review - ipa€¦ · ipa review — october-december, 1979 vigorously. along came mr. whitlam,...

IIPA REVIEW OCTOBER/DECEMBER 1979 Vol, 33 No. 4

Institute of Public Affairs 289 Flinders Lane Melbourne 3000 Tel. 63 6558

Editorial — A CRY FOR LEADERSHIP

Australia's economic performance inthe decade just ending — the 1970s —makes a dismal contrast with itsperformance in the two preceding decades— the '50s and the '60s.

The twenty years, 1950 to 1970, nowlook almost like a "golden age": thoughfew of us thought so at the time. In termsof growth, inflation and unemployment,the 1970s make, by comparison, a sorrystory.

In the twenty years from 1950 to 1970the average yearly increase in the GrossDomestic Product was slightly above 5per cent. In the 1970s it has been around 3per cent.

The average annual rate of inflation

over the '50s and '60s was about 4 percent.

In the 1970s it has been about 11 percent.

In the earlier decades, unemploymentaveraged slightly under 1.5 per cent.Sometimes it was under 1 per cent andonly in the minor recessions of 1952/53and 1961/62 did it reach 2 per cent ormore. In the early years of the 1970sunemployment was maintained at under 2per cent. During 1974/75 it rose rapidly toover 4 per cent and by the beginning of1977 was above 5 per cent. The presentrate is about 6 per cent.

To emphasize the contrast, the figuresare set out below in tabular form in termsof decades.

GROWTH PRICES UNEMPLOYMENT(Real GDP)

(Average annual percentage increase) (Approximateaverage)

1950s 5.0

1960s 5.5

1970s 3.2

IPA Review — October-December, 1979

65

5.3 (includes Korean 1.5War escalation)

2.3

1.510.8

6.1

(the rate as atSeptember, 1979)

Compared with the 1970s, theperformance of the '50s and '60s is all themore remarkable in view of theunprecedented increase in population —itself a powerful inflationary factor —mainly brought about by the pursuit oflarge-scale immigration. In the earlierdecades there was also a persistentweakness in the balance of payments — somuch so that for most of the 1950s wewere compelled to exercise direct controlsover imports.

How, then, is this striking disparitybetween the economic performance of the1970s, and that of the '50s and '60s to beaccounted for? It has something, but notall that much, to do with economic forcesbeyond our control. The economic windswere blowing only a little less favourablyfor Australia in the 1970s than in the '50sand '60s. The deterioration can fairly beattributed to a combinaton of threefactors — gross economic mismanage-ment, a failure of political leadership anda change in the public mood.

The change in the public mood —which was both cause and effect of theshortcomings in economic managementand political leadership — began to makeits presence felt in the closing years of the1960s. It was then that the rate of increasein money incomes began to acceleratedangerously.

In the ten years to 1963-64 averageearnings for male workers increased at ayearly rate of 4.5 per cent; in the 5 yearsto 1968-69, 6.4 per cent; in 1969-70, 8.4per cent; 1970-71, 11.1 per cent; 1971-72,9.7 per cent.

In retrospect, from the end of the waruntil about the middle of the 1960s theAustralian people exhibited a quiteremarkable degree of income restraint.This was especially so because the rate ofincrease in their consumptionexpenditure, which was an inevitable

66

consequence of the national policy ofrapid development and populationexpansion (requiring the diversion ofresources into investment), was very muchlower than in other Western countries.But by the closing years of the 1960s thisrestraint began to break down and in the1970s it was cast to the four winds. From1972-73 to 1975-76 the average annualincrease in male weekly earnings was anincredible 18.7 per cent; from 1975-76 to1977-78, 11.1 per cent. Moreover, withthe introduction of equal pay, the rate ofincrease in the earnings of women wasmuch greater, even than this. Theattitudes of moderation andreasonableness which, looking backward,prevailed over the great part of the'50sand '60s, were, in the '70s, succeeded byan ugly mood of greed and unreason.

The following table demonstratesgraphically what happened in the yearsbetween 1963/64 and 1977/78.

Percentage Yearly Increases in AverageEarnings of Male Workers

10 years to 1963/64 (annual average) 4.55 years to 1968/69 (annual average) 6.4

1968/69 7.51969/70 8.41970/71 11.11971/72 9.7

3 years to 1975/76 (annual average) 18.72 years to 1977/78 (annual average) 11.1

The immediate catalyst of the ominouschange in income expectations, althoughnot the underlying cause, probably lay inthe Metal Trades Judgement of December1967 which granted increases of $7.40 to afitter and $10 to a tradesman at the top ofthe scale. The Arbitration Commissionclearly concerned about the secondaryeffects of its decision included in itsjudgement two provisos, the unreality andfutility of which it was soon compelled to


admit. These were that the increasesshould not "flow on" to other industries,and that they should not be an additionto, but should be absorbed as far aspossible, in over-award payments. Fromprevious experience the Commissionshould have known that these twostipulations had no possibility whateverof being observed. The decisioncompletely overturned the whole patternof relativities and precipitated a torrent ofwage demands backed by work stoppages.

The situation was worsened by theCommission's judgement in the 1970National Wage Case. The Judgementawarded increases averaging over 6 percent, where previous judgements had beenin the realm of 3 per cent. Meanwhile,other tribunals, infected by the lavishgenerosity, were granting, unprecedentedrises. For instance, increases of the orderof 21 per cent were awarded to salariedofficers in the P.M.G. and the Melbourneand Metropolitan Board of Works. InAugust, 1971 the Arbitration Commissionpersisted in its over-generosity by grantinga further $6 to the Metal Trades andfollowed this up with a $6 consent awardin September, 1972.

In 1971 salary increases of 15 per centwere given to senior public servants by theCommonwealth Public Service Board andthen, to cap it all, politicians themselvesdecided to join in the fun and have a pieceof the action. The CommonwealthParliament provided for increases of$5,000 a year to its back-bench members,-along with, of course, substantialadditions to the salaries of Ministers. Akind of competitive madness had set in.Everyone, fearful of being left out in thecold, joined in the chase.

Blue and white collar unions began tomake utterly irresponsible claims of theorder of 20 per cent or even more.

By the end of the Gorton-McMahonyears the fires of inflation were burning


vigorously. Along came Mr. Whitlam,viewed this ominous scene, proceeded topour petrol on the blaze and turned it intoa raging inferno. The petrol was high-octane stuff — a compound ofgovernment-supported extravagant wageand salary rises, including "equal pay",and large, unprecedented increases inpublic expenditure — in one year, of amere 46 per cent. This was of courseprecisely the reverse of what was needed."Those whom the Gods wish to destroythey first make mad."

Australia has been suffering from theeconomic insanity of the Whitlam yearsever since. The four years of mild therapyadministered by the Fraser Governmenthave not sufficed to restore balance orstability to the economy: nor "sweetreasonableness" to the public mood.

