The American Enterprise Institute for Public Policy Research, established in 1943, is a publicly supported, nonparti. san, research and educational organization. Its purpose is to assist policy makers, scholars, businessmen, the press, and the public by providing objective analysis of national and international issues. Views expressed in the institute's publications are those of the authors and do not neces­ sarily reflect the views of the staff, advisory panels, officers, or trustees of AEI.

Council of Academic Advisers Paul W. McCracken, Chairman, Edmund Ezra Day University Professor of Busi­ ness Administration, University of Michigan Kenneth W. Darn, Harold ]. and Marion F. Green Professor of Law, University of Chicago Law School Milton Friedman, Paul Snowden Russell Distinguished Service Professor of Eco­ nomics, University of Chicago; Nobel Laureate in Economic Science Donald C. Hellmann, Professor of Political Science and Comparative and Foreign Area Studies, University of Washington D. Gale Johnson, Eliakim Hastings Moore Distinguished Service Professor of Economics and Provost, University of Chicago Robert A. Nisbet, Albert Schweitzer Professor of Humanities, Columbia University G. Warren Nutter, Paul Goodloe Mcintire Professor of Economics, University of Virginia Marina v. N. Whitman, Distinguished Public Service Professor of Economics, Uni­ versity of Pittsburgh James Q. Wilson, Henry Lee Shattuck Professor of Government, Harvard University

Executive Committee Herman J. Schmidt, Chairman of the Board Richard J. Farrell William J. Baroody, Jr., President Richard B. Madden Charles T. Fisher III, Treasurer Richard D. Wood

Gary L. Jones, Vice President, Edward Styles, Director of Administration Publications

Program Directors Periodicals Russell Chapin, Legislative Analyses AEI Defense Review, Robert A. Goldwin, Seminar Programs Robert J. Pranger, Bruce Palmer, Jr., Co-Editors Robert B. Helms, Health Policy Studies AEI Economist, Economic Policy Studies Herbert Stein, Thomas F. Johnson, Editor Marvin H. Kosters/James C. Miller III, Public Opinion, Government Regulation Studies Seymour Martin Lipset, Ben J. Wattenberg, Co­ W. S. Moore, Legal Policy Studies Editors; David R. Gergen, Rudolph G. Penner, Tax Policy Studies Managing Editor Howard R. Penniman/ Austin Ranney, Regulation, Anne Brunsdale, Political and Social Processes Editor Robert J. Pranger, Foreign and Defense William J. Baroody, Sr., Policy Studies Counsellor and Chairman, Laurence H. Silberman, Special Projects Development Committee A Conversadonwith the Honorable Barrg Bosworth

A Conversationwith theHonorable B Bosworth Coping with Infladon

Held on July 19, 1978 at the American Enterprise Institute for Public Policy Research Washington, D.C. Library of Congress Cataloging in Publication Data Bosworth, Barry, 1942- A conversation with the honorable Barry Bosworth. (AEI studies; 215) 1. Inflation (Finance)-United States. 2. Wage-price policy-United States. I. Title. II. Series: American Enterprise Institute for Public Policy Research. AEI studies; 215. HG538.B64 332.4'1'0973 78-20313 ISBN 0-8447-3317-2

AEI Studies 215 © 1978 by American Enterprise Institute for Public Policy Research, Washington, D.C. Permission to quote from or to reproduce materials in this publication is granted when due acknowledgment is made. The :views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff,advisory panels, officers, or trustees of AEI. Printed in the United States of America Introduction

Fighting inflation is a thankless job. For those in the forefront there is constant frustration, especially in a voluntary program with no controls and no influence·over monetary policy. All they can do is make a loud noise whenever a group in the economy does something which, in their judgment, contributes unnecessarily to inflation. Exer­ cising such authority, of course, is bound to lead to loud protests, since no one likes to be singled out for criticism. Such a "no win situation" is not for the faint of heart. On July 19, 1978, the honorable Barry Bosworth, director of the U.S. Council on Wage and Price Stability, and therefore in the thick of the fray, met with senior members of the staff of the American Enterprise Institute and several invited experts, including a few mem­ bers of the press who write regularly on the inflation issue. In view of Dr. Bosworth's reputation for maintaining controversial views and his skill in articulating them, we anticipated a lively exchange. We were not disappointed. In his opening remarks, Dr. Bosworth sets forth the thesis that the inflation of the 1970s is very different from that we experienced during the 1960s and, accordingly, requires a different approach. The major problem today is that certain groups in society have acquired unparalleled power to set prices and wages, relatively immune from competitive forces. Specifically, Dr. Bosworth points to labor unions and certain concentrated industries. He also mentions the increasing role of government-both as a provider of goods and services and as a regulator of the private sector. The key to fighting inflation in this new era, according to Dr. Bosworth, is to bring pressure on unions and certain producers not to "abuse" their monopoly power and for the government to be more efficient in its operations and in its approach to regulation.

1 The ensuing discussion ran the gamut of issues from coordination of the administration's anti-inflation program to the theoretical under­ pinnings of the approach to inflation Dr. Bosworth had outlined. Most notable is the colloquy which questions whether monopoly power (to the extent it exists) merely causes prices and wages to be higher than they would be otherwise, or whether this can explain constantly rising prices. Dr. Bosworth was a staff economist for the Council of Economic Advisers in 1968, prior to receiving his Ph.D. in economics from the University of Michigan in 1969. He has been an instructor and pro­ fessor of economics at Harvard University (1969-1971) and the Uni­ versity of California at Berkeley (1974), and has been a research associate (1971-1974) and senior fellow (1.976) at the Brookings Institution. In 1977 he chose to leave the relatively tranquil occupa­ tion of public policy research and enter into the foray of public policy making as the director of the Council on Wage and Price Stability in the Carter administration. Enough said. Let Dr. Bosworth and the other participants speak for themselves.

