Cover Story; 102; Inflation - It's Only Your Money

It's burned. Cover Story is made possible by a grant from 3M. Cover Story, a magazine program for public television. Produced by WQED Pittsburgh in association with Newsweek. Cover Story, one important topic examined from various points of view.

On this cover story, it's only your money. In the next hour, cover story will look at inflation. In segment one, the tranquil history of inflation before the Vietnam War and the mad history since. In segment two, an inflation quiz. How much do you know about your incredible shrinking dollar? Segment three, feedback, speaking out on how we can cope with rising prices. In segment four, points of view, two economists and a social scientist propose public policy to curb inflation. And finally, satirist Mark Russell talks about money and the nation's capital. Inflation has not always been a problem in this country, but it has been a cloud on our economic picture since the end of World War II, a gathering storm recently.

In the early 1960s, America's economy was booming. It was the decade of disposable everything. We were enjoying more money, more mobility than ever before. The nation was on a shopping spree, and one of the things we picked up almost without noticing was a small war in Southeast Asia. But there were no shortages, no cutbacks. It was war now, pay later. We would pay for Vietnam in many ways. The economic price was severe inflation, a steep and steady rise in prices. That means each year our dollars pushes less and are worth less. Inflation of seven percent a year, which is about what it's been over the last decade, means prices will double every ten years. And that's what's so troubling about inflation since the Vietnam era. It's so persistent. In the past, wartime all was brought inflation to the American economy, but it always went away. Take World War II.

Busy production lines and full employment left people with more money than there were things to buy. When the fighting ended, there was a rush to buy everything that wartime had made scarce. We were willing to pay more for the few goods that were available. I must now rely upon the American people and upon a patriotic and cooperative Congress to protect us all from the great pressures now upon us, leading us to disastrous inflation. Though prices almost doubled in the 40s by the end of the decade, inflation slowed. The demand that built up during the war was finally petering out. And there was even a brief decline in prices. Where we were headed in the cautious 1950s was right down the middle of the road. Productivity and the standard of living were progressing nicely. Industry converted from the war was turning out new consumer goods. Some felt President Eisenhower could have eased a late 1950s recession by increasing government spending or cutting taxes. But looking back, that recession seems very mild.

Ike believed a balanced budget and judicious federal spending were needed to preserve the value of the dollar. And in fact, during the Eisenhower years, inflation averaged almost undetectable 1.4%. In the 60s, a youthful President pledged to get the country moving again. We were moving to the new frontier. With the Kennedys, there was a new approach. Massive tax cuts for all would spur the economy and the federal budget would balance itself. The decade glowed with prosperity. With the help of color TV and jet-propelled tourists, America eagerly spread word of the new and improved good life. To some, ours must have appeared a nation with money to burn. The Kennedy era offered this cornucopia of pleasures at the amazingly low price, in terms of inflation, of about 1.5% a year. When Lyndon Johnson slipped into the saddle, he was determined that all his fellow Americans would enjoy the blessings of the great society.

So he loudly declared war on poverty and quietly administered the non-war in Southeast Asia. As Vietnam escalated, industry concentrated on making the tools of war and consumer prices began to rise. LBJ was unwilling to economize on his costly social programs to pay for the war. He simply printed more dollars, ran larger deficits to finance both guns and butter. By 1969, prices were going up a hefty 5% a year. American prosperity was developing high blood pressure. Then came Richard Nixon. When this administration took office nine months ago, we decided that we were going to stop talking about higher prices and we were going to start doing something about them. Now that we have begun to detect the signs of success and slowing down, we are not considering wage or price controls. But before his first term was over, Nixon had slapped on the first wage and price controls since Truman, for a while it seemed they might work.

Though Nixon was critical of democratic extravagances, he failed to really slash federal spending. And in the summer of 1973, inflation rocketed to 7.5%. Then, while the society reeled from Watergate, the economy came up with a shocker of its own. In 1974, inflation soared to an astounding 11%. At the same time, the country slipped into the worst recession since the 30s. Impossibles said the economists like having high and low blood pressure at the same time. Recession used to be the cure of inflation. In recession, industry slows. People get laid off. Don't have money, can't pay high prices, prices go down. This time, the prices kept going up. By 76, the recession finally slowed the rise in prices and inflation dropped to about 6%. The rules of the economy were changing. As a nation, we'd come to expect government to protect our environment and our civil rights, whatever the cost.

And we expected full employment. More and more wages and retirement benefits were linked to the cost of living. And business, for its part, passed price increases right onto the public. Finally, imported inflation became a major problem with the Arab oil embargo of 1973. The price of petroleum affects our entire cost of living. Almost overnight, OPEC oil prices quadrupled. And that was just the beginning of the energy crush. The steady rise in prices that began in the Vietnam era was becoming a permanent condition. And the nation was developing a psychology of inflation. The seller asks more than he needs, hoping to cover the cost increase that's sure to come. And the buyer buys now, because the price will only get worse later. Inflation reflects no confidence that things will be the same tomorrow. And it makes it very hard to make long-range plans. As inflation got worse in the late 70s, the rate of consumption in the U.S. actually increased.