Indeed, at the moment the situationthreatens to worsen. Hardly hadsubstantial rises been granted by theArbitration Commission in the recentMetal Trades Work Value Case and in theBuilding Industry Consent Award — riseswhich are certain to spread far and widethroughout the industry — than theCommission began its hearing onNovember 14th of the Wage IndexationCase.

And, if that was not enough, theGovernment has 'itself inexplicablyreversed its previous opposition to wageincreases and is now supporting fullindexation for price rises other than thoseinduced by government policies. Thismust inevitably give people the impressionthat the Government has weakened in itsdetermination to do battle with inflation.Inflationary expectations will bestrengthened and all sections of thecommunity will be encouraged to takefurther inflationary action to protectthemselves.

Meanwhile the militant unions, aswould be expected, remain unappeased

67

and the mood of other sections of thecommunity shows little sign of becomingresponsible and reasonable.

* * * *1980 will clearly be a critical year for

the Fraser Government. If inflation is notdecisively curbed by the latter half of theyear — and on present signs it could evenaccelerate — then it could well destroyFraser just as it destroyed Whitlam.

What should be crystal clear to theGovernment is that it must, in one way oranother, take control of the incomessituation and act to prevent the spiralwhich threatens. It cannot afford to washits hands of responsibility for themovements in wages and other incomeson the grounds that these are mattersdecided largely by Wage and SalaryTribunals and beyond its jurisdiction.

The Government must intervenedecisively to prevent the threatenedupsurge from occurring. For this purposeit must use all the weapons of politicalleadership at its command.

One of the most eminent and respectedeconomists in the world, Arthur Burns,recently questioned. whether policies of"gradualism" can succeed in the battleagainst inflation.' (This echoes aviewpoint put by the I.P.A. in itsassessment of the last CommonwealthBudget in the July/September"Review".) Burns argues that "drastictherapy" will be needed. Within thecoming weeks the Fraser Governmentneeds to make up its mind on theconstituents of a "drastic therapy".

For a start, the Government needs tore-establish full public confidence in itscapacity to lead and to control thedeteriorating situation through some eye-catching, decisive manoeuvre. For

See article on page 84.

68

instance, the Prime Minister couldannounce that in in 1980 no increases inthe pay of parliamentarians, senior publicservants and others of the like ilk will begranted. This is the kind of spectaculargesture needed to bring home to thepeople the madness of the presentcompetitive grab for larger and largershares of a near stationary cake. ThePrime Minister could make a frankconfession of the inability of theGovernment, indeed of any Government,to defeat inflation unless there is a periodof stability . in the incomes of all sectionsof the Australian people: that without areturn to moderation, the Governmentwill be impotent.

It should, if necessary, confront theCommunist-led unions. It shoulddemonstrate that the intransigence oftheir leaders is primarily designed not tobenefit the members of their unions — letalone those of any other — but to wreakhavoc in the economy and undermine theconfidence of the Australian people inthemselves. If necessary, theGovernment, by enlisting the support ofthe States, may have to consider the re-introduction of an incomes and pricesstandstill. It must attempt to restoresanity to the public mood through anurgent, widespread campaign ofeducation and communication to reachthe hearts and minds of the people.

The Australian people, at presentbewildered and disturbed, are crying outfor guidance, for strong leadership. It isup to the Government to provide it. Itcould be surprised at the response.

1980 will present a supreme test for theGovernment, a challenge to demonstrateits ability to lead, to inspire, to re-assertits mastery of events: in brief, to do thejob it was elected to do four years ago.


Annual Meeting Address

Challenge and Opportunity for British IndustrybyMr. W. B. M. Duncan, C.B.E.Deputy Chairman, I.C.I. Limited., U.K.

Born in Scotland, and graduating from Glasgow University with First-Class Honours inMechanical Engineering, Mr. Duncan's wide experience in senior management has rangedacross almost 30 years in the U.K. and North America. He was the first president of I. C.I.America Inc. and later of I.C.I. North America Ltd., co-ordinating interests inCanada and U.S.A.

His C.B.E. came in 1973 for services to British commercial interests in U.S.A. In April,1978, he became a Fellow of Engineering and received an honorary Doctor of Law fromStrathclyde University. In August, 1978 he was made a visiting Professor at StrathclydeUniversity.

IntroductionFortune magazine quotes a longtime

American resident of Puerto Rico: "Youcan feel patriotic about statehood, andyou can feel patriotic aboutindependence. But Commonwealth is anaffair of the mind" — a perceptivecomment, which underlies the friendlywelcome 1 have received in Australia. Thewelcome has been no less friendly whenmy accent reveals that I am a Scot,although I am aware that some of you


may feel that Scotland has recently onlyproduced shop stewards who emigrate toAustralia. I am reminded of the Scotvisiting an Australian cattle station manyyears ago who asked his host if there weremany Scots in Australia. "Yes," hereplied, "but our real plague is rabbits."

A major pre-occupation of the UKsince the end of World War II has beenhow to create the conditions for a sharedprosperity — a Common Wealth, if youlike. The years since 1945 have seen great

69

changes at national and internationallevels. We in Britain have experiencedthree. In the '50s, the big social changes:the creation of the welfare state, theprovision of a health service, equalopportunity in education, recognition ofthe principles of collective bargaining; inthe '60s the big political adjustments: ourImperial past behind us — before us, anew trading partnership with Europe; inthe '70s the big economic changes: the oiland energy crises, the concern forconservation, the prospects of lowereconomic growth.

Industrially, such matters at aminimum have preoccupied us and someeven slowed our post-war recovery.Economically, Britain lags behind most ofEurope and many other countries of theworld, and yet I firmly believe that ourstability may still serve us well. I amfortified in this by a recent comment bythe American ambassador who said, "Forthe foreign investor, Britain has the greatasset of being more moderate and stablethan any other industrial country. If I hadto predict over the next 20 years whichcountry was least likely to becomeunstable, I would have no doubt at allthat it would be the United Kingdom."

After three decades of social, politicaland economic upheaval, this complimentis all the more encouraging for beingforward-looking.

The Challenge to British Industry: WealthCreation

I would like now to talk about howparts of British industry are dealing withthese changes in a realistic and responsibleway.

The major element of social changesince the Second World War isundoubtedly the shift in the relationshipbetween industry and the community. It isright and proper that a civilized societyshould aim to ensure that all its sectors —

70

including industry — behave in aresponsible way. But I believe thoseattitudes are mistaken which concernthemselves with constraining industry'ssocial behaviour but do nothing toencourage financial performance.However broadly we define the termindustrial 'accountability' it must surelyinclude the obligation to create wealth.

How wealth is to be shared out is quiteproperly the responsibility of democraticgovernment but it is, of necessity, aconsequential consideration. Itsallocation rightly drives the swings ofpolitical programmes and theroundabouts of social conscience. Butprofit-making industry always has to payfor the ride.