}AMES c. MILLER III Codirector Center for the Study of Government Regulation American Enterprise Institute

2 A Conversation with the Honorable Barry Bosworth

First, let me try to summarize briefly what I think the nature of the inflation process and problem is, because that affects the arguments about what to do about it. And, second, I will outline why we in this administration have gone in a certain direction, some of the implica­ tions of our policy, and some of the problems with it. It's pretty obvious that we're not making much progress. In almost every quarter I have been in this job, the rate of inflation has gone up about 1 percent. But the current situation is not quite as bad as the consumer price indexes, or the magnitude of the acceleration, imply. From the middle of 1975, when we had an unemployment rate just below 9 percent, until the end of 1977, when the unemployment rate was down to about 6 percent, the inflation rate was constant. It appeared to fluctuatefrom month to month because food prices varied, and energy prices, mortgage interest rates, and some of the nonin­ dustrial prices were sometimes erratic. But the basic trend of inflation was neither up nor down. There was a fairly steady 6 percent rate of inflation on the price side, and almost exactly the same picture on the labor side. Straight-time hourly earnings were rising steadily at a 7 percent annual rate of increase, and private fringe benefits, social security measures, and the like brought us to the range of about 8-81/z percent. One of the major aspects of the inflation problem is that this country lost at least a full percentage point in its rate of productivity growth from the 1960s to the 1970s-from 3 percent to 2 percent annually. Thus, in the 1975-1977 period, unit labor costs were rising at a 6-61/2 percent annual rate of inflation, taking 2 percent off the wage increases for productivity improvements. And that is in equi­ librium with what was happening to prices. Profit margins, cyclically

3 adjusted for utilization rate changes, were almost an absolute con­ stant. The economy was caught on a steady momentum of inflation, yet with an unemployment rate in excess of 6 percent. By the Federal Reserve Board indexes of capacity utilization or by any other defini­ tion, the amount of excess capacity in the economy, on the average, was fantastically large. In any market or any other place in the entire economy, it was hard to find a situation where prices were being driven up by demand and supply factors. Instead, a momentum type of inflation was being fueled not by expectations of continuing inflation, but rather by a reaction to past increases in inflation. Wage earners were seeking wage increases to recover from past price increases, business firms were seeking to pass through past cost increases, and the whole thing was just cycling on itself. What we have today is an inflation fueled by the fact that we have given many groups in the economic system, through social and institutional changes, a lot of discretion over their wage and price increases. They can use that discretion to bring about increases in wages and prices that are not necessarily responsive to market con­ ditions. In other words, despite the fact that we like to say the economy is competitive, many sectors of the economy are, in fact, not competitive today. In the central industrial core of the economy, for example, the labor market bears little resemblance to a competitive market as most economists define it. It used to be that an individual either took a job or refused a job, and it was his own decision. Today, however, decisions over wages are largely group decisions-and if the group decides not to take the job, neither will anybody else. That is a fundamental change. As labor unions are structured, the use of seniority and other such provisions may, for example, be regarded as attempts of the group to protect those who would be most reluctant to strike by offering them the greatest protection against losing their jobs if a strike becomes necessary. The risk of being unemployed is allocated so that those who have been union members longest worry the least about the economic consequences of excessive wage increases-re­ duction of demand for their product and the consequent loss of jobs. The risk of unemployment does not threaten the regular union mem­ ber because he has enough seniority; it threatens instead the people who recently joined the industry. In any case, unemployment is seen as the result of actions in the other sectors of the economy that they cannot influence.

4 It is not just a question of labor unions. The whole social atti­ tude about what we expect from the labor market has changed. When I began studying economics, I don't think Paul Samuelson's book had the word "equity" in it, except perhaps in the chapter on income distribution. We said competition was effective and efficient in allo­ cating resources, but nobody ever said it was fair or equitable. Today, however, when people talk about the system, their primary demand is that it be fair, that it be equitable. We try to manage issues of equity by manipulating prices and wages in labor and product markets. This country has changed socially. One way to put it is that we have tried to humanize the system, and the price of doing so is that we have drastically weakened the competitive mechanisms. In a modern industrial economy, labor unions are a necessity to give the individual some feeling of control over the environment in which he works. But unions are more important as a social function than as an economic function. But they are also symptomatic of a major change in the role of competition in labor markets. The same thing can be seen in the product markets. Economies of scale and increased specialization have sharply limited the num­ ber of firms that can make any specific product line. This does not mean that competition does not exist, but it does mean that com­ petitive pressures take a very long time to be effective. In the last twenty or thirty years, decisions to expand or contract plant capacity, or to enter or leave an industry, have involved too much capital to be based on business cycle changes and conditions. Such decisions must be based on long-term projections, rather than on a short­ term reaction. In the long run, I think the economic system in the product markets is highly efficient and competitive. It reallocates resources quite well. But a distinction must be made between that and the short run. The reaction of the economy to changes in demand and supply has lengthened, so that a moderation of price increases in response to reduction of demand pressures takes a lot longer and works much more slowly than it used to. Industries such as contract construction illustrate that similar long-term competitive forces are present in labor markets. Wages can be pushed so high that an industry finally becomes priced out of the market. It just takes a long time for that to show up. Over the next ten to twenty years, I think it will show up in the U.S. steel industry. In that industry wages have been pushed beyond the point where the industry can compete in world markets. Unless some

5 adjustment takes place, there will be a steady deterioration in the number of jobs. Another drastic change that has taken place is the proportion of the economy today that is not even operated for profit. Government employment makes up about 18 percent of the economy. If we in­ clude employment in the regulated industries and in other public in­ stitutions, the total rises to 35-40 percent. In other words 35-40 per­ cent of the employed people in this country are engaged in work that is not operating either to minimize costs or to maximize profits. Finally, in the last ten years, a brand new mechanism has be­ come an important force for inflation. The government has gone into a new business-social regulation. This is an attempt to achieve national goals not through budgetary expenditures, and not through what were called off-budget expenditures-such as credit market provisions giving loan guarantees and other such devices used in the 1960s. When we found the budget cost to reach some of these goals too high, we tried off-budget financing. But that did not work much better because it pushed small business and home owners out of the capital markets. And so we turned to a third way. Now when we have a national goal, we just tell somebody to get us there. The cost shows up not in the form of higher taxes or government ex­ penditures, but in the increased costs of doing business and in mak­ ing the system more rigid. The cost of this regulation is difficult to measure because of the rigidities it has introduced into the system. Obviously, these changes have not occurred overnight, nor can it even be said that the speed at which these. changes have occurred accounts for the acceleration of inflation. Changes have been occur­ ring steadily in the system for the last fifty years. They did not result in inflation because the system works fine as long as it is not hit with major shocks or disturbances. In the short run, however, it is a rigid economic system, and it has been hit with a lot of shocks in the 1970s. This system would not have seen a big acceleration of inflation but for the food and fuel price increases of 1972-1974. The continuing inflation today has generated a momentum as various groups still try to adjust to the distortions of that period. Given that sort of economic system, one very obvious policy to deal with it is aggregate demand restraint. I don't think it can be denied that aggregate demand restraint would bring inflation to an end. If the Federal Reserve did not increase the money supply, forced interest rates to rise, let home building decline, and let invest­ ment and demand fall off, then at some level of unemployment and at some level of excess capacity prices and wages would finally stop

