INFLATION

Don’t Be Fooled. In The Long Run, Inflation Cheats All But The Very Clever And The Very Rich

Ottawa argues that a policy of restraint will hurt most Canadians less than a continued rise in prices, As chairman of the Prices and Incomes Commission, Dr. John Young is charged with the job of preserving the value of our dollar. In this exclusive interview, he tells why his task is vital and how he’s tackling it

April 1 1970
INFLATION

Don’t Be Fooled. In The Long Run, Inflation Cheats All But The Very Clever And The Very Rich

Ottawa argues that a policy of restraint will hurt most Canadians less than a continued rise in prices, As chairman of the Prices and Incomes Commission, Dr. John Young is charged with the job of preserving the value of our dollar. In this exclusive interview, he tells why his task is vital and how he’s tackling it

April 1 1970

Don’t Be Fooled. In The Long Run, Inflation Cheats All But The Very Clever And The Very Rich

INFLATION

Ottawa argues that a policy of restraint will hurt most Canadians less than a continued rise in prices, As chairman of the Prices and Incomes Commission, Dr. John Young is charged with the job of preserving the value of our dollar. In this exclusive interview, he tells why his task is vital and how he’s tackling it

LAST JULY the federal government established a watchdog board on inflation, the Prices and Incomes Commission. The commission’s specific mandate: to recommend measures designed to achieve price stability and to encourage self-imposed restraint. In this article the chairman of the commission. Dr. John Y'oung. explains why the government feels such restraint is necessary by answering some basic questions about inflation. First:

Question: What is inflation?

Answer: The word "inflation” can be used to refer to a number of different situations, but in Canada today it is merely a shorthand way of describing a rapid and general rise in prices and thus a decline in the purchasing power of the dollar.

Question: How bad is the present inflation?

Answer: It is the worst since the Korean war and, if the past few years can be described as peacetime, it is one of the most severe and protracted peacetime inflations in Canada's history.

Question: Doesn’t inflation help to keep up employment and make the country prosperous?

Answer: Yes, in the short run. before people catch on to the fact that prices are rising, we can get some extra growth in the economy as inflation develops. We get this, of course, at the expense of those who are not quick enough or powerful enough to protect themselves against a decline in the value of money.

In countries such as Canada, with a long history of relative price stability, this kind of thing can go on for quite a while. (Remember the people who held on to their bonds after the war, waiting for the price of houses to come down to a reasonable level again?) Eventually, even those least sensitive to economic events catch on to the fact that prices are rising and, if they can, begin to act on the assumption that prices will continue to rise. When this happens, inflation no longer contributes to higher employment or greater output. All we get is rising prices and a decline in the purchasing power of the dollar.

People often talk blithely about the trade-off between higher employment and price stability, arguing that higher employment can be achieved at the cost of a deterioration in the purchasing power of the dollar. To advocate such a position is to say, in effect, that those responsible for managing the economy should deliberately and permanently re-

duce the value of the money they issue for purely a short-term advantage.

Question: Isn't some increase in prices inevitable?

Answer: Yes, some increases in the conj ventional measures of price change, such as the consumer price index, will occur this year and next. Moreover, almost no one expects that over the years ahead | there will not be some upward movement. In recent years every attempt to define national economic objectives has j settled on "reasonable” price stability as j the goal to be attained. The Royal Com¡ mission on Banking and Financing, the j Royal Commission on Taxation and the ; Economic Council of Canada have all come out in favor of accepting changes in the consumer price index of around 11á percent to two percent a year as about the best that can be expected over ; the long run. Of course, the measures of price changes that are available are all to some extent imperfect, and the kind of declines in the prices of some commodij; ties that are necessary if an overall averj| age of zero is to be achieved are very j hard to bring about in our present economy. There is, however, a major difference between price increases of W2 percent a year and the 4'/2 percent a year we are having now. At W2 percent a j year the value of the dollar is reduced to 50 cents in about 47 years, while at 4'/2 j percent this happens in about 16 years, j Question: What’s so bad about inflation? ¡| Answer: This is not a question that is Î asked very frequently. Most people find inflation so irritating and frustrating that j even those who oppose any measures j taken to stop it are usually not bold enough to come out in favor of inflation directly. Given this general public hostility to inflation, there is always a temptation for anti-inflationists to exaggerate the dire consequences of rapid and continuing price increases.

Over the short run, unexpected inflation may stimulate the economy, but only by cheating some for the benefit of others. Expected inflation does not provide any stimulus and would not be easier to achieve than reasonable price stabilj ity. Indeed, the system advocated by j some, in which governments maintain a j rapid but steady rise in prices and offset some of the bad effects on income distribution by increasing pensions, welfare payments, etc., in line with price-level changes, is not a system that is likely to j prevail in the real world. Any government strong enough and capable enough to maintain a steady rate of price in-

crease is also strong enough and capable enough to maintain reasonable price stability, and will do so. Any government not capable of exercising that degree of influence over the economy will, in fact, allow prices to alter at rates that vary with the ebb and flow of economic and political events and are therefore impossible to predict. This kind of long-run inflation, which is the only kind we are likely to get, makes it very difficult to maintain the kind of financial arrangements we now have for providing funds j for residential housing and for various levels of government. Until major changes in these arrangements are made, these parts of the economy are, therej fore, likely to bear much of the impact of price instability.