Relationships with GovernmentAnother major influence on us in

Britain has been the intervention ofGovernment. This is partly a reflection ofsocial pressures and partly a consequenceof major economic and political changes.The important lesson is how to build arelationship such that policies whichmight harm industry are effectivelymodified before they become law. Therelationship must involve mutualunderstanding and yet be robust enoughto surmount party politics; indeed, itserves industry best when it is leastpolitical.

In the UK the chemical industry, andICI in particular, have developed aworking relationship with governmentand the civil service which opens the wayto sensible discussions on prospectiveregulations and their practicalimplementation, even where there aredifferences of opinion on basic principles.

One current example is the CompetitionBill which Mrs Thatcher's Government isintroducing. This effectively abolishes thePrice Commission but strengthens thepowers of the regulatory agencies of


•competition, the Office of Fair Tradingand the Monopolies and MergersCommission. The Price Commission wasa facet of Government intervention whichwas ill-conceived, whereas a reasonablecompetition law helps to maintain publicconfidence in the working of a freeeconomy.

However, although I understand thebroad purpose of the Bill, I am worried byits failure to reflect adequately thedimension of international competition.We trade and compete on an internationalbasis; our home market is now WesternEurope, and we think that these realitiesought to be recognised.

The second important point is thepower of the Director-General of FairTrading to investigate the practices ofbusinesses: should he be able toinvestigate arbitrarily, or should he firsthave to have evidence of malpractice? Inour view some reasonable safeguard forindustry should be built into thelegislation.

Nevertheless, successive UKGovernments have been prepared to payattention to industry's reactions, albeitwith different degrees of responsiveness.Such relationships contrast markedly withthose we are obliged to have with theparallel regulatory authority in Brussels.Here flexibility in discussion which couldlead to progressive, practical measures isseriously hampered by theuncompromising limitations of the Treatyof Rome.

Counting the CostsEven when the dialogue betweengovernment and industry is constructivethe cost burdens may greatly outweigh thesocial benefit, and the public must bemade aware of this.

For example, in 1955 the UK wasspending 40% of the GNP on governmentexpenditure: by 1975 this had risen to


60%. Between 1943 and 1976 about55,000 pages were added to our statutebook; we are doubling the volume ofstatute law once in every fifteen years. Asingle example from my own companywill illustrate the enormity of the chargessuch legislation inflicts.

In 1978 the salary cost alone for thework we in ICI undertook to satisfy therequirements of the Price Commission'sregulations was £250,000. We can clearlycount the cost of this exercise, but cananyone truly claim to have gained?

But times are changing. We are nowrecognising that the pendulum ofgovernment intervention has swung toofar. As Sir Geoffrey Howe said in 1977:"It should be the first duty of Parliamentto resist the temptation to add any morelaws."'

International Legislation: The En-vironment

One reason for this reassessment is thegrowing aversion to legislative im-positions from outside the UK, notablyfrom America. It is easier to see the motein another's eye! In the United States theCongressional Directory lists forty majorregulatory bodies. There are also 30government departments with directaccess to the President's Office. Just 10days ago in New York I heard ProfessorPaul MacAvoy of . Yale say that theregulatory agencies of US Governmenthad been responsible for "a veritableexplosion of controls".

Is it not a little ironic, in this context, tofind support in Ralph Nader, when hedraws attention to "regulatory policieswhich often frustrate rather than promoteeconomic competition". 2 But the EECdoesn't lag far behind.I From 'Too Much Law?' by the Rt. Hon. Sir Geoffrey Howe, M.P.(p.14)

2 From Yale Law Journal 1973

71

(i) EECConsider, for example, EEC legislation

on water pollution. The UK approach ispragmatic. Our statutes do not specifystandards for particular emissions.Instead, practical consultation betweenthe controlling water authority and thedischarger determines what should bedone. Control is carried out with regardto local circumstances, taking intoscientific consideration the nature of thedischarge, the nature and condition of thereceiving water, and the intended use towhich it will be put. Technical andfinancial implications are also considered,to make sure that available resources areeffectively employed to give realimprovement.

The alternative unhappily favoured inmost other countries (especially Germanyand Holland) is the uniform approach, inwhich all discharges, irrespective of theirlocation, the nature and quality of thewater to which they are made, and theeconomic effect upon the industryinvolved, are compelled to conform tofixed emission standards, frequentlyarbitrary and even ill-considered from ascientific point of view.

Such rigid standards divert scarceresources from areas where they could beused to greater effect. Moreover theyfrequently impose upon industry a burdenwhich is both uneconomic andunnecessary.(ii) U.S.

In the United States, too, the tendencyis to regulate first and ask questionsafterwards. Let me quote the example ofthe regulations already banningfluorocarbons for aerosols, and shortly tobe extended to essential applications suchas air-conditioning and refrigeration,where their replacement is provingextremely difficult and will undoubtedlybe costly.

In 1974 two American researchers

72

postulated on the basis of a laboratorymathematical 'model' that over a longperiod the very stable fluorocarbons riseslowly through the stratosphere, wherethey are decomposed by the sun's rays,releasing chlorine which attacks the ozonelayer.

Early evidence reveals that thechemistry in the upper atmosphere ismuch more complicated than was allowedfor in this model. However, evenaccepting the worst estimates of thehypotheses — that the ozone is beingdepleted by a fraction of a per cent peryear — the natural variation we allexperience day-today and acrosslatitudes is far greater, and demonstratesbeyond all doubt that no risk would havebeen involved in withholding regulatoryaction until the results of scientificresearch become known — in 3 to 5 years'time.

As an international industrialist whohas to deal with the world as he finds it,what do I conclude from all this? PerhapsLord Zuckerman, former chief scientificadviser to the British Government, cameclosest to my thinking when he observed:"The world is far from ready for theapplication of uniform environmentaland consumer standards."'

International Trade: The Challenge toInternational Companies

Mention of world-wide activity leadsme to another major change: thewithdrawal of Britain as a world powerand its entry into the Common Market.

Although there have undoubtedly beenmany changes in trading patterns as aresult, it is important to realise thatBritain is still a world trader, seekingbusiness wherever there are markets.

You might be excused for not

3 From an article based on an address by Lord Zuckerman to the

British Industrial Biological Research Association of which he isPresident.


•

understanding this, since so much hasbeen made of the decliningcompetitiveness of firms such as BritishLeyland. I make no apology, therefore,for speaking about the internationalsuccess of Britain's private enterprisechemical industry, with particularreference to my own Company. TheBritish chemical industry employs'430,000people, 5% of our industrial production,and accounts for 10% of our nationalmanufacturing output. It contributesabout a third of the trade surplus achievedby UK manufacturing industry whileexporting more than one third of its UKproduction. Despite the strength ofsterling, ICI alone is exporting fromBritain this year chemicals and relatedproducts at a rate in excess of £1,000million per annum.

How do we succeed internationally? Ibelieve a key factor is that, wherever weoperate in the world, we strive to developa progressive working relationship withgovernments, authorities, customers,trade unions, employees and the generalpublic. Our success is founded on theprinciple 'good practice precedes goodlaw'.

