The New Inflation

Abstract

This article argues that the Reagan economic program—budget slashing and tax cutting—is bound to fail because it does not deal with new sources of inflation. Specifically, the plan offers no solution to such fundamental initiators of inflation as food and energy price jolts, which have recurrently kicked off the price—wage spiral. Further, the policy is grounded in propositions for which there is little empirical support: people will work harder in response to lower tax rates, and because future expectations are a factor in investment decisions, inflation will decline if investors believe that it will. The failure of the supply-side option will leave us with nowhere to go but toward wage—price controls. To work, however, controls must be accompanied by a plan to deal with structural difficulties in the markets that are generating inflation in the first place. Economic policy must develop around a new inflation paradigm stressing stabilization of prices in the "necessity sectors," food, health, energy, and housing, where inflation is rising faster than the overall consumer price index (CPI).