6 nsmg. I do not deny that, but historical experience indicates the social cost would be too high. The economic literature on the rela­ tionships between unemployment and inflation and on past business cycles suggests that 1 million people must be. unemployed for two years to take 1 percent off the rate of inflation. That approach to dealing with inflation seems too expensive. The same is true of fiscal policy. On this particular issue, there is no real difference between fiscal and monetary policy. Both of them are demand restraint mechanisms. At the same time, without going into all the reasons, it seems clear that controls will not solve the problem of inflation in this economy. Inflation is a long-term problem. We have reached the point where the fear of unemployment is not an adequate restraint on wage increases and the fear of lost sales is not an adequate re­ straint on prices. An institutional change has occurred in every industrial democratic country in the world. They all have the same problem of inadequate restraints. It is a problem that will always be with us, and I readily admit I do not know the solution. I do not know how to change those institutions to reintroduce some restraint. But it seems to me that controls are not an effective response. They might be regarded as short-term solutions, and we have a long-term problem. Finally, I suppose we could make the economy more competitive. Years ago, I read the novels of Upton Sinclair and others, and I'm not sure I like the idea of a competitive economy. It is very unfair, and it is very cruel. It is attractive only to those ,who succeed in the economic arena, and those who fail quite naturally demand changes in it. That has been the process over the last fifty years. Instead, I believe there are three areas that we should focus on in grappling with the problem of inflation today. First, we have to face the fact that government itself has become a major source of inflationary pressures, particularly in the last decade. In part this is because of the instability of its fiscal and monetary policies on aggregate demand. But that is not the fundamental problem. The problem is much more direct than that. Through its direct actions such as taxes and regulatory actions in the social arena, government has introduced a new element that adds considerably to the rate of inflation, even though it may be justified in the terms of the benefits it yields. For example, this year the increased social security tax, the minimum wage increase, and the unemployment insurance tax in­ crease-just those three items together-added three-quarters of a percentage point to the rate of inflation.

7 Roughly three-quarters of a percent a year is added to the in­ flation rate by environmental and health and safety regulations. They may be justified, and the benefits may be worth the cost. Keep in mind, however, that people say they want an improvement in the environment, and that they are willing to pay for it. However, when the prices go up, they want a wage increase to compensate them through a cost-of-living escalator. It is not true that people stand ready to pay through the price mechanism for improvements in health and safety and the environment-particularly not the groups that are most vociferous in demanding such improvements. That has been an important source of the inflationary pressures. In addition, this administration has had difficulty with another problem-with what might be called special interest legislation. A group can make a very strong case for why it deserves government help, whether it be trade restrictions, price supports, or whatever. The benefits to the members of the group are overwhelming. They will vote for or against a politician solely on his decision on that one issue. The cost of that decision shows up as cost to everybody else, but it is diffused. For example, nobody will vote for or against the president because of his decision on a sugar bill except the sugar producers-13,000 strong out of a population of 220 million. The political pressures exerted by special interest groups are enormous. Because of the way the political system operates, it is very hard for anybody standing for reelection to say "no." This problem has grown to such an extent that it makes a considerable contribution to in­ flationary pressures. Our attempts to placate special interest groups have become. very costly to us in recent years. Another part of the problem lies in the private sector. Even if the government reduced its inflationary pressures to zero, I believe inflation would still continue. It might not accelerate, since govern­ ment may be the major source of accelerating inflation. We would still have that wage-price spiral, however. A basic problem is in the industrial core sector of the economy. There is no problem with much of the economy, but in the regulated industries and the concentrated industries, there is a lot of trouble. It shows up in industry-wide bargaining. Why should the steel com­ panies resist the demands of the union? If they agree to a reasonable wage increase, they know every other company in the industry will grant the same increase. All their costs will go up proportionately. They all will raise their prices, and they all will be in the same com­ petitive position they were in before. If they should miscalculate and get into some difficulty with imports-the only remaining source of

8 competition-the union and the company will join forces, come down to Washington, and demand trade restrictions. Unfortunately, we usually give way to their pressures, at least to some degree. In such industries, it is interesting to hear what management has to say about the union, and what the union has to say about management. They are effusive in complimenting each other and in saying how well they work together. But the focus of their compli­ ments is how well they both deal with government, and not how well they interact between themselves to determine work rules and wages. In the wage area, I don't see how we can moderate the rate of wage increase without dealing with the split that has developed between the very large wage increases of the major unions in the industrial core of the economy and those of the rest of the economy. The contracts of the largest industrial unions lead them to expect wage and benefit increases of nearly 10 percent a year, while the rest of the economy receives 7-8 percent a year. It is very difficult to induce people to exercise restraint when they see the most visible groups in society receiving such large wage increases. We have made some progress, perhaps, with business on the price side, though it is primarily in the form of verbal support rather than real actions. Our greatest difficulty now is to find a way to deal with the relative wage issue in order to gain some momentum on the wage side. Qyestions and Answers

RICHARD DUNHAM, visiting fellow, AEI: You implied in the first part of your comments that business, labor, and government are all guilty in the weakening of the bargaining position. It seems to me that one of the major problems is the trend in all three areas toward indexing in wage contracts and various other things. It seems to me that this trend makes bargaining start at a higher base automatically. My question is, Is this trend toward indexing a major structural problem?

DR. BoswoRTH: I have mixed feelings. I argue on both sides of that question sometimes. Problems arise because some groups in society have indexing, and others do not. Arguments in favor of some indexing can be made. People on social security, for example, are not part of the process determining wages and prices. Why should these outsiders be penalized when the government, business, and labor can't get their act together to deal with the inflation problem?