Saving cash was no good, so we spent more than ever. Then we borrowed more and spent that. We seem to be mortgaging the future for immediate gratification. Spiraling inflation now appears to be a fixture in the American economy. And it's casting a shadow on the American dream of doing better and better every year. And that means we will learn to live with a little less one way or another. And now folks, the host of the Price is Wrong, Consumer Specialist David Horwell! Thank you, thank you, thank you, thank you, and welcome to the Price is Wrong. The game that deals with your survival and self-respect in these inflationary times. Now, as you all know, we know that inflation means a lot and we have a lot of questions about it.

So here's your chance to learn how to make your dollars work better for you. Now, maybe some of your questions will be answered in our simulated game today. So let's meet today's four lucky contestants starting with this gentleman on the end. My name is Walter and I'm 67 years old today. You got a present for me? Well, no, Walter, I'm sorry we don't. We didn't know it was your birthday. I'll take cash, I'm not proud. Well, thank you, Walter. Let's go out to our next contestant. I'm Henry Atta Marie. I'm single. And as Gloria Steinem said, woman without a man is like a fish without a bicycle. I love my career. I'm a statistician. One out of five people in my family is a statistician. Well, that figures, Henry Atta. Anyway, let's go on to our next contestant. My name is Charity. I'm here with my husband, Viv. Hi, honey.

And I'm glad for this chance to make my money go a little further. We seem to be having trouble feeding our family of 2.4 children. So, once a week, I take the kids to the Bronx Zoo to look at the yaks so they won't forget what meat looks like. Welcome. Let's go on to our next contestant. My name is Alan, and I own a dry cleaning store in Westerly Road, Alan. We're located on Canal Street, opposite the United Theatre. Alan's dry cleaning store has got a special on how to fight inflation. Two misdress shirts with the Vicky Bros. Two washed and pressed with a price of one. Also, two spots removed for the price of one. And the spots can come from your choice of foods. No extra charge for duck stains. That's very valuable information. Thank you very much, Alan. Now, you all know how to play the price is wrong. Now, when you think you have the right answer, you have bells in front of you, just ring your bells. Let's try them. Let's see if they all work. Okay. First, we're going to see what you know about the dollar.

What's this 1967 dollar worth today? 80 cents, 60 cents, 50 cents, 40 cents. Now, think carefully. Alan, the 1967 dollar is worth 40 cents. Actually, it's worth about 43 cents, or at least it was when I came to the studio about an hour ago. It seems even less to me. Well, still using the 1967 dollar is our base. Which of these wage earners has been hurt most by inflation since 1967? Accountants, key punch operators, plumbers, steel workers. Henrietta. The accountant. The typical white collar worker, like me, has suffered a 9% drop in real income after taxes and the effects of inflation. The key punch operator lost, the plumber gained a little, the steel worker with a strong union got a 32% gain in real income over 1967. Henrietta, spoken like a true accountant.

Now, most accountants and key punch operators are not as well protected by the cost of living causes as people who do have labor contracts. Now, the consumer price index, known as the CPI by the bureaucrats and the economists, is something that few of us understand. Am I right, folks? Now, the CPI measures changes in price as paid for goods and services by city folks. Now, to our next question. Which of the categories measured has risen least between the start of the 70s? Listen carefully. Food. Howling. Clothing. Energy. Medical care. Entertainment. It's a tough question. Think carefully. Alan, clothing. And what would the stuff being made out of synthetic fabrics? People are washing their own stuff more. They're dripping and drying and drying and dripping. And meanwhile, the cost of my labor is going up. And the cost of my chemicals.

And the cost of my rent on Canal Street, opposite the United Theatre. Okay, Henrietta, you'll know where his place is located and where it's located. Now, let's go on to our next question. Which on that list of items that we gave has risen most since the 70s? The food, the housing, the energy, the medical care, the entertainment? Walter. Energy. I know that one because we all have to pay it. Medicine is still taken care of and we don't have to wear a lot of clothing down south. Okay. The government now says that a family of four needs a minimum of $20,500 a year to live decently. That means that you have a two-year-old car, you have a six-room house, you don't have any dishwasher, and you can buy a new refrigerator only every 18 years. Can you folks imagine getting a refrigerator that's going to last you 18 years? Does anyone have one here? Some. Okay.