It is obvious that some people benefit from continuing inflation. If, however, there is no net gain in output from running the economy this way, then it folj lows that others must lose. Those who i lose are those who are less able to adapt their money incomes and the form of their savings to continuous, large and variable price increases. Those who are clever at arranging their financial affairs, or possess economic or political power, can generally look after themselves pretty well. Those who are less adept and i cannot bring pressure to bear are the most likely victims of inflation. Retired people trying to get by on fixed incomes have had a difficult time in recent years.

If it were true that unemployment could be maintained at a lower level over the years with continuing inflation than with reasonable price stability, the poor and underprivileged might get some benefit to offset the share of the cost of inflation borne by many of them. But there is no plausible reason for believing this to be the case.

Question: Can anything be done about inflation by Canadian actions alone? Answer: The short answer is “Yes." This is a country, not a region of the United States, nor a small, fully integrated piece of the world economy. While there is no question that economic as well as other events in Canada are very much affected by what goes on beyond our borders, and particularly by what goes on in the United States, we are not helpless. Much of our present inflationary problem stems from events and attitudes that are Canadian in origin and can be dealt with through Canadian policies.

The job would, of course, be much harder and require more basic changes if the government of the United States

were not grappling with its own inflationary problem at the same time. Those who suggest that we should sit by and wait for the effects of United States’ policies to be felt in Canada are, in effect, suggesting that we wait until our international position has been so undermined that we have no choice but to act precipitously to bring things back into line.

Given what we know, this would not be a responsible policy. We would, however, like to know much more about the international aspects of Canadian inflation, and this is one of the areas the research staff of the Prices and Incomes Commission will be exploring in depth. Question: Isn’t the cure for inflation worse than the disease?

Answer: It is certainly the case that when an inflation develops the momentum of this one, it is hard to stop. The medicine of general expenditure restraint will work, but not without some undesirable side effects. If all prices and incomes were very sensitive to changes in market forces, the problem would be less serious. A softening in the market for goods would yield immediate effects on prices and a softening in the market for labor would reduce income increases.

Unfortunately, things are not that easy. Those with power to influence markets for goods or for labor can resist short-term changes in market conditions, with the result that employment and output fall, rather than the rate of price and wage increases. The use of the traditional weapons alone can lead to results no one wants but which are hard to avoid.

It is for this reason that the Prices and Incomes Commission decided to try to persuade those with market power to accept a system of restraint in order to reduce the undesirable side effects of limitations on public and private spending. To the extent that this is possible, it means less unemployment and loss of output than might otherwise occur. Question: Will voluntary restraint work? Answer: People who ask this question often couple it with the observation that individuals cannot be expected to act in any other way than that dictated by a narrow view of their own immediate self-interest. It might be possible to run a society such as ours if people really behaved this way — but they don’t.

There are, of course, limits to how far individuals can be expected to go in taking a more enlightened view of their own self-interest, and this is particularly difficult in the case of prices and incomes. Nevertheless, almost all the major

groups in the community have strong reasons for taking a broader view than that suggested by short-run self-interest. Businessmen have for a number of years been very concerned with the general problem of inflation and have recognized that if governments are driven to take fairly drastic measures to deal with the problem, this may well have adverse effects on the position of their firms.

In the case of labor, there is also widespread concern about the problem of rapidly rising prices and in this case much more reason to be worried about the effects of alternative ways of controlling inflation. As indicated earlier, the traditional techniques for restraining expenditure have undesirable side effects, the most serious of which is unemployment. It is, therefore, wage and salary earners who have the most to lose from the use of the traditional weapons, and they more than others have an interest in finding a partial substitute for the usual techniques.

Other groups have varying degrees of motivation to support a direct scaling down of price and income increases. Many farmers in Canada have been submitted to a sharp squeeze between relatively stable prices for their output and rapidly rising wage and cost increases. Other groups have shared more fully in the general rise in prices and incomes, but have found the leap-frogging process a pointless one and have indicated some willingness to share in a program designed to bring inflation under control.

Any program of direct restraint also draws a good deal of support from those concerned with the fate of the less-buoyant regions of Canada. When general measures of restraint are used, they affect all parts of the economy and there are limits to the extent to which these weapons can be made more selective in their impact. Thus, any technique that limits price and income increases without adding to the level of unemployment in the less-buoyant parts of the country derives much support from these areas.

This is not to say that it is easy to obtain support for a system of direct restraint. It is to say, however, that if this inflation is going to be brought under control, then those who are concerned to minimize the level of unemployment and loss of output during the next year or two should not be casual in dismissing a program of direct restraint. □

For a guide to your personal inflation-time financing, turn to page 103.