9 On the other hand, some way must be found to prevent rela­ tive income inequities from developing-inequities that occur by acci­ dent when some incomes are indexed and others are not. By accident, several large unions had cost-of-living contracts in 1973-1974, which carried their wages way up when the inflation accelerated in those years and created distortions in relative wages. In subsequent years, the wage increases of those without cost-of-living escalators accel­ erated in an effort to catch up. Now we have a big differential be­ tween wage gains of the strongest unions and everybody else. I believe those inequities of income are the primary motivating force for inflation right now. They provide the increased pressure as other groups try to catch up. There is no acceleration taking place in large union wage increases, and we may actually have made a little prog­ ress in slowing them down. I want to make that point as strongly as I can. The major dif­ ference on the labor side is not between union and nonunion plants. It is between the unions of the large enterprises of the central in­ dustrial core and the rest. In the wage behavior of these large unions, there is no evidence that unemployment influences their wage rates. There is no evidence that they moderate their demands during a recession. They have insulated themselves against the cost of in­ flation, and they have insulated themselves against the cost of unemployment. They follow a life of their own, depending upon cost-of-living price increases plus an annual "productivity" incre­ ment. In a recession, the wage demands of the competitive sector of the economy fall off because of fears of unemployment. A wage gap opens, and the rate of overall inflation slows down. But because that gap has been opened, it has to be closed during the next expan­ sion. Thus, as the unemployment rate comes down, wage increases again accelerate in the more competitive sectors. Right now in U.S. labor markets, the smaller unions are demand­ ing contracts that give 30 percent increases in three years so they can catch up to the big guys. And the nonunion workers are looking at local labor markets and thinking they ought to join the others who are getting these increases. Cost-of-living escalators can make that situation worse in some situations and better in others. Inequities do not develop in all cases. Also, when a three-year contract is being negotiated, the workers cannot be expected to exercise restraint in their wage increases for three years when the business firm can raise its prices the next month. The workers need some protection, such as escalators. Alter-

10 natively, perhaps long-term contracting should be abandoned. As an emergency device to bring the inflation rate down, we may for the next few years have to stop building expectations of continuing inflation. We could go to year-by-year negotiations. It's true that business would resist that vigorously, because it does not like fight­ ing over wages every year. The problem is obviously not just on the union's side.

WILLIAM FELLNER, resident scholar, AEI: If we went to escalators across the board, we would really be bargaining for real wages, for real wage increases to correspond to productivity increases, right?

DR. BoswoRTH: It is inequitable when some workers have a cost-of­ living escalator and some don't. Moreover, many labor contracts currently call for cost of living plus a productivity improvement. The only trouble is that this formula dates from the world of the 1950s and 1960s, when we had 3 percent annual productivity in­ creases. This economy hasn't had a 3 percent annual productivity growth in a decade.

DR. FELLNER: What would you say we do have?

DR. BoswORTH: Until the first of this year, we had a 2 percent annual rate of growth of productivity. Once we saw what happened in the second quarter this year, and what has happened to the unemploy­ ment rate, we began to question whether the underlying rate of pro­ ductivity, adjusted for the cyclical fluctuations, is any better than l 1/2 percent.

DR. FELLNER: Have you deducted anything for the government sector?

DR. BoswoRTH: No, I'm speaking of nonfarm business.

DR. FELLNER: Won't productivity be higher if the composition of the labor force changes, as it will with the decline of the weight of teenagers, since teenagers probably diminish productivity?

DR. BoswoRTH: I don't know what caused the slowdown in pro­ ductivity. I don't find arguments about the age or sex composition of -the labor force convincing at all. Somebody pointed out that the growth in the number of females and teenagers in the work force in the last decade appears to have slowed the rate of productivity. The

11 only problem is that there was an even greater impact of that growth in the prior decade.

DR. FELLNER: But if the percentage of teenagers in the labor force diminishes, won't they play a smaller role than they do now or did ten or fifteen years ago?

DR. BoswoRTH: Only if the types of jobs being filled by teenagers also vanish from the economy. A teenager produces less than an experienced white male who is twenty to fifty-five years old only becauses of differences in the type of jobs they do.

HERBERT STEIN, senior fellow, AEI: There's a distinction between struc­ tural factors that make the rate of inflation, whatever it is, very sticky and rigid, and structural factors that make the rate of inflation high. Most of what you are pointing to would make the rate of inflation stay wherever it is. We could have zero inflation, with zero rate of productivity growth and a high rate of real costs imposed on the economy by government regulations, and so on. There are rates of wage increase which will give all those things. But you said we wouldn't have this high inflation rate now if it hadn't been for some exogenous force. Suppose we were willing to accept 1 million un­ employed a year for ten years, and that we brought the inflation rate down by five percentage points to a rate of 2 percent. Would all these structural forces then help us to stick at 2 percent forever, until the Arabs quadrupled the price of oil, or is that the nature of the problem? That is, is this a policy choice for us, a permanent low inflationin exchange for ten years of unemployment?

DR. BoswoRTH: Basically, the answer to that is yes. That is, I believe the structural changes that have occurred tend to make the inflation rate remain at whatever it has been. They make it sticky. I would say that explains the first half of the 1960s-despite a rather sharp de­ cline in the unemployment rate, the inflation rate stayed pretty con­ stant. Then the Vietnam War was a shock that overdid the demand stimulus, and we went to a higher rate, where it stuck for the last half of the 1960s. Then the oil embargo and the food shortages shocked it up again, to a very high level, but the recession brought it back down and it stuck again at 6 percent. If we followed a policy of biting the bullet and accepted double­ digit unemployment for a time, it would bring the inflation rate down,

12 yes, except for one problem. We could not continue to have around 10 or 12 million people unemployed.

DR. STEIN: Didn't you say 1 million unemployed for two years takes one point offthe inflationrate?

DR. BoswoRTH: Yes.

DR. STEIN: Would 1 million unemployed for ten years reduce inflation five percentage points?

DR. BoswoRTH: I don't believe so. What I'm saying is, if unemploy­ ment were raised by 1 million people, the indications are we would lose 1 percent off the inflation rate within two years. Whether that rate of deceleration would continue in the following two years is problematical. But let's take a slightly different example. Suppose there were a severe, short recession, which dropped the inflation rate down to 2 percent, with a very large pool of unemployed. We would subse­ quently need to put those people back to work. The policies we would use to stimulate the economy, to recreate enough jobs to bring about a socially acceptable level of unemployment, would once again generate the very capacity shortages, disruptions, and other difficulties that lead to inflation.

DR. STEIN: Is that consistent with your arguing about the stickiness of the rate?

DR. BoswoRTH: Not if the expansion was gradual. But could our society accept a very gradual economic expansion, as in the period from 1961 to 1965, which began with such a high amount of un­ employment?

DR. STEIN: Don't we have to ask the people to decide what's socially acceptable? Perhaps we economists, sitting around a table, have enor­ mously exaggerated the intolerance of the American people about unemployment. Judging what is socially acceptable is not something we are particularly trained to do. Society did accept a lot more unem­ ployment than I thought it would when unemployment rose to 9 percent.

DR. BoswORTH: Thatmay be.