Now, the question is, what will the family of four have to earn to have the same standard of living in 1989? No guesses? It's not impressive. Depressive. Henrietta. I read somewhere that statistics indicate that by 1989, the average family of four in suburbia will have to earn $69,000 a year in order to maintain their present $20,500 standard of living. Henrietta, I don't know where you come up with this. You know something? She's right. That is the current estimate. That is the current estimate. You know what that means? Do you know what I'll have to charge for pressing the suit just to keep it even? I don't want to know. I won't wear a suit. Walter. It's a sexual devil. Now, for those of you who are getting away from actual costs of living to cost that you have to live with, like the cost of keeping your kids in college, interesting statistics.

Over the last 10 years, the cost of a college education has gone up a lot. I'm going to ask you how much? 25%, 50%, 95%, 100%, who knows? Henrietta. The cost has gone up 95%, approaching $9,000 at some Ivy League colleges. Well, that was a good answer, Henrietta, Marie. Now, the final question is aimed at all of us here to see where we fit into this inflationary society. Now, we now know that since 1967, consumer prices have doubled. The $19.67 buys about half of what it did then. Now, can you tell me who has been the hardest hit by inflation in the past 15 years? Young singles, young parents, 25 to 45, working people in their 50s and 60s, or senior citizens and retirees. We are. We don't have anything but social security, job pensions, and Medicare. Well, this and our adjustments started in life.

We're being clobbered by these rising prices. We want to buy a mobile home that's stationary. That's our dream. Let me tell you something. The people who are hardest hit are those of us between the ages of 25 and 45. We have a couple of kids, and have to clothe, feed, and educate them. Single people have been hardest hit by taxes, and as a consequence, have less money to spend, proportionate to their earnings. Well, Alan is right on this one. And for once, Henrietta, your answer falls a little short, I'm sorry. Younger, middle-income families are the hardest hit, but everyone is feeling a pinch of inflation. And what can we do about it? Well, let's talk more about how we can cope with inflation in just a few minutes. What I want to do is I want to thank you for being with us. I'm David Horowitz, with the twice as long. Thank you, David. Thank you. And now, feed back.

How are we to cope day by day with rising prices? Ten years ago, I would say this house would have sold for less than half of what they're asking for today. I guess a year ago cost me about $5 to fill it up. Now, it's costing me $11. Four bucks. Oh, my God. See, that's $24. I could just know from when I had her, how much the formula and the diapers and the food and all that has gone up. I'm not here. I'm going to be going to do that. When everything goes up. I think the majority of people really shop. If you look around, they have their coupons, they, you see from their baskets, they buy what's on special. And the majority of people are really trying, I think it's a challenge. I'm done a notch. I'm not driving a big, big car that I'm not that I like to drive. First of all, we went to look at other homes. We were looking for something bigger. And with the high interest rates and the houses that we looked at, they had to have almost as much work done to them as what they wanted for the price of the house.

So we just figured that we would fix our own house up and add on, and that's what we're in the process of doing. And we do less traveling. But we found that it was so expensive to take our family since we have four children to public sports events that we've turned to things like camping and things that we can do as a family that isn't quite as costly. Even Hamburg's expensive now, so it'd be pretty hard to cut almost anywhere. We don't go out. We don't go out at all. I said it's tough, but you know, getting babysitters isn't that too. You know, what's pay for that? So we just stay home all the time. Within the home, you just exist there in a sense today with the family. With the economy, the way it is now, I think, very hard about having children, about how big of a responsibility it is financially to have children. Right now, I think people are really afraid to go out and buy a new car right now, because they read so much bad news in the newspaper. Every time you turn the news on television, it's more bad news, and it's scary right now.

And I know a lot of people are scared. If I were to have kids, and if I were to plan for them, it would certainly be something I would plan right away, because as I look at my parents and what they're going through, I could never meet this cost. I think the middle income person is hit the hardest. It's almost impossible for them to make a down payment in order to purchase a house. The interest rates are so high now that it's just prohibitive. People that are making $20 to $30,000 a year now are almost out of the market. I'm unstable, I guess, very much like the economy. It's very unstable. I sort of fluctuate depending upon what I read and where I read it at. I mean, you read certain articles in the Wall Street Journal, and you hear that the crisis situation is in hand, and then the following week you'll read about it, and it seems to be unstable. I think that's the same with our economy. That's the same with the average in American. I don't really know. I think it's just so out of control. I don't even know where to start either. I don't know what to do right now. I don't think anybody really knows what to do. I don't know what the answer is.

I'm just glad it's not up to me. It seems to me like they're just letting whatever happens takes place. And then after it happens, then they'll try and come up with some solution to resolve it instead of trying to work ahead. We just have not planned correctly for what we're going to need. And I don't think that we can actually do that until we get some leadership that kind of, you know, states and says, this is the plan that we're going to follow, and maybe follows that plan. You get that same check month after month, and these prices keep going out, but it's not what they can do. So I don't know where it's going to start. One way to put today's prices in perspective is to take a look at the prices in the recent past. What we've done is we've devised a little inflation fashion show for you. In 1960, this is what a homemaker might have worn while shopping at the supermarket. For $50, her shopping card included rib roast beef, hamburger, pork chops, bacon, chicken, tuna fish, a ham, a turkey, all kinds of fruits and vegetables, including one head of lettuce, two loaves of bread, and five pounds of coffee.

