November 1, 1978

The Only Game In Town

President Jimmy Carter's new anti-inflation program reminds one of the old Chinese proverb: "Better to light one small candle than curse the darkness."

The so called voluntary wage and price guidelines - backed up with toothless threats for the present - have been tried before with little effect.

His renewed promise to cut government spending is welcome but unconvincing.  We've heard that old tune before.  It's the only workable solution, but no elected official has the guts to make the first cut.

We are faced, therefore, with the necessity of pulling a rabbit out of the hat once again.  Previous feats of economic legerdemain proved to be illusions of light and shadow.  Yet, we are anxious to be fooled; so we are ready for one more wave of the magic wand.

The new gimmick is "wage insurance," a term which conjures up feelings of stability and protection.

It is the same semantic con game used back in the 30's to sell Social Security Insurance.  Only, then, it was not cash invested in safe banks pending the day we called it back for our old age.  It was a simple "transfer payment" from one tax payer to another - exactly as Carter's new plan will be.

Having put the wage insurance rebate in proper, though somewhat unfavorable, perspective I rush on to recommend we give it a good try.  It's the only game in town.

The plan smacks strongly of George McGovern's ill-fated proposal to give every one a thousand dollars from the U.S. Treasury.  It is cut from the same cloth that drapes the negative income tax whereby all citizens are guaranteed a minimum annual wage.

So be it.  Carter proposes to limit the experiment to one year.  Inasmuch as no one has come up with a painless way of cutting government spending, why not see if psychology might not break the dizzy wage-price inflationary spiral?  We can't get hurt too badly in one year.

Under the wage insurance plan, employees of the top 400 companies would be placed in one of three groups: management, union, and all others.  Employees of smaller companies could seek wage insurance certification, but would not be monitored by Big Brother.  Employees making less than $4 an hour would be exempt entirely from wage restraint.

At the end of the year, big employers would state on the W-2 income tax report the average wage increase of all workers in each of the three reporting groups.  If the average increase for the group has been 7 percent or less, all employees in that group will be eligible for a rebate.

The tax kick-back will be 1 percent of the employee's base salary for every 1 point of increase in the rate of inflation above 7 percent.  For example, a worker making the median wage of $15,000 in a year that inflation rose to 8 percent would receive a 1 percent rebate of $150.

If - big if - inflation can be that closely controlled the rebate plan might encourage workers to moderate their wage demands.  But it is like playing Russian roulette.

Private payrolls in the United States currently are running about $900 billion a year.  Each 1 percent rise in the cost of living over 7 percent will cost the government $9 billion.  With inflation now running at something over 10 percent, the Washington bureaucrats might have to shovel out $30 billion in rebates.

This kind of a pay-out would, by itself, constitute a powerful kick upward for inflation.  It would be like trying to put out a fire with gasoline.

For Carter's plan to succeed, it must first succeed.  What comes first, the chicken or the egg?

And where will the rebate money come from?  New taxes?  New borrowing?  New deficits?  All are inflationary.

Thoughtful citizens are worried about the precedent that will be set by the rebate procedure.  They see it as a giant step toward the wider use of federal taxing powers to circumscribe individual freedom.  It would be the final move toward the concept of taxing to transfer wealth from the most productive to the least productive.

The wage insurance rebate is awfully close to the Brazil-type "indexing" which keeps workers in step with inflation, but does nothing to stop inflation.  It is a mad, death whirl.

Still, the rebate may be useful in exposing what has to be the last, futile "free lunch" approach to our inflation problem.

A year from now we should be in a more realistic mood to tackle the only workable solution - giving up some of the goodies we have come to expect from Uncle Sugar.

Alfred E.  Kahn, Carter's new inflation czar, is hinting that we should delay or reduce the Social Security increases scheduled for January 1, and cut out some of the end benefits.

The minimum wage is another cavalier mandate of the government cited as inflationary.

Kahn says we could help fight inflation by conserving energy (true) but would accomplish this with a tax on oil to discourage use (inflationary).  Try and figure that one out!

Perhaps it is no coincidence that the Chinese - who invented paper money and inflation - came up with a proverb to encourage tiny efforts against great odds.

Author: Lindsey Williams