Slowing the Wage-Price Spiral: The Macroeconomic View

OVER A DECADE has passed since the standard remedy of demand restraint was first urged to combat inflation. By the mid-1960s, many economists, including those at the Council of Economic Advisers, believed war expenditures were pushing the economy into the inflationary, excess-demand zone and recommended tax increases to help restrain aggregate demand. We cannot know how different subsequent economic performance would have been if that advice had been heeded. But it was not. Unemployment continued to decline into 1969, and the inflation rate in consumer prices rose above 5 percent. Inflation, by then, had become firmly entrenched in economic decisionmaking. When demand finally fell and unemployment rose in the recession of 1970, the inflation rate scarcely budged. Both average hourly earnings and the private nonfarm price deflator rose faster during 1970-71 than in any year of the 1960s. Many observers concluded that a recession deeper than that of 1970 would be needed to stop inflation. In summer 1971, the Nixon administration tried a different cure, imposing wage and price controls that lasted in modified form until April 1974. These controls slowed the inflation rate for most wages and prices. But by the time the controls expired, higher prices for food and fuel, which were largely unrelated to the state of demand, and for industrial raw materials, which reflected strong world demand and speculative buying, had created double-digit rates of overall