In 1960, you could get a house that looked like this one for about $17,000. You might also have had a top of the line Fort Thunderbird, like the one on this old TV commercial for $3,700. Things changed by 1970. Remember the miniskirt? The shopping card did not include any bacon, any ham, or a few other items, but it still had one head of lettuce, two loaves of bread, and five pounds of coffee. For $17,000 in 1970, you could buy about three quarters of this new house, and the $3,700 car would not be top of the line. By 1980, the change has been dramatic and traumatic. The shopping card is a different type and has less and less. No sirloin steak, no rib roast, no pork chops, no bacon, no chicken, no ham, no turkey, and fewer staple items.

Although there is one head of lettuce, two loaves of bread, and five pounds of coffee. This year, your $17,000 will buy only one quarter of that house, and this year, your $3,700 will pay for only one of the least expensive cars. By 1990, this may be what you'll be wearing, but it is certain that if inflation continues at about 10% a year, that for $50, you will carry from the grocery store only one head of lettuce, two loaves of bread, and five pounds of coffee. Your $17,000 for a home will buy only a small fraction of just one room. If you could afford the entire house, it would cost about a quarter of a million dollars. And if inflation continues, the money you could have bought a Thunderbird 4 in 1960 will buy you this motorcycle, and I've got to tell you it would be tough to load your family onto this bike.

So you might ask the question, how can we cope? To talk about this, we invited two Newsweek staffers who are both experts, Lynn Polvich, who is a senior editor, and Harry Anderson, who is a general editor. You know, and I think we ought to lay the groundwork for a whole discussion by asking this very simple question, and that is, you deal a lot with words and people and how they feel. What are people worried about most today? Why don't we start with you, Harry? Well, they've got a lot to be worried about, but I think two of their primary concerns are the subject of the show, inflation, which has been eating at their paychecks and at their morale for 15 years. And joining that fear at this point is recession, which promises to be a very significant one by post-war standards. Lynn, you do a lot on people's lifestyles. How are people's lifestyles changing in this recession, inflationary economy? What are they doing? What do you see?

Basically, they're cutting back across the board. I mean, they are purchasing less fuel and cheaper cars. They are eating out less. They are going on fewer vacations. They are cutting out movies and theater. They are cutting down on food. They may substitute chicken and pork for steak. They may buy instead of six pounds of hamburger or a week, six pounds a month. In general, the cutbacks are across the board. They are even postponing having children because inflation is troubling them so much. Now, what negative effect, Harry, is this having on the economy because people are cutting back? Well, I think the most visible negative effect is unemployment. Unemployment is rising and will continue to rise. Business is cutting back. It's a particularly apparent here in Pittsburgh with the steel industry. Right. Now, with all these aspects, with people cutting back, back to you Lynn, do you find that there's more people awareness now how they can get things done for cheaper, how they can survive, how they can cope? Oh, absolutely. I think part of it may have grown out of the do-it-yourself movement from the 60s, but there's no question that people are doing their own repairs in their home and their cars, they're making their own clothes if they have to.

They are certainly far more self-reliant on what they have to do. One of the things that a lot of people are curious about is that there are a lot of families where the husband and the wife are both working. Lynn, this is an area that you know about, where there are two paychecks coming in. Suddenly, what either the husband or the wife is out of a job? What effect does that have in this economy on that family? Well, it has the effect of basically cutting back on the necessities of life. I think 53% now of all married couples have two husband and wife are working. And for the first time, there are more married women working than women staying home as housewives. But what they are, what their paychecks are buying are not the luxuries, they're buying the food bill, they're paying for the gas bill. And if one of them loses a job, then it's basically cutting back on the necessities, which is going to put people in a very tight pinch. It's basically doubling the problem of recession for any single family. I just had something. It is remarkable in terms of the statistics that are generated in Washington and all the rest, and the degree to which people are dependent upon unusual sources of income, whether it be a second income from a spouse, whether it be from overtime, whether it be from working our jobs.

The American people as a whole are saving only about 3% of their income. Much of that is just a statistical kind of saving its pension money that is not immediately available for an emergency. In order to keep ahead of inflation, people borrowed, they spent, and they behaved in a manner that was perfectly rational on the short-term basis. But suddenly people have come to the realization that if they continue at this pace, they're not going to be able to educate the kids, they're not going to be able to pay for the big wedding, they're not going to be able to protect themselves against medical or financial emergency. And they're cutting back very strongly now, and they need every penny they can get. A New York psychotherapist recently developed something that he calls the Ripple of Syndrome, and he said that people in our society today are more tense and more anxious and are involved in more mental anguish, emotional problems, because of the state of the economy and the fact that they feel they're being ripped off by the government, by business, by all these other entities. And that's what's causing all this emotional illness in this country.