13 RoBERT CRANDALL, senior fellow, the Brookings Institution, and former deputy director of the Council on Wage and Price Stability: Couldn't we have a slightly different bargain? Namely, couldn't we come down to 5.7 percent unemployment over a slightly longer period of time? It would make your job easier, and it would even increase the electability of your employer, I would think.

DR. BoswoRTH: Given that a million additional people unemployed for two years takes 1 percent off the inflation rate-in other words, to go from 6 percent to 7 percent unemployment-it does not follow that holding it for four years would take two points off. That argu­ ment is not necessarily true. We know the rate of inflation did not drop when the unemployment rate was up to 8 or 9 percent during 1975 to 1977.

DR. FELLNER: Doesn't that mean that all the nominal earnings are now accelerating?

DR. BoswoRTH: In the first part of this year, average hourly earnings accelerated. Year over year, they are up 8.1 percent. Last year, they were rising at a rate of 7 percent, so they are up about a full percent­ age point. The rate of increase from January to June of this year, however, was 6.5 percent, seasonally adjusted. In other words, all of it comes from the December-} anuary period. There was an enor­ mous rise in the wage rates at the time the new minimum wage went into effect. We have to allow for the effect of the minimum wage law, which we guessed to be around a half of a percentage point. Given the magnitude of increase in food and other prices that are being translated into cost-of-living escalators, I don't find that wage rates are accelerating dramatically. Unemployment has stayed at about 6 percent. The underlying inflation rate is accelerating be­ cause food price rises are now being built into wage escalators and ar� generating some upward pressures. I don't know how serious it will be. I expect it to level out fairly quickly. But I don't find that excess demand lies behind the inflation.

DR. CRANDALL: It doesn't require excess demand. It just requires an increase in demand.

DR. BoswoRTH: But I would remind you that the path of food prices for the first five months of this year was even worse than the 1972-

14 1973 experience. There has been a 50 percent annual rate of rise in farm-level prices, and wholesale prices are up at a 50 percent annual rate for the first five months. That's an enormous shock to expect the economy to absorb. In the industrial sector, there is not that much worsening of the pressure. But I will grant that there was some acceleration in the small union and nonunion wage increases when the employment rate got down to 6 percent as they tried to catch up to the large employment units.

MARVIN KosTERS, director of the Center for the Study of Government Regulation, AEI: If the essence of your theory is one of rigidity, it seems to be a one-sided theory, that is, one-way rigidity. Is the floor at 6 percent a permanent floor, or a rising floor, or what?

DR. BoswoRTH: That's not a floor. Six percent is just the rate that we got out of the shocks of the past. If there were a way to gen­ erate some shocks to drive the inflation rate down, they would carry the underlying unemployment rate back down. Unfortunately, the way the system operates, almost all relative price changes seem to be inflationary. I always have a little bit of trouble trying to explain that. I don't know the answer.

DR. FELLNER: Are you describing a change in the basic characteristics of the system, which cannot be fixed without moving to a compre­ hensively controlled economic system?

DR. BoswoRTH: No, with a six percent rate of unemployment, we worry that the shock of food prices, our minimum wage action, and some other things have driven inflation up. Now, what are some things that could take it down, that we can try to get? A small initiative that has helped drive it down is the deregula­ tion effort with respect to airlines. That has generated some down­ ward movement in prices. In other words, some government actions can generate downward prices, such as deregulation efforts in truck­ ing, airlines, and the like. We have focused on actions to direct this momentum back down.

BEN J. WATTENBERG, senior fellow, AEI: But you say that it leads to Upton Sinclair's Jungle if you do that, is that right?

DR. BoswoRTH: Well, while I think we have to be careful, I don't find any of Upton Sinclair's arguments present in trucking. It seems to me trucking is-

15 DR. MILLER: The Grapes of Wrath? [Laughter.]

DR. BoswoRTH: We have a great opportunity to get a much lower price level out of that sector, with almost no social repercussions and no problems.

MR. WATTENBERG: Where do you find the real danger of Upton Sin­ clair's Jungle in this particular society? I'm curious about that.

DR. BoswoRTH: I'm not too sure. I don't want to go so far as to say that labor unions have outlived their usefulness, because I don't think that's true. But the fundamental problems to which they were a response have largely disappeared. Even if we had no unions, the social attitude of the nineteenth century would not return. Times have changed. The extreme exploitation of highly unorganized labor by a dominant employer, I believe, has passed.

MR. WATTENBERG: Are you saying that there is some slack in this kind of social system that would allow us to go toward more com­ petitive mechanisms, which would tend to reduce inflation?

DR. BoswoRTH: Yes.

DR. FELLNER: Is there a cure to what you are describing?

DR. BoswoRTH: Some short-term measures can be tried to keep things under control, though some one-shot attempts to improve competition may worsen the problem. It is the Achilles heel of an industrial society that people do not want to go back to the sort of life they led when everybody worked on the farm, which was a true competitive world. We will not give up the high living standards that go along with specialization, economies of scale, modern technology, and the way we are now organized. We made those changes, and now we have to find a way to keep those changes without rampant inflation.

DR. FELLNER: That brings us back to the question of what is socially acceptable. We are talking about a very, very fundamental change of the whole economic and political mechanism. Who will decide whether this is socially more acceptable than an increase of a million in un­ employment for some years, I don't know how many years?

DR. BoswoRTH: We face a choice between trying to change the insti­ tutional structure of the present economy somehow, or of following

16 the prescription to bite the bullet and tolerate a long period of fairly high unemployment. But that prescription couldn't work, because the unemployed would not sit idly by and say, "Yes, we are the pool of unemployeds being used to keep prices down, and that's fine." No, those people would go into the political arena and say, "This damned system doesn't work, and I want the rules of the game changed."

DR. FELLNER: Just 1 million will do that?

DR. BoswoRTH: One million, or whatever number of people is needed.

DR. FELLNER: If policy makers are hesitant, going back and forth, there is very little confidence that they will stick to any anti­ inflationary program. If they were consistent, however, then the coefficients would change somewhat. When there was some decelera­ tion, nobody believed that the policy makers would stick with that policy, since they had never stuck with one for more than a few quarters. If they did show they would stick with one, the coefficients would improve, and it would not be necessary to have a million addi­ tional unemployed for that many years. The question is whether additional unemployment is less ac­ ceptable than the real alternative, which, I think, would not be anything mild. The real alternative is something rigorous and com­ prehensive in the way of controls, and that may be much less accept­ able than that million excess in unemployment for a number of years. What happened in the past might be misleading, because in the past nobody believed that the government would stick to their policies.

