Abstracts
Résumé
Nous vivons dans une inflation, qui apparaît de plus en plus comme étant la fille naturelle de la croissance, sa seconde nature. Dans ce contexte, l'analyse des politiques de l’après-guerre montre la nécessité d'avoir recours à de nouveaux instruments.
Abstract
Postwar economic history can be seen as an unremitting effort towards that three-pronged objective (growth, full employment and price stability) constantly refined over the years, but never sufficiently perfected to permit successful achievement on a permanent basis.
It was realized very soon during those years that, while two out of the three objectives were reached quite easily, to close the triangle was a puzzle not readily resolved, and that especially so since the British economist Phillips plotted in 1958 a few curves which have become famous, apparently proving the existence of a close and stable inverse relationship between the rate of price increase and the level of unemployment.
The triangle was therefore transformed, and in the 1960s the rule became based on three times 3 per cent : a minimum growth rate of 3 per cent in volume could readily be made to coincide with a maximum price increase of 3 per cent and an unemployment rate of the order of 3 per cent. Until recently, with the exception of the United States and Canada, where the unemployment rate tended to exceed the 3 per cent but where prices were generally more stable, most OECDcountries conformed reasonably well as new representatives of the triangle. Inflation existed, but it was merely creeping. In the second half of the 1960s, matters deteriorated and the rule of three times three fell apart. In June 1971, the experts of the OECD Economic Policy Committee wrote : « It has been recognized, in fact, that there is no simple or constant relationship between the rates of price increase, on the one hand, and the degrees of demand pressures, the rate of growth and the levels of unemployment, on the other. The answer has been given by an explosion of prices that seems to persist despite a sharp rise in unemployment and a slowing down of growth. There is no longer any triangle ; our policies have lost their foundation. Towards the end of the 1960s and the beginning of the 1970s, all governments expressed their will to fight inflation and took the restrictive measures that were felt necessary to that end. As a result of these efforts, there are not, at the present time, less than 14 million unemployed workers in the OECD countries, where an average of 3 per cent decrease of GNP and 10 per cent price increase were recorded in 1974. In this context the analysis of postwar policies reveals an obvious need to use new instruments.
What is this inflation of today ? It is still an exceed demand for goods and services in relation to supply, leading to a self-sustained price increase — which is accompanied by either a progressive exhaustion of reserves of foreign exchange or a decrease in the value of the national currency according to whether the exchange rate is fixed or flexible. However, as to the underlying reason why at a given moment there is excess demand, several explanations exist, each of which is apparently as good as the others. First, the monetary explanation : assuming a constant rate of circulation in the stock of money, any increase in the money supply, over and above the rate of gain in real production, inevitably gives rise (unless there is some change in individual behavior) to an excess of total demand expressed in nominal terms, which leads to a price increase equal to the gap between the two rates. Then there are the international explanations : where the prices of certain products are rising, for one reason or another, countries that are price leaders on international market for those products export inflation to other nations, thus spreading the infection. Shortages are also at the origin of inflationary strains. They involve a potential limitation in the supply of goods, so that an increase in prices must occur in order to cancel the excess demand. Furthermore one must remember that growth itself is a source of inflation. Moreover, the new private or collective preferences, such as environmental conservation, shorter work periods, management participation, and social security, both multiply needs and reduce potential supply so that they become inflation factors.
It is not longer surprising, then, that in this rush for more the price-regulating mechanisms have stopped working. Formerly, a fiscal plan for readjustment, accompanied by the appropriate psychological conditioning, resulted in a genuine lowering of purchasing power and a slowdown of inflationary pressures. Inflation as a cause or consequence is then accepted as a lubricant of social mechanisms for as long as economic development helps to mitigate aggressive feelings. But how long will it play that role ? It is clear, for instance, that inflation undermines the very foundations of growth, since inflation clouds the future with uncertainty, reduces the chances of finding the necessary money for saving, and thereforepenalizes savers who « today forgo the substance in order to find tomorrow only the shadow of a shadow ». Saving is penalized, prodigality is rewarded. Any investment is a bet on the future and implies for the entrepreneur a normal economic risk, the reward for which is the profits or dividends accruing to the investor. When its rate can be forecast, inflation serves to increase the risk for the entrepreneur and thus raise the nominal interest rate required by the saver in order that he may obtain from his investments a reasonable real return. On the other hand, since inflationary movements take place within short- and medium-term time periods, they lower the economic horizon for decision-making. Therefore, inflation reduces long-term investments, and these are precisely those investments that are associated with the introduction of a new product or a new technique ; they also are those that command productivity improvement and progress. But if, in addition, as is the case most of the time, the rate of inflation cannot be fully anticipated then the very mechanism of investment is jeopardized. The value of an investment is a flow of expected returns discounted at the interest rate prevailing on the financial market. Yet any assessment of this type becomes risky and even impossible due to the uncertainty associated with inflation. Savings dry up, investments decrease, productivity slows down for lack of investments, and finally unemployment threatens, while recipients of fixed money incomes experience a decrease in the real value of their assets.