In your lifestyles department at Newsweek, how do you look at something like that? Is there any truth through it? There was an interesting study done in 75 after the last recession on the effects of unemployment on mental health, and that was quite specific, because the statistics did show that there was an increase in admissions to mental hospital, alcoholism, marital discord, wife abuse and even rape, when a husband at that point, because there were fewer two paycheck families, was out of work, and it hasn't yet been done for inflation, but as Harry says with the unemployment rising, we may be back in the same situation. Then we get to the bottom line, and the bottom line is how are people going to cope?

People are behaving as rationally as they ever have. They borrowed and they spent while inflation appeared to be a problem. They're cutting back while a recession appears to be a problem, and they're contributing to the recession by cutting back. Basically, as individuals and as families, they're behaving very well. Individual good behavior, though, can be multiplied into very bad things for the national economy, and I think that's what we're seeing right now. What we're going to do is we have a studio audience, and why don't we ask some of the members of the studio audience how they are coping with this inflationary cycle, and I think we have a pretty good cross section. Most of the folks here are from the Pittsburgh and Washington DC area, and just let me ask some of you, how are you coping with this so-called inflationary cycle? Let's have your name. Why don't we have you stand up?

I mean, where are you cutting back? Well, I got rid of my car. I ride my bike everywhere I can now. This is a motorbike or a pedal bike? A pedal bike. I use no credit cards. I buy no meat, and I go out kind of infrequently. Do you think this has been a positive thing for you? Well, it's been hard. What scares me is I don't have any savings, and I've been thinking about starting some, but right now it's too hard to do. So is this causing you to readjust? It's a worry. I mean, I support myself, and it's kind of scary. Thank you. How about you, sir? Why don't we have you stand up? I'm Ralph Bailey, and I'm retired. And so far, I've been very fortunate in not having to cut down, but I was born before the Great Depression, and these things seem to be perfectly natural responses to a high prices. And so the car is 10 years old, and as long as it goes, it'll continue.

We're having a good time. We're not cutting our vacations particularly, but we have become almost vegetarians, and the stakes are seldom on the menu. But do you find that the money that you've saved, that you've accumulated all these years, your retirement, is now going for things that you weren't nearly wouldn't have spent it for? I don't think there's any change. Well, that's very interesting, and you're seeing how some people are coping with inflation and recession. Thank you. Now what we'd like to do is to have members of our studio audience ask some leading questions to our guest experts. Let's have your question. Yeah. Why don't we want to stand up? Sure. Thank you. I'm curious about alternatives to savings accounts. If you do manage to get a little bit ahead, and you put your money into a savings account at five or six percent when inflation is double and triple that, I don't know, frankly, what the alternatives are. And I'm hoping that you can suggest them for the small saver person with just a couple of hundred dollars, or not in multiples of thousands or tens of thousands. What are some alternatives?

Well, in answer to the question, I think if you have less than a thousand dollars, what if you can, and it should be something you're interested in, what has become known as collectibles, has been one of the best ways to hedge against inflation, which is, if you're interested in any sort of art or antiques, or even something from the 1920s, which is now considered an antique, you can pick them up still at flea markets and bazaars and things like that. Those things appreciate. And for that amount of money, I think that's one of the best hedges against inflation. If you can't go into a money market or a certificate of deposit or something like that. What about real estate, even with the high interest rates? Can you buy something for a couple hundred dollars? For a couple hundred dollars, what about investing savings in real estate? I think perhaps the safest real estate investment would be the family home. We've heard about common stocks being a sure hedge against inflation. They're not.

We've heard about gold. Gold has fallen very dramatically in price. The hunt brothers managed to bring some terminal to silver prices. But about the only thing that has not fallen dramatically in price, although occasionally it dips, is the family house. Lynn, what have you found about people? Are they staying in their homes and adding on, remodeling? What are they doing in terms of their family home? Oh, I think very much so. I think that people have stopped moving, certainly in the last year. And of course, depending on how far the mortgage rates come down, it is cyclical. It may all start again. But I think for the moment people are making do. They're dividing rooms to make two rooms. If they're having another child and they can't move. They're remodeling their houses. They're improving their houses. They're putting in insulation and buying furniture. And I think basically they're trying to improve their own homes so that when they can afford to trade up, they will have a better investment in that sense. Let's have our next question over here.