DR. BoswoRTH: I don't think that rigorous controls have to be the alternative. I would not advocate the TIP [tax-oriented incomes policy] program specifically, because I don't think it is sufficient, but we should think in terms of trying to put incentives back into the sys­ tem. If the fear of unemployment is not an adequate incentive and fear of lost sales is not an adequate incentive, then some other incentive mechanism must be introduced into the market system to make it more in the individual's own interest to hold down his price increases or his wage increases. It is not unfeasible to think of chang­ ing institutional structures along those lines.

}AMES C. MILLER III, codirector, Center for the Study of Government Regulation, AEI: What would be the effect of an even more Draconian

17 measure, such as eliminating the antitrust immunity that labor unions have, and eliminating antitrust immunities generally for truckers, airlines, and many other industries?

DR. KosTERS: I don't understand why we need to look for drastic alternatives when we are not willing to accept competition from inter­ national sources in, say, steel. It seems to me that we keep back­ peddling on the obvious sources of competition.

DR. BosWORTH: If you are saying that the administration has moved heavily to introduce trade restrictions, I think that's a gross misread­ ing of the administration's responses to the pressure placed on it. In 1974, the prior administration supported a bill that required that imports be priced to cover the full cost of production, including fixed costs. Under that system, we were threatened with a series of court suits and filings before the Treasury Department, charging every country in the world with dumping in the United States. Interna­ tional trade would come to an end under that rule, because in a competitive world economy prices are supposed to drop below full cost during periods of reduced demand. The moment they did, how­ ever, it would become illegal to trade, and that would cut back pro­ duction even more. It would have resulted in chaos, so we tried to find a way to handle the problem in a manageable fashion that would not disrupt the domestic economy. We didn't put on a quota, and we didn't put on a tariff, though both were requested. We just tried to define the cost of production in the lowest-cost country in the world, Japan (though we may have to change that in the near future, if the Japanese yen keeps appreciating), and we settled on a mini­ mum price for imports to be used in investigating dumping issues. All we did was get rid of the administrative problem of being faced with a hundred differentlaw suits.

DR. MrLLER: But that's not a per se defense, is it?

DR. BoswORTH: If you can find a way to go before the Congress and get the 1974 Trade Act changed, then more power to you. The trade actions of this administration rely very heavily on trade adjustment assistance; in only one or two cases have imports been restrained. Because of the way many of our industries are organized, we are well aware that the only effective restraint on their price and

18 wage behavior is imports. Imports are absolutely necessary to keep these industries in line. But if we rely on import competition in a world where the dollar is falling in value, then this restraint mech­ anism creates an umbrella for domestic price increases. That has created some difficulties in the first half of this year that have nothing to do with excess demand pressures.

AusnN RANNEY, resident scholar, AEI: I'd like to ask a political ques­ tion. For better or for worse, economists can only do what elected public officials let them do. And it's hard to see when the happy day will come when that won't be the case. They, in turn, have to be pretty conscious of, and react to, what they anticipate the voters will do. My question is this: What evidence is there that inflation, as long as it doesn't reach 50, 60, or 100 percent, or the level of Weimar Germany in the 1920s, is all that unpopular? There is a lot of evi­ dence that severe deflation, as happened here in 1931 and 1932, is political dynamite, but what evidence is there in this country, or in any other country that has free democratic elections, that inflation is considered a bad thing?

DR. BoswORTH: In public opinion polls, I think 85 percent say that inflation is the worst problem the country faces.

DR. RANNEY: Yes, but we all know that those answers depend very much upon the way the questions are asked.

DR. BoswoRTH: We haven't found a way to ask the question so that inflation is ranked low.

DR. RANNEY: Do 85 percent of the people feel that the prices that they charge for their goods and services are the worst problem facing the country? If the question is asked that way, I doubt that 85 percent would say yes.

DR. BoswoRTH: No. Do you think one of the country's big problems is that your wage rate increases have been too large?

DR. FELLNER: In the end, if it turned out to be a question of approxi­ mately 1 million unemployed for a number of years versus a really controlled system, wouldn't the latter be more objectionable to a much larger part of the population? After all, the employment ratio

19 is exceedingly high, at a record level, and most of those unemployed are people who recently entered the labor force and don't yet have a job. Most of it is not long-term unemployment. We face a very, very uncomfortable choice, but I think the other side of this choice consists of basic institutional changes and not those little things you mention.

DR. BoswoRTH: You keep saying 1 million unemployed. I guess you are taking that 1 million and assuming that if they went on being unemployed for four years, they would have twice as much effect in reducing inflation. But if we tried a policy of cutting aggregate demand, so that the number of individuals unemployed increases, people would learn to adjust to that level of unemployment. Once they have protected themselves against it, through more work re­ strictions, for example, and other institutional changes like those made in past recessions, they learn after a period of time to live with it. The rate of inflation would then stabilize; it wouldn't keep on declining. Furthermore, the reduced level of demand will slow capital formation, leading to a slower expansion of capacity.

DR. FELLNER: Well, I don't know. If inflation remains unchanged, or if it is coming down, the rate of capital formation might increase.

DR. BoswORTH: We will not create capacity for a demand we will not have. Most institutional changes limiting the amount of compe­ tition for jobs and products have occurred in response to recessions. When the unemployment rate goes up by a million or so, there will be increased pressure to change the institutional system, to make people feel less threatened by unemployment than they were before. An increasing number of people entering into the labor force will not be trained for any effective job, so they will not compete with the existing job holders. There will be more and more people in the system who are unemployed and unemployable, because they will not have been trained. One reason we talk about unemployment being so high in a given period is that it has been high. If there were some way to hold prices down, and the unemployment rate came down to low levels and stayed there for a long time, the system would adjust. That un­ employment rate would be noninflationary, and the means to hold prices and wages down would no longer be necessary. A noninfla­ tionary rate of unemployment is, in fact, a function of the level of

20 unemployment that has been experienced in the past, that the insti­ tutions and the trained work force have become used to.

DR. FELLNER: But if unemployment stayed at 7 percent for a while, the labor force participation rate would be smaller. We are talking about the labor force participation rate as well as the unemployment rate. I mean, I don't know whether it would be 7 percent with that participation rate.