A second principle is to respectindividual expertise, and delegatewherever possible. Overseas subsidiariesare seen to be national companies of thecountries concerned, and run bynationals. Indeed we delegatesignificantly to all our operating units, bethey divisions in the UK or companies likeICI Australia. Let me expand a little. In1928 we formed a manufacturingcompany here in Australia and we did soin a commercial agreement, negotiated atarms' length, which I believe has beengood for ICI, for ICI Australia andindeed for Australia. We contracted toprovide technical know-how whenever asound economic case could be made forreplacing imports by manufacture. Five


decades ago we chose a policy ofprogressive international distribution ofresearch, and that agreement with ICIAustralia provides a broad and simpleframework for technology transfer andlocal development of science andtechnology which may well have been themost important single factor in thegrowth of the chemical industy ofAustralia.

So much ill-informed and biasedcriticism is made of multinationals andprivate enterprise that I make no apologyfor quoting from a Business InternationalReport: "Multinational corporationshave fashioned new techniques offinancial management to cope withcapital shortages, rampant inflation, andfloating exchange rates. They havedeveloped wholly new marketing conceptsand practices to fit a world shrunken bycommunications satellites. And they havebeen far in advance of the chancelleries ofthis world in opening a dialogue andcreating economic intercourse betweencapitalist and socialist countries as amajor step toward peacefulaccommodation."

The Way Ahead: EnergyI believe this entitles us to comment

cautiously on the future, beset as it will beby the energy crisis.

It is already clear that the '80s willcontinue as a period of limited economicgrowth, at least for the developed nations,or we must find ways of growing withoutextra oil. The free world consumes 50million barrels of oil every day and theOPEC countries produce 34 millionbarrels, with no intention currently ofincreasing that quantity. Britain, despitethe current riches of North Sea oil, andthe whole Western world will face anenergy gap by the year 2000 unlesspositive alternative sources to oil aredeveloped.

73

Here governments have an increasinglyresponsible role to play, not only to framepolicies which conserve resources andencourage economies, but alsointernationally to act cohesively toaccommodate the economic repercussionswhich result from fluctuations in the flowof Mid-east oil. As consumers we cannotafford to bury our heads in the sands untilthe oil runs dry.

You, in Australia, are particularly wellplaced to develop an industrial economywhich is progressively less dependent onoil. But it is more than that. The ratios ofreserves to consumption for all fossil fuelsare more favourable in Australia than inJapan, UK, West Europe and NorthAmerica with the single exception ofBritish oil. It is already evident that yourlarge reserves of easily won andconveniently located coal will serve as thebasis for major, energy dependent,industrial developments. Your uraniumreserves are very large by world standardsand even your natural gas and oil reservestaken together are appreciable.

Obviously your Governments, Federaland State, are well aware of this happysituation and anxious to share withestablished industries the task of

developing these resources in the nationalinterest. I hope that industry's practicalknowledge and experience are sensiblyused in pursuing these important nationalobjectives.

ConclusionWhat are my conclusions? First, that inspite of three decades of great change, the'80s will surely see even more. Second,that greater efforts are needed at theinterface between industry and society todevelop better understanding. Third, thatrelationships between governments andindustry, particularly at internationallevels need to be conducted in anincreasingly mature and practical manner,such that legislation does notinadvertently act against the publicinterest by unnecessarily inhibiting orpenalising industrial activity.

Finally, that in a world of shrinkingresources, there is an obligation forsuccessful companies, particularly thoseoperating on an international scale, tospell out more clearly than ever the realcontribution that healthy, competitive,efficient industry can make to ourcommon wealth and standards of livingthroughout the world.

74 IPA Review — October-December, 1979

NEW SPECIAL BOOKLET

"A Test of Character"Can We Beat

Inflationand

Unemployment— and Reduce

Taxes?The I.P.A. has just published an eight page illustrated booklet which

comes to grips with our economic problems in simple but precise terms."A Test of Character" rejects the view that Australia's major

problems — inflation and unemployment, high taxes and "biggovernment" — can be solved by Economists or by Politicians.

Rather, the booklet promotes the view that each Australian cancontribute to the nation's economic recovery, if only we all begin tounderstand and act upon some basic principles of our market economy.These include the following:—

*Inflation and unemployment will continue while our money incomesrise faster than our production.*The key to more employment is restraint in all incomes — including

those of senior management, professionals and politicians.*We cannot expect less taxation while we request government to do

more. The two don't go together.*Good profits are the only lasting means of securing higher wages and

more jobs.*Unless all of us start exercising self-restraint in the demands for higher

incomes, our problems will intensify.

I.P.A. hopes that many companies and other organizations will order"A Test of Character" in bulk to ensure that the widest possiblecirculation of the booklets can be achieved, especially amongstemployers, employees and students throughout Australia.

The price per copy is 25 cents, less the following reductions in price forI.P.A. contributors:

10 to 100 copies — 10%101 to 500 Copies — 15%Over 500 copies — 20%

IPA Review — October-December, 1979 75

A CHALLENGE TO WELFARISM

One of the least endearing features ofgovernment welfare in Australia is thesystem's resistance to change. It isespecially resistant to any reduction in thesize or scope of programmes currentlybeing undertaken.

Marvin Stone, the , Editor of U.S. Newsand World Report described precisely theintractable nature of state welfare in arecent editorial:—

"Welfarism, once planted sinks deeproots that are difficult, if not impossibleto dig out."

In Australia the roots were well andtruly established by the mid 1970s. Sincethat time growth has continued unabated.

Once politicians discover votes inwelfare schemes and the loss of votes incutting them back, the whole welfareapparatus (cash payments, paperwork,social workers and the rest) begins tosprawl. Cutting out excess inadministrative procedures, eliminatingwaste and inefficiencies, become tasks too"politically impossible" or too"administratively impracticable" for theGovernment to execute. Thus the WelfareState mushrooms. And the Governmentof the day finds it increasingly difficult todisqualify certain categories of recipients— who provide jobs for bureaucrats — nomatter how undeserving they may be. Thegranting of universal rights to welfare toooften results in the expansion ofgovernment programmes in response to

76

population changes, new lifestyles,inflation, recession and other "un-controllable" causes.

When it comes to government hand-outs politicians and bureaucrats play thesame game, called "How much more canwe expand the system". The interests ofthose responsible for the maintenance ofthe Welfare State are best served by open-ended programmes. Over the last tenyears all categories of social security haveincreased at a faster rate than oureconomic growth. The extraordinarygrowth in some categories has principallybeen a response to the demands ofinfluential groups of voters in thecommunity, whose interests may appearto be directly served by rising governmentassistance. Unhappily we are discoveringthat politically-determined welfaredistribution brings gross inefficiency andinevitable waste — and the poor get noricher.