My name's Linda Blithe. I'm always wondering when I read things about what kind of salary I'd have to make in 1990 or something to have comparable earning power to what I have now. And that a loaf of bread would cost $50. What that all means. I mean, if it's all relative, if I'm making five times as much as I'm making, and a loaf of bread costs five times as much, am I any further ahead or any further behind, what real effect is that having on me? Well, I think you're right. I think people may be making more and spending more, but they may not be any poorer or any richer. We just may find ourselves 20 years from now in a very similar situation, which is sort of making-do but feeling strapped. It also may be that the inflation rate stays up at such a point that we just may start indexing it into our salaries, into our income tax, and everything else. So it will simply be finally the acceptance of double-digit inflation, which will then be indexed into the economy, whereas until now they've tried to fight it by trying not to index it and accept it as a fact of life. So we shouldn't worry about it. I don't think we can.

And on that note, we're going to bring our discussion to a close. I want to thank Harry Anderson and Lynn Povitch of Newsweek Magazine, and I'm David Horowitz. Next, points of view on inflation and government policy. First, economist Robert L. Heilbruner, whose book, The Worldly Philosophers, has become a standard introduction to economics, and has been translated into two dozen languages. The reason that we have inflation is, of course, we live in a system, in a capitalist business system, which has become inflation prone, in the way that it used to be back in the 1910s and 1890s, depression prone. Back in the 1890s, the 1910s, when the system got out of kilter, and capitalism was always out of kilter. It's a tremendously dynamic and changeful and running, and therefore, a stumbling system. When I got out of kilter, it got very out of kilter, and we had unemployment rates of 10%, 15%, we had terrific depressions in the 1870s, 1890s, 1929, or I have to tell you.

And the reason was, there was nothing to stop them. When they went down, when the economy went down, it rolled down hill like a snow wall. Now, out of those depressions and the lessons people learned from them and the harm they inflicted, deep seated changes were gradually put in place in the economy. One was that, beginning in the 1920s, really, in the 30s, the government put in security floors. When you're unemployed, you have a security floor. When you're an old person, you have a security floor. When you're sick, and you can't pay the bill, you have a security floor. When you're a small business and badly need a credit, you have a security floor. When you're a depositor in a bank, you have a security business that says your deposit is insured up to 40,000 dollars. But security floors throughout the economy, none of which, hard to believe, none of which used to exist. And that changes the way the economy works. Also, the economy is, in this country, in Japan, in Australia, in Canada, every place in the world, is kept moving by a city flow of government spending.

The government is a part of the economic system today, in a way that it wasn't. And it's never going to be pulled out. If you were suddenly given complete control of the economy and could do whatever you wanted to to stop inflation, what would you do? If I were God Almighty, so to speak, and empowered to change to fix things up, and I know exactly what I do, I would put in a series of ceilings comparable to the floors. And just as the floors, they never quite took away any possibility of recession. We have one right now. But they prevent that recession from becoming a juggernaut out of control. So I would put in ceilings, wage and price ceilings, controls, perhaps, and very necessary controls over one's income through the income tax form, that would limit the amount of balloon propensity, upward rising this of the economy.

That's what I would do, and that's what I think will have to be done eventually. So modern day capitalism has floors underneath and ceilings on top and manages to stay between them. Do I understand correctly that the kind of wage and price controls you would impose would be permanent and not the temporary ones we've had in the past, which don't seem to have worked very well? I think that the only kind of controls that will work will be permanent or at least permanent dash standby controls. And I also think that controls by themselves don't work unless they're backed by taxes, which they never were before. Controls are, so to speak, like sandbags against the mountain Mississippi. And for a while, I keep the dam river from flooding, but what you really need while you put those sandbags up there is some tremendous diversionary channel to keep the river from going up. That diversionary channel is taxing. In your opinion, then, using a recession to combat inflation as we seem to be doing at the present time is by no means the most palatable option.

I think it's absurd and terrible. And terrible testimony to the fact we don't understand the system or and or don't have the courage to see the moral injustice that's being perpetrated in the name of trying to rectify some ill-defined ailment that possesses. I'm really aghast that if everyone were made to be unemployed two weeks of the year, and if it's a consequence of that, prices stop rising instantly, we'd all do it. I'd be very happy to stop working right this minute and take it up again in two weeks, and everybody else would also, every looker and listener would they not? And then our price of the stop rising would say we got elected, but that's not the way it works. This person and that person is unemployed and the rest of us hope that our prices are going to stop rising.

The people unemployed are always the marginal people, usually. It's the blacks and the women on part time and the least organized and those actually who are least influential in pushing up prices. So it's a, it's a cock-eyed policy and a bad policy, but it's the policy we're going to use until we become sufficiently understanding about inflation. And sufficiently worried about inflation to do what I think has to be done. And it may take, God forbid, five years or ten years before we learn that inflation won't go away, that it's deeply rooted in the nature of modern day capitalism. And that it has to be met with measures that are adequate to its causes. A different view on inflation and government policy is offered by Nobel Prize-winning economist Milton Friedman. If you were inaugurated president in January 1981, what would you do to stop inflation?

