Inflation: Cancer on the American Body Politic

Abstract

Inflation is a signal that a serious malfunction exists in the American economy. Given that this malfunction will not necessarily correct itself, some form of intervention by policymakers is necessary. Price increases in the health, housing, and higher education sectors have caused a great deal of hardship with some individuals unable to obtain adequate health care, others unable to purchase a home, and still others unable to attend college. In addition, state and local government has been hard hit and the rising price of oil has made life very difficult for many. For the economy as a whole, inflation has led to confusion in economic decision making, distorted the tax system, and increased the risks to investment and innovation. Although our current inflation has not meant falling real income, the growth of income has been slower than in the 1960s because inflation has helped to depress the level of savings and investment. Inflation has also redistributed income, not systematically, but haphazardly. Fiscal restraint and close coordination between federal and monetary authorities is necessary if inflation is to be brought under control. However, fiscal restraint will not be easy both because cuts in federal expenditures will exacerbate the problems people now face in the markets for such items as health and housing and because a large share of the budget is indexed to the consumer price index. Changes should be made in this indexing procedure. In addition, every effort to reverse the decline in productivity should be made, if inflation is to be brought under control.