There should be noticeable (and real)differences in the approach to welfare byAustralia's two major political Parties.On paper, at any rate, Labor is far moreconcerned with "The Government"righting the wrongs of society throughuniversal schemes and public sectorintervention. For instance, in the currentA.L.P. platform there are firmcommitments to introducing a no-fault(i.e. no liability for negligibility whatever)compensation scheme and a national


superannuation scheme for all Australianworkers. The Liberal Party, on the otherhand, places greater emphasis ondirecting welfare to those most in needand less emphasis on the Governmentacting on behalf of all of us to redressinequalities and injustices in incomedistribution. The compulsory removal ofchoice in Labor's proposed universalschemes clearly distinguishes its platformprinciples from those of the LiberalParty.

Despite the apparent differences,however, the present Government hasfailed dismally to reduce the WelfareState erected in the Whitlam years. Thecollective grip of the state on theindividual remains strong. The principleof universal coverage regardless ofrecipients' incomes, assets or needs seemsfirmly entrenched. The election pledge totransfer income from the public to theprivate sector — by way of substantial taxand "social" expenditure reductions — isburied and forgotten. In practice, theFraser Government has progressivelyincreased its responsibility formaintaining and increasing the scale ofsocial welfare benefits.

Social security is the area ofCommonwealth Government spendingwhich has shown by , far the greatestincrease in recent years. In each of the lastfour Commonwealth Budgets, there havebeen steady rises in expenditure onwelfare. The coverage of welfare hasgreatly expanded. This is the case evenafter allowing for the unavoidable impacton welfare spending of non-discretionaryfactors such as the "ageing" of thepopulation and the historically higherlevels of unemployment.

We are spending more on welfare, inreal terms, than ever before. In recentyears costs and claimants have spiralled— facts clearly shown in the followingtrends:—


* Between 1975-76 and 1978-79Commonwealth Government expenditureon social security rose by 60 per cent from$5,000 million (7 per cent of Australia'sGross Domestic Product) to just over$8,000 million (8 per cent of our GDP). In1979-80 the estimated expenditure is$9,000 million or over 8 per cent of ourGDP.* Expressed in another way, socialsecurity has increased its share of totalCommonwealth Budget outlays from 23per cent in 1975-76 to 28 per cent in1978-79. Even after deductingexpenditure on family allowances andunemployment benefits, welfare outlayshave still risen from $4,000 million (18 percent of outlays) to $6,600 million (21 percent of outlays) in three years of theFraser Government.* From 1975-76 to 1978-79 cash benefitsto social security recipients increased byover 70 per cent — from $4,500 million(on average $325 per Australian) to$7,700 million (on average $534 perAustralian).

Even after allowing for inflation cashbenefits for social security per head haverisen 22 per cent in only three years.

Unhappily we have reached the stagewhere most Australians are, in one way oranother, affected by welfarism (whether .they like it or not!). The present system isa commitment in perpetuity to assist agreat mass of people, many of whomcould easily look after themselves if onlytaxes and inflation were not destroyingunmercifully their capacity to earn andsave. This state of affairs will persist solong as the present Government scatterswilly-nilly the benefits and the publicprovision of social services throughoutthe community. Lord Harris, Director ofthe London Institute of EconomicAffairs, recently expressed his opinion onthe "blunderbuss" method of welfaredistribution in the following way:—

77

"The best thing that can be said for the`universalist' policy of free services is thatit operates like a blunderbuss: byscattering benefits widely it aims to missno one who may be in need of them."

One ought to add, as a Liberal Memberof Parliament, Mr. John Hyde, is onrecord for saying, that the worst aspect ofuniversal benefits, is the fact that it"generally means bleeding the poor topay the rich." In other words the taxes onlow income earners are being used tosubsidize the provision of governmentbenefits to higher income groups in thecommunity. Free tertiary education (aproduct of the welfare state, althoughoutside the restricted scope of this article)is a glaring example of the basic inequityof state subsidized higher education. Taxsubsidized growth in higher educationhas effectively transferred resources awayfrom lower income households to thosepersons who will eventually come out nearthe top of the income ladder.

Lord Harris believes, as I.P.A. does,that state-imposed welfare "encourageseveryone to draw as much in benefits ashe can, and contribute in taxes as little ashe cannot evade." This appears to be thecase in Australia where there is a growingresentment (partly reflected in theincreasing incidence of tax evasion) to thesize of government spending on the"social wage".

This resentment has been aggravated bythe perceived shortcomings of our welfaresystem. Despite the high tax levelsrequired to sustain the Welfare State, theGovernment does not appear to be anycloser than was its predecessor in"curing" our more glaring social ills.Welfare agencies are always quick topoint to the poverty and destitution thatexist beneath the great affluence of thenation. According to ProfessorHenderson and the Australian Council ofSocial Services, there is an urgent need for

78

income support to unorganized but needygroups in the community. Unable tocommand any electoral punch, thesegroups include the unemployed withoutdependants, those living below the(Henderson) poverty line and single lowincome households with large familiesand few assets.

Given the system's failures, it is hardlysurprising that a growing number ofAustralians are concerned about the waysin which their taxes are being spent onwelfare, and for that matter, on the otherstate-imposed "public" services. Theexpanding eligibility for welfare haslocked the Government into distributing arising share of Australia's nationalincome to all and sundry. Close to 78 percent of total Commonwealth expenditureon welfare is indexed periodically andautomatically to the inflation rate. Thusas long as inflation continues we are stuckon an interminable welfare escalator. Theescalator will bring us mountingbureaucracy, rising government spendingand higher taxes. But it won't cure ourworst social ills.

The solution to welfarism — thealternative to spiralling governmentexpenditure on welfare — lies in thediminution of people's expectations oftheir rights to government hand-outs.Hereupon the Government must take thelead by severely pruning the social andeconomic entitlements that Australiansnow expect — and accept — if onlybecause they have no other option. Thealternative of "opting out" of the system,looking after oneself as it were, is not arealistic proposition for most people,without the incentive of significantreductions in personal income tax — andwithout lower inflation.

The accepted notion that the Stateshould maintain the welfare and livingstandards of all its citizens must surelynow be brought into question. The


Government has a responsibility to lookafter those in need, to take care of peopleunable to look after themselves or theirchildren. It has an unquestionableobligation to protect the members of oursociety on whom misfortune has fallenheavily. In the provision of welfare,however, the Government must have adefined role, a limited responsibility. Thatis not to say that entitlements to the needyin society shouldn't be raisedsubstantially. To the contrary! Themeans of achieving ProfessorHenderson's desired guaranteedminimum income (i.e. ensuring that noone's income falls below a basic standardof living) will be found by Governmentdirecting welfare resources to the needywhile leaving the rest to look afterthemselves. The spiralling cost of open-ended hand-outs is presently preventingthe introduction of direct incomesubsidies to the deserving welfarerecipients.