There are two separate questions that you're asking. One is, where is the political constituency for putting a program into an effect? And second, what is the program you want to put into effect? The second in many ways is easier than the first. Let me deal with it, to begin with, what program needs to be, what are the policies that need to be followed? Number one, we need to have a firm commitment to a slow and steady restraint in the rate of monetary growth. We don't want a shock treatment. We don't want to cut monetary growth from the over ten percent that has been maintaining in recent years down to zero. Because that would be too hard to adjust it. Too many people have entered into commitments based on continuing inflation. What we want to do is to have a, and this would be step number one, to have a long-term program announced by the Federal Reserve with the concurrence and support of the president. Of a five-year program of gradually bringing monetary growth down to a level consistent with no inflation.

Step number one, step number two, a similar long-term program for reducing government spending as a fraction of a national income. Again, you cannot cut that down overnight. You cannot go from a $600 billion budget to a $400 billion budget overnight. But you should have a long-term announced plan for gradually reducing government spending. And along with that, for an actually reducing taxes, not fake reductions, but real reductions in the level of taxes, particularly in the collection of taxes that most impede productivity. High marginal rates in various ways. Next, a similar program for dismantling the excessive burden of government regulations that we now have. Those are the four key points that you would want in a program. Now, the question is, how do you get elected on that kind of a platform? And the answer to that is that inflation has now reached a stage in this country, and not only inflation, the mismanagement of government, the high government spending, the excessive regulation have now reached the point where there is a widespread revolt among the public at large against you. In fact, I believe myself that the Congress is lagging behind the public in this respect, that the Congress has not recognized the extent to which the public in the United States is in favor of moving in the direction of cutting down the size of government and bringing it back under control.

So, in a way, the building of a political constituency to do what has to be done has been the more difficult task in the past. But the very consequences of mismanagement of government policy, the consequences of that have been building the constituency. It's there. It doesn't have to be built. It needs to be mobilized and directed. Seems also there would be a constituency opposed to that. Just as the alcoholic finds it very difficult to withdraw from alcohol, so there is no doubt that you will have strong political pressures to move away. I don't have any panacea to offer about how you get around them except to keep on explaining to the public at large how limited are the alternatives I have. Is there anything an individual can do to deal with inflation?

Very little. The problem is not an individual problem. There is little and we, in fact, there is nothing that you as an individual or I as an individual can do. As a consumer, if we spend less, that may mean a slightly lower interest rate. It won't affect inflation. If we are producers, if we produce a little more, if we are a little more efficient, well, that will benefit us mostly, but it would also, to a minor matter, affect inflation. But in the main, there is almost nothing we can do as consumers, as savers, as producers. We can do something very important as citizens, and that is support the kind of policies in Washington that are necessary. The inflation is made in Washington and nowhere else. Now, of course, nobody likes to take the blame for something bad. And if you listen to the voices that emanate from Washington and you will be told, oh no, we're not responsible for inflation. It's those wicked, opaque cheeks who are raising prices on us, or it's those grasping union leaders who are trying to get high wages, or it's those profit-hungry businessmen who are exploiting us, or it's the spend-thrift housewife. It's never we who are guilty, and yet the truth is, inflation is made in Washington and nowhere else.

That's it. Minor exaggeration, but only a very minor one. In a lively session with Newsweek Editors, Daniel Yankellovich, social scientist, argues that inflation is more than economics. There's an economic side to inflation and a sort of political, psychological side. I've become convinced over the past couple of years that this less familiar political, psychological side is really the key to the solution. Because I don't think we have any agreement, any consensus in the country on who's going to pay and how they're going to pay. We have rules on how to share the game. There's a lot of injustice to it, the rich get richer, but the poor have made out all right. So there's been a consensus, but we don't have a consensus going the other way on sharing the pain.

And I don't see how we're going to be able to come to grips with the problem unless we do. And what really just concerns me is that the two chief candidates for Office of the President, Governor Reagan and President Carter, really don't seem to be thinking along these lines at all. And unless they do, I don't think we're going to get a handle on the problem. You think our standard of living is going to go down. And this is what we are struggling about at this moment. I think that's what we're struggling about. I think that the combined cost of our paying OPEC for all that oil and our becoming less competitive in our government programs, they've got to be paid for. And that encounters an implacable determination by people not to give up the gains that they've gotten in the past. That's why you get this pulling and tugging and you don't have this nice, easy rational process because people don't want to give up their gains.

