April 19, 1974

Indexing Is Latest Anti-Inflation Scheme

Phase 4 is phased-out, the Cost of Living Council is being dismantled and anti-inflation guidelines are ignored.

But the illusion persists that economists can feed the multitude with five loaves and five fishes.

Though price-wage controls have been discredited as a long-range solution to inflation, the race is on to find a new formula for wealth without work.

The leading contender is a scheme called "indexing" imported from Brazil.

You will hear more about this controversial technique in the next year or so, for few Americans are willing to pay the price for economic stability.  Indexing has worked - or seemed to - in a limited number of market situations, hence its appeal as a successor to government controls.

Back in 1964, the inflation rate in Brazil hit 92 percent - nearly double the price of things a year earlier.  When you remember that our inflation hit 10 percent for a short period last year, you can better understand the catastrophic effect of Brazil's inflation rate.

At this point a military dictatorship took over and instituted a system of automatic "corrections" to key costs and prices.

If the cost of living index went up, workers received an automatic wage hike.  If corporate profits declined, price increases on their products were allowed.  If inflation cut the real value of a savings account 10 percent, the government put an additional $10 into individual accounts to bring them back up to par.

As a result of strict controls by wise, dedicated managers Brazil's inflation rate has been brought down to about 20, percent.  This is twice the worst U.S. rate but infinitely better than the bankruptcy rate of the previous decade.

The RELATIVE success of the Brazil experiment has excited a number of American economists, principally a 30-year-old financial expert named Francis E. Hassey.  He is employed by the State Street Boston Financial Corporation so his recent report, "Inflation: The Need For A New Mentality," has to be considered.

Hassey argues that "economic policy is essentially beyond our control so we have no choice but to accept the world as it is and learn how to operate within that environment."

John Dunlop, head of the Cost of Living Council, echoes the despair when he says, "I don't believe it is clear that mankind today knows how to control inflation."

Under the circumstances, the world eagerly seeks a financial messiah - and the pretenders are many.

Dr.  Dunlop knows the ultimate solution for he told the U.S. News and World Report just last week that economic stability will be achieved when prices and demand reach a balance.  His pessimism comes from a realization "that a modern society is not willing to pay for price stability in the form of more unemployment, more labor-management warfare, more government controls."

"When the crunch comes," said Dunlop, "we're not willing to pay for stability in those terms."

Thus, we search for panaceas, for painless affluence, for Easy Street.

Indexing is attractive to many Americans because it now benefits a few unions that have cost-of-living escalator clauses in their contracts.  Starting next year, those on Social Security will receive automatic increases as the COL index rises.

I am dubious because the only examples of full indexing are Communist Russia and Communist China.

Brazil has had substantial indexing that mostly maintains a status quo.  It's a great system if you had status when it started, but lousy if you are quo.  Brazilian inflation has been slowed, but the disparity between the very rich and the very poor widens.

It is significant that indexing has shown a flash of success only under strict military repression.

Excuse me, but I can't muster much confidence in 30-year-old economists all atwitter over social experiments by backward countries.

I like grey-haired pragmatists who have lived through the Great Depression and watched the falterings of socialist countries over many years.

The free enterprise, capitalistic system is the only one that provides individual freedom and opportunity of rising to ever higher stations.

Of course, achievement requires productive work, ingenuity and some setbacks.

But, it still keeps inflation in the U.S. the lowest in the world, employment the highest, the middle class the largest, education the best, and freedom the brightest.

Author: Lindsey Williams