The climate becomes more and more antagonistic. Negotiations get longer, the number of strikes occuring before collective agreements increase, this reflects the will of workers to have their wages indexed to inflation. Finally, since we are living in a world where national economies are increasingly intermingled, it is obvious that inflation disturbs the development of the external trade of all partners. However, it is precisely because nations are increasingly interdependent within a single integrated world economy that inflation is everywhere. Governments then must find other ways to achieve internal balance and control a phenomenon which at present rates of increase undermine the very basis of growth. The traditional instruments, including tax policies, have played their part — or rather have failed to do so, because postwar governments have used them widely with the results we know. Neither monetary policy, which is too brutal or effective to be used fully, nor the traditional fiscal measures, seem to be able to cope with the current inflation problem.
Nevertheless, even though the efficiency of fiscal policy is questioned, and rightly so, it is likely that the implementation of new techniques will make it before long a preferred means for fighting inflation. Monetary policy has the advantage of having a wider impact than fiscal policy as a means of regulating demand, since it influences prices, incomes, consumer expenditures, and investments altogether through interest rates and quantitative credit restrictions. It is precisely because of its very wide impact that monetary policy is questioned. By acting on all demand components including investments it is powerful enough to create unemployment. Indeed, it must strike hard to stop cost-push inflation, and induce that reduction in output that will put pressure on costs. For this reason, it is preferable deliberately to manage tax rates so as to adjust the amount of tax increases to the evolution of anticipated income and expenditure flows. Fiscalpolicy then becomes an active contracyclical instrument. However, whatever fiscal techniques are used the deflationary effect sought through fiscal action is not always attained. In an economic climate in which inflation is becoming rnore and more a permanent element, the tax system can instead tend to feed and reinforce inflationary pressures.
Between a monetary policy that is necessary but intolerably blunt and fiscal policy that is more flexible but of doubtful efficiency — and perhaps even a contributor to inflationary pressures — the traditional instruments of economic policy do not seem very adequate to enable us to control inflation. Nevertheless, all these policies share a common feature : they have an impact on the utilization of income but hardly any on the determination of income. Since the incomes of some people necessarily constitute costs for others, any intervention at the level of income formation would present the double advantage of limiting excessive increases in income and thereby controlling costs. Such policies have been developed by resorting to devices other than fiscal ones such as prices and incomes policies. Generally, these policies strive to bear upon the formation of incomes rather than on their potential uses ; they are related to future rather than, past gains, they are indicative or contractual rather than imperative. Generally, the lack of coercive measures which would bring into question the concertation mechanism does not lead to lasting success and cannot be institutionalized. With respect to wage and price controls, we are well aware of their merits and demerits. If it is a more flexible system that is conceived to be permanent, it then becomes rapidly distorted and sinks into inefficiency. Nevertheless, it is undeniably in this new direction, involving an intervention at the level of income formation, that the fiscal system will be called upon to move in order to help provide public authorities with instruments appropriate to the era of inflation. Already the avenues in which it needs to move have been laid out by practitioners and theoricians alike. To give an example, the French government introduced in January 1975 a stabilization levy which is an application of the anti-inflationary fiscal techniques suggested by Professor Weintraub among others. Such a system can be generalized by applying it not only to business firms but to all economic agents by way of a fixed or progressive surtax on excess incomes. In the case of progressive rates, the scale could be determined by reference to the size of the increase over and above the stated quideline or perhaps to the income level itself so as to reinforce the re-distributive nature of the system. Such a formula, more general than the suggestion advanced by Professor Weintraub, would be my preference since I suspect that business firms might be tempted to shift the burden of the tax to their customers. After 25 years of almost uninterrupted economic growth supported by a refined and classic system of economic regulation, inflation is more vigorous and en-trenched than ever. Its causes are so wideranging that their identification has lost practical interest. Recent experience has shown that we must stop tilting at windmills lest we end by mourning the ruin of our society. We must find and apply new techniques of overall demand management and succeed in checking inflation ; otherwise, we will have no choice but to reduce growth to levels below those we have enjoyed over the past 25 years or to forsake our hopes for a more equitable sharing of wealth in the world.