They're being presented with the need to do so. They don't see other people doing so. They see injustice all over the place. And that's what I mean by rules. And I mean in the sense of norms, understandings, some sort of principle of equity with which we can deal with this problem. I think it's awfully tough to ask political leaders or spokesman of any sort in the country to set out a vision of a narrower, more meager future for people. I think that is just politically unrealistic. And I have the sneaking suspicion that if we were all sitting around this table in 25 years from now, and looking back on the 70s and 80s, we'd say, gee whiz, I think they coped with some of those problems pretty well. I would remind you that the subject of our discussion is inflation. And on the subject of inflation, I think we have a lot of evidence that we're really not dealing with it all that effectively.

I think that the number of the policies that have been enunciated for dealing with it are may alleviate it to some degree in the short run by creating tremendous unemployment. And by being destructive of business profits and our productive capacity at a time we need it. And we stock the next boom at a higher level of inflation. I come back to my basic point, which is not one of optimism of pessimism. It is the simple stock one that we have incurred a few massive costs. And we don't have any agreement on the society on how we're going to handle them. That's not a matter of optimism of pessimism. It's not criticism. It's not whether we've made some headway or we haven't made some headway. It's what are we going to do about that? Am I wrong as the solution to jiggle with the interest rates and use some variation of fiscal and monetary policy? Is that going to do it? Can we leave these political and psychological factors for the scramble to their own devices? I don't think so.

What you're saying is that we're at a watershed and we're going to blow it. Well, I don't think we are blowing it. And I think one of the reasons was touched upon that it's very difficult to ask political leaders to be on the pure inside of reality. But where they may be misled, and you'll forgive me, I hope for my saying this, I think that they pay too much attention to the public opinion polls. They're supposed to leave. They're supposed to leave not follow. And you have a process where people, and the polls show this, have been moving toward facing these unpleasant realities, but they're not there yet. So then the question in a campaign becomes, do you pander to people and their lack of realism when they're still not quite ready to face reality? Or do you try to lead them a step beyond and show them the rewards if they do bite the bullet?

When you come to the question of biting the bullet, do you think it can be done in any way except under compulsion? I take, for example, New York City, where everyone in the New York City government knew that this city was in very serious trouble, but the process prevented anyone from stopping himself until we actually went bust. And once that happened, then we began the process of reallocating the city's limited wealth, but we were unable to do it until the acts really fell. Do you think that maybe that may be what we're up against, that these war and interest groups are going to be unable to come to terms with it until the acts falls? I don't think it has to go that far. One of the most interesting cases I know about is in Merrin County, when there was a war to shortage, and people were able to get together and do something about it without having to have the whole population die of thirst for rest. The principle of inoculation works. When, after you've had people stand in a gas line a few days, four o'clock in the morning, then you don't have to have a full-blown catastrophe people have had a little taste of what's in store for them.

One of the, I think one of the great missed opportunities of our time was the mood of the public after the Arab oil embargo of 1973, 1974. The country was ready to take hard decisions to make real moves in conservation, but Watergate and the leadership was distracted, we didn't do it. And then there was plenty of gas, and people started blaming the oil companies, and the moment had passed. There are psychological moments. There are times when people are ready, and I would say that right now, uninflation is a time when people are ready, if you could, I'm struggling now with the diet, the Skarsdale diet. Need to. But you know, there's something very fundamental about that diet that if I follow the prescription and cut down in the prescribed way, I can weigh myself, and I can see the reward.

Now, you know, we need the equivalent of that in this area. Then Washington Cure Inflation, according to Satterist Mark Russell, no. Do you get the idea that in Congress, austerity really means smaller marble lions, part of President Carter's inflation plan, he warned the American people about the dangers of the abuse of credit cards. He wasn't the first president to warn Americans of that. Over a century ago, Abraham Lincoln said it best. A plastic house divided against itself cannot stand, not even until a date of expiration, which is why any day now, you'll see a commercial on television where a man with a beard looks at you in your living room, and he says, hello, do you know me? I was a great general in the Civil War, and even though I was a lousy president, my picture is still on the $50 bill.

This is Ulysses S. Grant for American Cash. Don't leave home without it. My friends, there's only one way to cope with today's recession. And that is to start calling what we now have, a depression. So that when things get worse, we won't have a name for it. Giving you some guidelines now, because in Washington, that's what we're noted for. Heed the Mark Russell guidelines for the fiscally befuddled. If you want to figure out the cost of a new car today, take the cost of your first house and double it. Times like these, it's best to remember the words of Franklin. Stonewall Franklin, he's my accountant. Penny saved? There's a waste of time. A fool and his money are soon parted, but a fool in your money is probably running for re-election.

For more information on the subject of inflation, right for brochure to inflation, Post Office Box 43658, St. Paul, Minnesota 55164. Cover Story was produced by WQED Pittsburgh, which is solely responsible for its content, and was made possible by a grant from 3M.

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