Government must spread burden of country’s falling income

Press, Volume CXV, Issue 33804, 29 March 1975, Page 3

Government must spread burden of country’s falling income

New Zealand’s real income is falling, and is likely to fall further. The Government’s most important task in the next few months, apart from cushioning this decline, is to frame policies to spread the burden as equitably as possible.

Policymakers in many] countries are facing a new problem: continuing, inflation at a time when] the production of goods is declining. In New Zealand also, after a period when inflation was under reasonable control by world standards, the rate of inflation appears to be increasing again. This type of inflation, when prices rise under conditions of falling demand, is! often called cost-push! inflation: Prices are raised to;

. recover increased costs,' al- ! though fewer goods are sold.! Because wages form a i large proportion of costs, wage increases are usually blamed for this cost-push inflation, and employers are held to be “innocent” of “profit inflation” m passing , on the increase in costs as long as mark-ups are not ■ raised. Buj ing power On the other hand, the trade unions argue that it is just because of rising prices 11 that wages have r o be raised in an attempt to maintain or restore their original buying ! power. Business then “innocently” raises prices again to recoup, the increased costs and inflation is upon us as well, as the endless dispute about iwho started it. This “chicken and egg” debate is always in-! because the parties can never agree that i ! there was a “just” or “nori mal” distribution of product, !between wages and profits in! the first place. ;! Perhaps a better descrip-! • tion than “cost-push I inflation” would he “supply, ’ I inflation’’ — in contrast to! demand inflation — so as to! I avoid the implication of any! moral judgment. ! r *ll Impossible Supply inflation takes; i place when wage earners! and profit takers together at ; ■ tempt to get shares that; I amount to more than 100 1 per cent of the-selling price. i This is obviously impos■isible, but it is precisely on this impossibility that any

continuing process of supply inflation depends. This type of inflation is ; therefore the result of the s attempts by sectional groups s to increase their share of lithe national income. r The Government has ap- ’ pealed on a number of occai sions to all groups to moderate their demands for a ’larger share. But these 1 groups all believe that they L carry an unfair share of the •• burden, and are not inclined i to co-operate. Public not aware ’! Some economists hold the f view that this feeling ‘ reflects the Government’s in--1 ability to make the general ’ public aware of economic ; problems. However, when we have ’strong unions with the ' power to raise wages, strong ’■business organisations with J l the power to ‘ set prices ' administratively, and a general atmosphere in which it ;is considered normal, natural, and only fair for wages >;to be increased regularly by si more than the increase in -productivity, inflation is t! difficult to stop. )■ The widespread and generous feeling that workers • are entitled to the wage ini creases that they get is ' made easier by the recogni-

’ tion that these increases! may be properly passed) along to the public in higher; prices. A really firm refusal by I the Government to permit l expenditure to increase (a credit squeeze, or liquidity; crisis) will not prevent prices from rising. Or per-1 haps it would, but only! under conditions of severe! depression and unemployment. Wage order ; How strong the most im-i portant element in supply! inflation — the general feel-1 ing of the propriety and, inevitability of wage and) cost increases — really is,! was shown by the January! | wage order. Negotiated at a time when ■ the Government was genI uinely concerned about inflation, negotiations set an increase of 4 per cent as a fail-back position at the lower end. But 4 per cent is much more than the average increase of production per head, so that there was a significant piece of supply inflation right at the lower end of the range to be negotiated. In such an atmosphere it would take, ,ve may think, a really severe depression- to change people’s notions of what is the proper growth of wages and prices. But such a “cure” would; be worse than the disease: i the depression would be more harmful than the, inflation it sought to pre-' vent. Such a course of action) could not possibly be consid-) ered by any Government —i

(certainly not by a demojcratically elected one. 1 No wonder then that most ! economists have come to the [conclusion that the only way to deal with supply inflation is by firmly controlling wages and prices.

This is the third of a series of articles by Adrian Brokking, commercial editor of “The Press,” on the state of the economy.