The "social experimentation" of the'70s, which in the beginning promised the"Great Society" but in the end onlyproduced more government, has given usa salutary lesson. This lesson is, thatGovernment, no matter how beneficientits intentions, cannot achieve its "social"

promises by expanding stateresponsibilities and powers. During thenext decade "the market" — the realengine of progress — should be used to amuch greater extent to allocate resourcesin areas previously the exclusive domainof the government — i.e. the publicsector's goods and services. Policy-makers, politicians and economists oughtnow to be proposing ways in whichresources can be transferred to the privatesector, particularly resources presentlybeing used inefficiently in state welfare.

The means testing of the greater part ofsocial security payments would put aneffective brake on rising welfareentitlements. The end of "universal"schemes and their substitution with directsubsidy programmes would bring uscloser to concentrating welfare on those inreal need. Opting out of the system couldthen be encouraged by the Governmentreducing income taxes and cutting itsspending on the "social wage". New waysof transferring responsibility for incomemaintenance from Government to theindividual need to be examined. Thepresent system urgently requires radicalsurgery. The Government must bravelytake up this challenge.


79

Resistance to "BigGovernment"

The I.P.A. Presidential Address

by

Sir Wilfred Brookes, C.B.E., D.S.O.

I intend to use this address to say something about a matter thatis causing grave concern not merely to businessmen but to most of thecommunity — that is, the ever-increasing size of Government.

Everywhere I went on a recent trip overseas, I found the topicof "Big Government" to be uppermost in people's minds.

Over the last few decades, Government has come to occupy a!arger and larger role in the economies of most Western countries, andpolitical parties, even those of a non-socialist persuasion, have been ableto do little to curb its growth. This is as true of Australia as of othercountries, notwithstanding our deep-rooted tradition of individualismand the well-known Australian resentment of being pushed around.

Twenty-five years ago total public sector spending — includingCommonwealth, State and Local Government expenditures — hadreached about 25 per cent of national expenditure. Ten years ago it wasaround 30 per cent. Now, believe it or not, it is approaching 40 per centof• total national spending. To its credit, the Fraser Government hasarrested the growth of the Commonwealth public sector which, in theGovernment's own words, became "bloated beyond belief" in theWhitlam years. But, after four years in office it has not succeeded incutting back the size by so much as one per cent.

The progressive expansion of Government cannot just beattributed to power-hungry politicians or to "empire-building"bureaucrats.ln recent years, there has been a tendency, exacerbated Ithink by the media, for the people to expect far too much of Governmentas such, to look to Governments to solve all problems, big and little, andto castigate them if they don't. It was once held that the job ofdemocratic Government was to provide a basis for law and order, to evenup opportunities and to look after the weak, but beyond that to leave usfree to go about our own concerns and to manage our own lives as best


we can. Now we have come to expect Government to watch over us fromthe womb to the tomb, to act as if it were a charitable foundation with itsown funds, to guarantee us with a job of our own choice, to improve ourliving standards without fail every year, to cater for our health needs, toeducate our children, to rescue our business if it threatens to sink in thestormy waters of competition: and, of course, having thus brought aboutgalloping inflation to be castigated for not instantly being able to solvethe problem. How it is possible for any Government to do that whilemost sections of the community are clamouring for increases in theirincomes of 10 and 20 per cent per annum, and even more in somequarters, every year, I do not know. Perhaps some economist orpolitician or union leader will tell us.

However, I am glad to say that at last there are someencouraging signs that the tide is beginning to turn. The battle against"Big Government" is now being joined. One can detect three reasonsaccounting for this all-important change in the public mood.

First, there is the resistance to ever-increasing taxes resultingfrom the natural desire of people to spend more of their own earnings inthe ways they wish, instead of handing it over to governments to spendfor them. Most of you will be aware of "the tax revolt" in the UnitedStates. But you may be surprised to know that in 1978 no fewer than 12States decided to impose constitutional ceilings on taxation. In Australia,we have our own species of "tax revolt" — seen in the huge andreprehensible tax evasion "industry", if one can call it that — and in thegrowth of the cash economy.

The second reason for the mounting opposition to "BigGovernment" lies in the growing realisation that it simply doesn't work,that it doesn't achieve the objectives it sets for itself, and that in manyareas the intervention of Government creates more problems than itsolves. I suppose the most spectacular example of this is the monstroussituation that has developed as a consequence of Government controlover the provision of Health care. In a few short years expenditures onHealth have escalated from $149 per head of population to anunbelievable $500 per Australian (or $240 per head after allowing forinflation) and from 6 per cent to 8 per cent of the Gross DomesticProduct. The basic reason behind this explosion of health costs lies quiteclearly in the fact that "market" principles were abandoned over thegreat part of medical, hospital and pharmaceutical services. Withoutchecks and balances in any area, whether Government or private, the"sky is the limit" particularly if the other fellow pays the bill.

The third reason for the increasing opposition to "BigGovernment" is the growing alarm, even fear, of insidious unnecessarybureaucratic intrusion into our everyday business and private affairs.Apart from the constant irritation and time-consuming frustration ofhaving to comply with a multitude of government regulations, to keependless records, to obtain permission from some government departmentbefore we can make a move, there is the chilling fear of an omnipotent,


omnipresent, sinister "Big Daddy" overseeing our lives, intruding eveninto our most private personal concerns and instructing us what to do.

Over 40 years ago, a few far-sighted people such as the NobelPrize winner, Professor F. A. Hayek (who spoke at this meeting threeyears ago) warned us of the dangers of more and more Government. ThisInstitute, I am glad to say, also contributed its quota over the years tothose warnings. Now these fears are being vindicated. I believe that the1980 decade will see the resistance to "Big Government" grow strongerand stronger and, in the economic sphere at any rate, people will comeincreasingly to see that the only effective efficient way of conducting ouraffairs lies in the operation of the free market. In fact, I suggest that themajor function of the I.P.A. in the decade ahead will be to contribute tothis resistance.

Let me conclude by quoting some words that appeared in aneditorial in the Institute's "Facts" in 1970.

"Government in a free society does not exist primarily to dothings for those whom it governs: it exists primarily to help them to dothings for themselves.

The dignity and development of the individual person is theultimate objective of the free society. But the only kind of developmentworthy of the name is self-development. Men grow big only throughtheir own efforts."


A "THE POLITICS OF TAXATION"The 1980 Summer School of the Australian

Institute of Political Science. To be held in

Canberra from Saturday, 26th January

to Monday, 28th January, 1980.

Few Australians are satisfied with the present tax system? Many of uswant less tax. But at the same time we want what the tax money provides— and more!

Has the limit to taxation been reached? Or alternatively can ournational objectives be met only by expanding the public sector and thetax base?

These important questions and other relevant issues concerning the"Politics of Taxation" will be the subjects to be addressed by speakersand participants at the A.I.P.S. Summer School.

Several well-known people will address the Summer School.They include:—*Lord Ralph Harris, General Director, Institute of Economic Affairs,

London. Topic: "The Role of Taxation and Public Expenditure in aModern Democracy".*Mr. Hugh Stretton, Reader in History, the University of Adelaide.