DR. Boswo:RTH: The question is, if it were 7 percent, how long would it have to hold at 7 percent, and after the first couple of years, how fast would the inflation rate continue to drop? I think that the infla­ tion rate wouid slow down, and drop very, very gradually and, after a while, it wouldn't slow down at all any more. We would learn to live with a 7 percent unemployment rate, and that would become full employment, so to speak.

WARREN NUTTER, adjunct scholar, AEI: How did they manage to cut back inflation in Germany?

DR. BoswoRTH: A better example is Switzerland. The Swiss got a low rate of inflation by aggregate demand restraint, and as part of that struggle to set demand restraint, they created an enormous amount of unemployment. Then they took those unemployed workers, said, "Go home," and they shipped them out of the country. As I remem­ ber, Switzerland reduced its labor force by about 10 percent by ship­ ping its foreign workers to other countries. Germany's problem was of a smaller magnitude. Its unemploy­ ment rate was down around 3 or 4 percent. A lot of its foreign labor stayed in Germany, but they were ineligible for unemployment in­ surance and for welfare payments or anything else. In time, they can be forced to go back home. If we could do as the Swiss did, and pack up our unemployment problem and ship it to a foreign country, maybe we could follow that policy. In addition, these countries are far more inflation-conscious than we are. They also have a mechanism, through national wage negotia­ tions, to express that concern and to enter into something like a social compact at the national level. It seems to me that centralized bargain­ ing can be very advantageous to a country, if the population is very sensitive to inflation. In the case of Germany, it works out well. In some other countries that have centralized bargaining but have little concern about inflation, it doesn't work out very well.

21 DR. NUTTER: In Japan?

DR. BoswoRTH: Japan has centralized bargaining, a fair amount of government control, very weak unions, a lot of control over wages, and a fairly high sensitivity about inflation. So it works fairly well for them. In Great Britain, things didn't work so well.

THOMAS JOHNSON, director of economic policy studies, AEI: A high rate of inflation after a while appears to increase the sensitivity of the population substantially. Maybe we will some day have it.

DR. BoswoRTH: There must be some rate of inflation where we will look over the brink, get scared about where we are headed, and pull back. I just hope it doesn't have to go as far as it did in Great Britain, where the rate rose to 30 percent. But then, when they did get scared, they did pull back, and Great Britain has made enormous progress in reducing the rate of inflation in the last few years.

DR. FELLNER: Didn't they do it belatedly, and at a very high cost of unemployment by their standards?

DR. BoswORTH: Given those fears, they managed to find a way to win public backing for some of their income programs to have force against wage and price increases in major industries.

DR. JOHNSON: If we are not willing to take the byproduct of some rise in the unemployment rate, we have to accept the inflation. That's what you're saying, isn't it?

DR. BoswoRTH: No, I think I'd say it a little differently. I agree that to reduce the inflation by increasing the level of unemployment as a byproduct basically hurts. There is some disagreement over how much of an increase in unemployment it would take. Economists have never been able to agree among themselves on how much unemploy­ ment would be required. We in this administration are trying to find some approach, other than putting the economy through another episode of high unemployment, to bring the rate of inflation down.

DR. FELLNER: Other than comprehensive controls?

DR. BoswORTH: Other than comprehensive controls. To which some would answer, "I don't believe you can do it." To which my answer

22 is, "I'm not convinced that we cannot find a combination of admin­ istrative action, better control of government decision making, and some voluntary cooperation by the people-perhaps together with some incentive mechanism-that would be able to do it." If we can do it, we believe-because we think the cost of the unemployment approach is too high-that there would be major social benefits to the country. After having had just a few months' time in which the administration, the Congress, and the public have begun to focus on the inflation problem, it is a little premature to say, "The administration has been trying to do something for a couple of months, and, gee, nothing has happened. Therefore we ought to abandon the effort." Give us a chance for a year or so.

DR. FELLNER: Barry, are you willing to have the same discussion with us a year from now?

DR. BoswoRm: Yes. And, a year from now I may have concluded that you're right, it can't be done.

DR. JOHNSON: But if you don't succeed, we will end up with both higher inflation and higher unemployment, will we not?

DR. BoswoRTH: No, not necessarily. It's my view that the current unemployment rate and the current inflation will just continue at present levels unless there's a shock that happens to drive it higher, or a shock that happens to drive it lower.

DR. MILLER: Would you cut taxes, while you're looking for this mechanism to restrain inflation? What do you think of the Laffer curve, and what would be the effects of passage of the Roth-Kemp bill?

DR. BoswoRTH: I was in graduate school when Walter Heller was selling the benefits of a tax cut to the country and to the administra­ tion. We went through balanced budget multipliers and everything else. But even Walter Heller never tried to overstate the case to the extent that is currently being done. Some of these arguments are particularly unrealistic when ap­ plied to the capital gains tax. I tend to agree that there is a problem of capital formation in this country, that it is at too low a rate, and that there is a need to stimulate it. On the other hand, it is a mistake to think the problem is a lack of savings. I think the problem is a

23 lack of incentives to do anything with the savings. There are plenty of savings in this economy, as is confirmed by the fact that the federal government is running a $55 billion deficit trying to soak them up and keep the economy going. The problem is that there are inadequate incentives for business fixed investment. A much more realistic approach would focus on monetary policy, or direct tax incentives for physical investment, such as investment tax credits, tax cuts, accelerated depreciation, et cetera. There is another problem with venture capital. If there were a way to design a tax measure that would make venture capital more attractive, it would be okay to do it. But the capital gains tax cannot be used for that purpose. Many sources of income for which capital gains are claimed are not venture capital. Venture capital is a very small proportion of the total income to which the capital gains tax is applied.

DR. MILLER: Do you agree with Charles Schultze that passage of Roth-Kemp would be disastrous for the rate of inflation?

DR. BoswoRTH: If it is done suddenly, yes. I said earlier that I don't think excess demand is a major problem now, nor is some continued growth of the economy a major factor in inflation. However, let's be realistic. A major surge of aggregate demand, of course, can touch offanother inflation. And there is not enough capacity in the economy to tolerate a sudden surge in the rate of economic growth.

DR. STEIN: Can you tell us what variants of TIP you were studying?

DR. BoswoRTH: I'll tell you what problems we see. There are, of course, the administrative ones that many people have mentioned, but I don't think they are overwhelming. Bureaucrats always tend to become upset about administrative problems. We worry more, right now, whether or not TIP would have any impact. If the explanation I gave you earlier was right-that the fundamental problem is a dis­ parity of wage gains between different groups-won't those groups who are getting the largest wage increases tend to ignore TIP? Putting in a tax incentive would merely induce those who have already had modest wage increases to accept even more modest wage increases, and the wage gap would still widen. It is not clear that what I con­ sider the fundamental problem-the inequity of the wage increases­ is addressed by a TIP program. It might have more impact on the

24 competitive sector of the economy and less on the noncompetitive sector of the economy.

