wage inereas , the r al incom of every auto worker who purchased a car would be incr a d. ot only that, the real income of eH' rv oth r worker, or con umer, in the country who purcha ed a car ai o would be increa ed. If such a practice were extended to other indu, trie . such as steel. rubber, Lin can, furniture, shoe , food. communiealion . utilitic , and the like, it would not only abate th inflation, but result in price declines which would increa e the real income of all consumer . , ueh a policy al. o could be initial d by management neg~tiator ol <·ompanies. Management negotiator might ta rt with the premis , that th y are going lo do omething for the con ~m~r a well a!-> the workers and suggest that pric be lowered in lieu of wag increase . IT PRACTICAL? It i obvious that ther are difficulti of implementing uch a wag -price trade-off policy. The u ual retort from management are: 1) that they are reluctant to give up one of the la t of manage-m nt pr rogative , which i th det rmination of price : B~t any-time you di cu wage and fringe benefit it is going to indirectly, 32 or di r ctly, aff ct price . A s c nd ma nag m nt bj ction i that uch a dbcu ion about pri'' could b in violation of th ant.i -tru t law . . Th anti -tru t la,, , how v r, hav b nm difi d or ·hang d b f r . m nitt<·s admit that th propo al to xchang wag incr a., for pric deer asp s und . go d. but that it is not pra tital. H w v r. mu<'h the sam thing wa atd ab ut h rganization of in du,t rial work r . th coll >ctiv' bargaining proc . th dal " c·urity S} l m, un mploym nl romp n ation, indu'i rial p n i ns, co-.t of-living sl'alator clause , h alth insuranc(> program . :uppl m ntary unemploym nt h( n fits. and a ho l of oth r mea urPs whi<·h r •qutr •d a chang in our attitud and e<·onomic thinking. 1 -,hould hi' r m mb r d al. o hat in th pa l ighl n month!> a group of airlin pil t. gav up a wag in<·r a. t protect th ir job-,, som<' munu·ipal polttem n work d r due d hour to prev nt lay off.,, - m, railroad ,, orker., ace pl •d a pay cul, hicago earp nt r took a cut in v. age . . . ' •w York bri<·klay r · agr • d to a wag cul lo trmulat ·onstru<·t1on d mand and th in ·innalt con.,tru lion work r . n gotial. d a 'iubstantial ag r ducti n. Labor I adN obj ct that th y v. ould b unabl lo con, me th ,1ork "" that sueh a mov would be go d for th m. n analy i, of h<' rhang- ' tn rl'al v. ag- or purchasing p w r of th Ill ork r in th pa t <l<>l'ad •, ho,Hv •r, sh uld h Ip onvinl' th ,1 rk r . It ·ho,, 1hat th :n.eragt> w rk r has gain d 'l'r." lilll , if anything. as a r • ult ol thP "ag prt<'<• spiral. RE L \\ GES \ 'ER. l ' :\>IO~EY WAGE I. t us look at th r,c·ord. In · ) ar period, 195 1. · ·. w had nagg-ing un •mploym nl. 5. p re •nt annually. and th<· ( onsum •r Prtr Incl · tC' l an annual rate of 1.3 per <"<•n1. That "as le. sofa pril' · hat of any maJ r nation tn th v.orld. Durin · ekl_, y wage of a nonagrt('ultural v.or O to p •r wc•t>k . That v. a an in<-rea that p<>riod his real 11ag- , or the purcha . , id not inc a, mUl·h, hut it di 7 ant dollar \,ork• ' l\\a~ 17 twa 'l..J . I i p rl' Ul -,j · · • start cl in the• wo no ar pPriod 1! 'Ii th r' 5. That was an tn<'r 'a-. , .07 e ntl of that ~ll'riod. h r, t I. ·7 p k. ln . hort. ork the ni r. P •rtod a It of nly that. ht~ high r m >n ) la'<' tax brack L. Thi · furth hi, pur<'ha. ing po\ r . 33 .. Th_i rtainly . hould giv a labor lead r pl nty of ammunitio t convince mo t w~rk r _that they ar gaining nothing through ·urr nt. wag pnc _p1ral. In fa t. la t y ar alone the average work . r 1n manu~acturtng end d_ up with $9.44 mor in hi paycheck , ~ul his purchasing pow r d dm d by 2.90 p r w ek. He exper-l n<'ed a _.Ip_ re nl incr~a. in mon y wag . but suffer d a 2. p r-e nt d clme m purcha mg _power. T~e pr viou y ar. 1974, the av •rage ~ork r lo.~t 4. 9 1n purcha. mg power d pite his $9 .02 p r " •ek mer a. e tn mon y wag . . 0. LC. 101\1 It w ulrl Lake hold and courageou labor leader and bu in managt>r::- to adopt sul·h a wag-e-pri • xchang policy, and on can appre<'1atc the a ppr hension . on th part of labor lead r who, like polill<'Ian . like> to gl't r lert d. Perhaps a prop r way t mitiat such a policy would b to rlPelar ·. 1m,tt>ad of" ag price controb, om typ of a moratorium on \\ag- and priee in -r a. e with trong r comm ndation . via jav. hon mg. that,, orker-. e k to obtain incom gain in th form of lowPr prw . \Vork<•r . con um r , and th economy g n rally. in the long- run. would b helter off with low r pric rather than h1g-ht·r wag ' "· which ar too oft n ohlit rat d by pric increa Th •r ar · certain di advantag<'s in -;urh a wag -pric xchange polil', .. But. I b Ii v that th y ar rar ulweigh d by th ad an-tag- , . If -..u<·h a poli<"y were adopted it would remo e a good bit of unet>rtaint:, from conom1e planning. it would incr a e th valu of our ,a, mg-s. enhanec th purcha.-ing power of our gov rnment and <·ommPrc1al bonrls, increas th prot ction of lif in uranc policie and 1mpro\ th standard of living afford d by our p n ion plan . Furthermor . it would Pn<'ourag saving . low r int re t rat , and pro, idc• mor fund for hou ·ing- and inve tment, and improv in~ r-national balan<' of paym nts. La t. all ·onsumer:, noL JU t incli, idual \\ orkers, w uld h n fit from pr duclivity gain in our mo. t Ul'l'{'"'>ful indu tri ' rtainlv with the · ama ·ti .' about lim that we revert ba('k lo some d co ·c obj ctiv and b _gin to think about obtainin ea! in through lower price instead of ·ontinuing Lo c ag -pric piral. Dr. Hail tone i D an of th oll 'g of Bu in Xa i r niv rsity in incinnati, Oh io. dmini t ration al 34 

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Inflation Can Be Stopped!!

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Inflation Can Be Stopped!!

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