Topic: "Future Patterns for Taxation and Public Expenditure inAustralia".*Professor Russell Mathews, Director, Centre for Research on Federal

Financial Relations, the Australian National University. Topic: "TheStructure of Taxation".*Professor David Kemp, Department of Political Science, Monash

University. Topic: "The Politics of Change".The Summer School will be held in Melville Hall at the Australian

National University, Canberra. It is open to anyone interested in animportant issue which should concern all of us. We commend it to oursubscribers.

For further information and details concerning enrolment, allcorrespondence should be directed to:Ms. Susan Smith,Secretary,Australian Institute of Political Science,2nd Floor, Archway House,32 Market Street,SYDNEY, N.S.W., 2000. Phone: (02) 29 7340.


"DRASTIC THERAPY" NEEDEDby

Arthur F. Burns

We have received the kind permission of Dr. Arthur Burns to republish extracts fromhis Per Jacobsson Memorial Lecture, "The Anguish of Central Banking", delivered inBelgrade on September, 30th this year. (The sub-titles are ours.) Arthur Burns, a formerChairman of the President's Council of Economic Advisers (1953-56) and later theChairman of the Board of Governors of the Reserve System in the United States(1970-78), is one of the most eminent and respected economists in the world.

In his lecture, Dr. Burns throws doubts on the efficacy of the conventional"gradualist" approach to the curbing of inflation and suggests that "drastic therapy"

will be needed.This is also the view of the I.P.A. — the view expressed in the July/September 1979

issue of this publication.(Per Jacobsson won world acclaim for his outstanding work as the Managing Director

of the International Monetary Fund and the World Bank some twenty years ago.)

The anguish of central bankingWhy is the world-wide disease of

inflation proving so stubborn? Why is itnot yielding to the various efforts of theaffected nations, including somedetermined efforts, to bring it to an end?Why, in particular, have central bankers,whose main business one might suppose isto fight inflation, been so ineffective indealing with this world-wide problem?

Depite their antipathy to inflation andthe powerful weapons they could wieldagainst it, central bankers have failed soutterly in this mission in recent years. Inthis paradox lies the anguish of centralbanking.

Great expectationsBy way of introduction, I might note

that during much of the period since theend of World War II, over-all economicdevelopments were, in the main,satisfactory. By prewar standards,recessions were brief and mild through themid-1960's, both in the United States andin other industrial countries; world tradeexpanded rapidly under a beneficientregime of stable exchange rates; and living

84

standards rose impressively throughoutthe developed world. In most industrialcountries inflationary pressures weretroublesome from time to time — as in theimmediate postwar years, during theKorean hostilities, and for a couple ofyears after the mid-1950's. Thesepressures were more substantial in somecountries than in the United States, but innone did inflation appear to be out ofcontrol.

This experience of economic progressstrengthened the public's expectations ofprogress. What had once been a quietpersonal feeling that the long futurewould be better than the past, particularlyfor one's children, was transformedduring the postwar years into an articulateand widespread expectation of steadyimprovement in living standards —indeed, to a feeling of entitlement toannual increases in real income.

But the rapid rise in national affluencedid not create a mood of contentment.

Demands on GovernmentIn the innocence of the day, many

Americans came to believe that all of the


4) new or newly discovered ills of societyshould be addressed promptly by theFederal government. And in theinnocence of the day, the administrationin office attempted to respond to thegrowing demands for social and economicreform while waging war in Vietnam on arising scale.

When the government undertook in themid-1960's to address such "unfinishedtasks" as reducing frictionalunemployment, eliminating poverty,widening the benefits of prosperity, andimproving the quality of life, it awakenednew ranges of expectation and demand.Once it was established that the keyfunction of government was to solveproblems and relieve hardships — notonly for society at large but also fortroubled industries, regions, occupations,or social groups — a great and growingbody of problems and hardships becamecandidates for governmental solution.New techniques for bringing pressure onCongress — and also on the Statelegislatures and other elected officials —were developed, refined, and exploited.Congress responded by pouring out abroad stream of measures that involvedgovernment spending, special tax relief,or regulations mandating privatespending. Every demonstration of asuccessful tactic in securing rights,establishing entitlements or extractingother benefits from government led tonew applications of that tactic. Evengovernment employees, particularly at thestate and municipal levels, discovered thepecuniary rewards of shedding genteelnotions of public service and pressingeconomic demands with a stridentmilitancy.

Government and inflationMany results of this interaction of

government and citizen activism provedwholesome. Their cumulative effect,


however, was to impart a stronginflationary bias to the Americaneconomy. The proliferation ofgovernment programs led to progressivelyhigher tax burdens on both individualsand corporations. Even so, thewillingness of government to levy taxesfell distinctly short of its propensity tospend. Since 1950 the Federal budget hasbeen in balance in only five years. Since1970 a deficit has occurred in every year.Not only that, but the deficits have beenmounting in size.

"Full" employmentThe pursuit of costly social reforms

often went hand in hand with the pursuitof full employment. In fact, much of theexpanding range of government spendingwas prompted by the commitment to fullemployment.

Inflation came to be widely viewed as atemporary phenomenon — or, provided itremained mild, as an acceptablecondition. "Maximum" or "full"employment, after all, had become thenation's major economic goal — notstability of the price level. That inflationultimately brings on recession andotherwise nullifies many of the benefitssought through social legislation waslargely ignored. Even conservativepoliticians and businessmen beganechoing Keynesian teachings. Fear ofimmediate unemployment — rather thanfear of current or eventual inflation —thus came to dominate economic policymaking.

The impotence of monetary policyNowadays, businessmen, farmers,

bankers, trade union leaders, factoryworkers, and housewives generallyproceed on the expectation that inflationwill continue in the future, whethereconomic activity is booming or receding.Once such a pyschology has become

85

dominant in a country, the influence of acentral bank error that intensifiesinflation may stretch out over years, evenafter a business recession has set in. For inour modern environment, any rise in thegeneral price level tends to develop amomentum of its own. It stimulateshigher wage demands which areaccommodated by employers who feelthey can recover the additional coststhrough higher prices; it results in labouragreements in key industries that call forsubstantial wage increases in later yearswithout regard to the state of businessthen; and through the use of indexingformulas, it leads to automatic increasesin other wages as well as in social securitypayments, various other pensions, welfarebenefits, also in rents on many propertiesand in the prices of many commoditiesacquired under long-term contracts. Onthe other hand, unintended central bankeffects of a restrictive type do not ramifyin similar fashion. To develop anysignificant momentum in unwindinginflation, they would need to be bothlarge and repetitive — a combination thatcan hardly occur under prevailingconditions in the industrial democracies.

My conclusion that it is illusory toexpect central banks to put an end to theinflation that now afflicts the industrialdemocracies does not mean that centralbanks are incapable of stabilising actions;it simply means that their practicalcapacity for curbing an inflation that iscontinually driven by political forces isvery limited.