DR. CRANDALL: Does that hold for a penalty TIP, as well?

DR. BoswoRTH: Yes. If the product market can pass through a 30 percent wage increase, why can't it pass through a 32 percent wage increase?

DR. STEIN: Well, I don't understand your view of the labor market. Why don't steel workers get $50,000 a year-instead of only $30,000? [Laughter.]

DR. BoswoRTH: In a labor negotiation, each group looks at what comparable groups have gained as a fair increase. A steel worker, for example, tends to look at what the other major unions like the auto workers got. If he receives a wage increase in line with what they got, he thinks it is reasonable, and he goes back to the job. There is no reason to pay him twice that. Relative wage increases­ the notion of what other people have been getting-is a strong ele­ ment in labor negotiation. If a person is told he will get less than what everybody else has been getting, he becomes outraged, and he feels right is on his side. Much of the game of bargaining is to pay a wage increase that satisfies the workers, so they will come back to work and not throw a screwdriver in a $100,000 machine. From an economic point of view, I have to disagree with people who say the union has all the power. In the automobile industry, if the game were to win a strike, General Motors could beat the UAW (United Auto Workers). It has far more financial resources behind it. In the last long strike at General Motors, the UAW had to borrow money from other unions. It had to mortgage its headquarters. It really did run out of funds. But labor negotiations are not a war, where one side wins and one loses. They aim for what seems reasonable and fair and equitable to both sides, which tends to be the pattern of what everybody else has been getting, unless the economic situation changes dramatically.

DR. MILLER: One last question?

DR. KOSTERS: I wonder if you would like to make any observations on the railroad unions or the postal settlement in terms of the wage disparities you've been talking about. What kind of settlement would you regard as exercising restraint?

25 DR. BoswoRTH: I have problems commenting on either of those two right now because it seems counterproductive to say anything much about them. In the case of the railroads, a settlement has been an­ nounced, but we have no numbers yet. We know what the money wage increases are. They are not quite what the newspapers said, which priced them out at an 8 percent rate of inflation. We have estimated the cost of other labor contracts with cost-of-living adjust­ ments at a 6 percent rate of inflation. There are some work rule changes, but we have no numbers yet. I have heard that there are no significant changes in the fringe benefits. And there is a big issue still unsettled-crew consist. Even though it is being negotiated on a local union railroad basis, it is a crucial element in determining what the cost of the railroad settlement ultimately will turn out to be. Discussing the postal negotiations is pointless. They are in the middle of negotiations. We made our argument pretty clear before they started. I think both parties got our message and know what we felt about it.

26 SELECTED AEI PUBLICATIONS Regulation: The AEI Journal on Government and Society, published bi­ monthly (one year, $12; two years, $22; single copy, $2.50) Regulation and Reform of the Housing Finance System, Patric H. Hender­ shott and Kevin E. Villani (135 pp., $3.25) Minimum Wages: Issues and Evidence, Finis Welch (48 pp., $2.75) Prices and Consumer Information: The Benefits from Posting Retail Gasoline Prices, Alex Maurizi and Thom Kelly (76 pp., $2.75) Welfare Gains from Advertising: The Problem of Regulation, Dean A. Worcester (134 pp., $3.25) Ford Administration Papers on Regulatory Reform, Paul W. MacAvoy, ed. Federal Milk Marketing Orders and Price Supports (168 pp., $3.75) Railroad Revitalization and Regulatory Reform (246 pp., $4.75) Regulation of Entry and Pricing in Truck Transportation (301 pp., $5.75) Regulation of Passenger Fares and Competition among the Airlines (210 pp., $4.75) Deregulation of Cable Television (169 pp., $3.75) Federal-State Regulation of the Pricing and Marketing of Insurance (105 pp., $3.25) Federal Energy Administration (195 pp., $3.75) OSHA Safety Regulation (104 pp., $3.25)

AEI ASSOCIATES PROGRAM The American Enterprise Institute invites your participation in the competition of ideas through its AEI Associates Program. This program has two objectives: The first is to broaden the distribution of AEI studies, conferences, forums, and reviews, and thereby to extend public familiarity with the issues. AEI Associates receive regular information on AEI research and programs, and they can order publications and cassettes at a savings. The second objective is to increase the research activity of the American Enter­ prise Institute and the dissemination of its published materials to policy makers, the academic community, journalists, and others who help shape public at­ titudes. Your contribution, which in most cases is partly tax deductible, will help ensure that decision makers have the benefit of scholarly research on the prac­ tical options to be considered before programs are formulated. The issues studied by AEI include: • Defense Policy • Health Policy • Economic Policy • Legal Policy • Energy Policy • Political and Social Processes • Foreign Policy • Social Security and Retirement Policy • Government Regulation • Tax Policy For more information, write to: AMERICAN ENTERPRISE INSTITUTE l 150 Seventeenth Street, N.W., Washington, D.C. 20036 A Conversation with the Honorable Barry Bosworth: Coping with Inflation is an edited transcript of a discussion with the director of the Council on Wage and Price Stability held at the American Enter­ prise Institute in July 1978. In this discussion, one of the Carter administration's chief inflation fighters explores the causes of the recent inflationary period, assesses the available mechanisms to deal with inflation, and discusses the current administration's approach to the problem.In addition, Dr.Bosworth and the assembled AEI scholars and fellows engage in a wide-ranging dialogue, speculating on such topics as public expectations and institutional changes in the eco­ nomic system. A sampling of Dr. Bosworth's views as revealed through the discussion: • "Today, however, when people talk about the [economic] sys­ tem, their primary demand is that it be fair, that it be equitable ... we have tried to humanize the system, and the price of doing so is that we have drastically weakened the competitive mechanisms." • "I don't think it can be denied that aggregate demand restraint would bring inflation to an end.... I do not deny that, but historical experience indicates the social cost would be too high." • "I don't want to go so far as to say that labor unions have outlived their usefulness, because I don't think that's true. But the fundamental problems to which they were a response have largely disappeared. Even if we had no unions, the social attitude of the nineteenth century would not return. Times have changed."

$2.25

�American Enterprise Institute for Public Policy Research � 1150 Seventeenth Street, N.W., Washington, D.C. 20036

GOV. REG. 1978

18