New climate of thought required to endinflation

The persistent inflation that plagues theindustrial democracies will not bevanquished — or even substantiallycurbed — until new currents of thoughtcreate a political environment in whichthe difficult adjustments required to end

86

inflation can be undertaken.There are some signs, as yet tenuous

and inconclusive, that such a change inthe intellectual and political climate of thedemocracies is getting under way. One ofthe characteristic features of a democracyis that it encourages learning fromexperience. Recent disturbing trends ineconomic and social life, particularly thepersistence and acceleration of inflation,have led to much soul-searching byleaders of thought and opinion. Amongeconomists, the Keynesian school has lostmuch of its erstwhile vigor, self-confidence, and influence. Economistsare no longer focusing so exclusively onunemployment and governmentalmanagement of aggregate demand. Theyare paying more attention to themanagement of aggregate supply — to theneed to strengthen incentives to work andinnovate, to ways of stimulating savingand investment, to the importance ofeliminating barriers to competition, toways of reducing the regulatory burdensimposed on industry, and to other meansof bolstering business confidence. •

Many economists now recognize thatmuch of reported unemployment isvoluntary, that curbing inflation andreducing involuntary unemployment arecomplementary rather than competitivegoals, that persistent governmentaldeficits and excessive creation of moneytend to feed the fires of inflation, that thehigh savings rate that usually prevails inthe early stages of inflation is eventuallysucceeded by minimal savings, and thatwhen this stage is reached it becomes verymuch harder to bring inflation undercontrol.

Government spending not producing theexpected social benefits

The intellectual ferment in the world'sdemocracies is having its influence notonly on businessman and investors, but


also on politicians, trade union leaders,and even housewives; for all of them havebeen learning from experience and fromone another. In the United States, forexample, people have come to feel inincreasing numbers that much of thegovernment spending sanctioned by theircompassion and altruism was falling shortof its objectives; that urban blight wascontinuing, that the quality of publicschools was deteriorating, that crime andviolence were increasing, that welfarecheating was still widespread, thatcollecting unemployment insurance wasbecoming a way of life for far too many— in short, that the relentless increases ofgovernment spending were not producingthe social benefits expected from themand yet were adding to the taxes of hard-working people and to the already highprices they had to pay at the grocery storeand everywhere else. In my judgement,such feelings of resentment andfrustration are largely responsible for theconservative political trend that hasdeveloped of late in the United States.And I gather from the results of recentelections elsewhere that concern aboutinflation and disenchantment withsocialist solutions are increasing also inother industrial countries. Fightinginflation is therefore being accorded ahigher priority by policy makers inEurope and in much of the rest of theworld.

Inflation: the number one problemIn the United States a great majority of

the public now regard inflation as theNumber One problem facing the country,and this judgement is accepted by boththe Congress and the Executiveestablishment. Some steps have thereforebeen taken within the past year to checkthe rapid rise of Federal spending, tolower certain taxes in the interest ofencouraging business investment, and yet


bring down the still large budget deficit.Pressures to augment the privileges oftrade unions have been resisted by theCongress. Some government regulations— as in the case of airlines and crude oil— have been eased. And even restrictivemoves by the Federal Reserve, which notlong ago would have stirred anger andanxiety in government circles, have beenaccepted with equanimity. Symbolic ofthe changed political atmosphere was theannouncement of an increase in theFederal Reserve discount rate on the veryday this July, when a sizable decline of thenation's over-all production was beingreported for the spring quarter.

Doubts about the "gradualist" approachThe present widespread concern about

inflation in the United States is anencouraging development, but no one canyet be sure how far it will go or howlasting it will prove. The changes thathave thus far occurred in fiscal,monetary, and structural policies havebeen marginal adjustments. Americanpolicy makers tend to see merit in agradualist approach because it promises areturn to general price stability — perhapswith a delay of five or more years butwithout requiring significant sacrifices onthe part of workers or their employers.But the very caution that leads politicallyto a policy of gradualism may well leadalso to its premature suspension orabandonment in actual practice.Economic life is subject to all sorts ofsurprises and disturbances — businessrecessions, labor unrest, foreign trouble,monopolistic shocks, elections, andgovernmental upsets. One or another suchdevelopment, especially a businessrecession, could readily overwhelm andtopple a gradualist timetable for curbinginflation. That has happened in the pastand it may happen again.

87

"Drastic therapy" neededIf the United States and other industrial

countries are to make real headway in theFight against inflation it will first benecessary to rout inflationary psychology— that is, to make people feel thatinflation can be, and probably will be,brought under control. Such a change innational psychology is not likely to beaccomplished by marginal adjustments ofpublic policy. In view of the strong andwidespread expectations of inflation thatprevail at present, I have thereforereluctantly come to believe that fairlydrastic therapy will be needed to turninflationary psychology around.

The precise therapy that can serve anation best is not easy to identify, andwhat will work well in one country maywork poorly in another. In the case of theAmerican inflation, which has become amajor threat to the well-being of much ofthe world as well as of the Americanpeople, it would seem wise to me at thisjuncture of history for the government toadopt a basic program consisting of fourparts. The first of these would be alegislative revision of the Federalbudgetary process that would make itmore difficult to run budget deficits andthat would serve as the initial step towarda constitutional amendment directed tothe same end. The second part would be acommitment to a comprehensive plan fordismantling regulations that have beenimpeding the competitive process and formodifying others that have been runningup costs and prices unnecessarily. Thethird part would be a bindingendorsement of restrictive monetarypolicies until the rate of inflation hasbecome substantially lower. And thefourth part would consist of legislationscheduling reductions of business taxes in

88

each of the next five years — thereduction to be quite small in the first twoyears but to become substantial in lateryears. This sort of tax legislation wouldrelease powerful forces to improve thenation's productivity and thereby exertdownward pressure on prices; and itwould also help in the more immediatefuture to ease the difficult adjustmentsforced on many businesses and theiremployees by the adoption of the firstthree parts of the suggested program.

Painful adjustments unavoidableI wish I could close this long address by

expressing confidence that a programalong the lines I have just sketched, or anyother constructive and forceful programfor dealing with inflation, will beundertaken in the near future in theUnited States or elsewhere. That I cannotdo today. I am not even sure that many ofthe central bankers of the world, havingby now become immured to gradualism,would be willing to risk the painfuleconomic adjustments that I fear areultimately unavoidable. I would thereforenot be surprised if the return toreasonable price stability in the industrialdemocracies and thereby to an orderlyinternational monetary system ispostponed by more false starts. But ifpolitical patience in individual countries isseverely tested as that happens, thelearning process will also be speeded. Theconservative trend that now appears to beunder way in many of the industrialdemocracies will then gather strength; andunless political leadership falls intoirresponsible hands, the inflationary biasthat has been sapping the economic andmoral vitality of the democracies canfinally be routed.


review - ipa€¦ · ipa review — october-december, 1979 vigorously. along came mr. whitlam,...

Documents