Mitchell’s Musings 7-3-2017: The Way It Was

29 Jun 2017 2:45 PM | Daniel Mitchell (Administrator)

Mitchell’s Musings 7-3-17: The Way It Was

Daniel J.B. Mitchell

Thirty-six years ago in 1981, I participated in a forum held at the National Press Club in Washington, DC. The forum’s topic was what to do about inflation. More specifically, it dealt with the anti-inflation policy of the new Reagan administration. The Reagan administration had abandoned what was then called “incomes policy” – essentially a program of wage-price “voluntary” guidelines that had been pursued by the previous Carter administration - and was relying on a “tight” monetary policy to reduce the inflation rate. In terms of fiscal policy, however, the Reagan administration had cut taxes based on some version of “supply-side” theory. So fiscal policy was stimulative, while monetary policy worked in the opposite direction.

As can be seen from the chart below, the “core” Consumer Price Index (CPI) was recording double-digit increases in 1981. There had been problems with the index’s methodology, notably in its treatment of housing, but then as now, it was the headline indicator of inflation. The real economy was in the midst of a double-dip recession episode, the second dip of which would substantially boost unemployment. Although we now talk about the Great Recession of 2008 and afterwards, at the time of the 1981 forum, the U.S. was embarking on a comparable episode, both in terms of the depth of the drop and the length of time it took to return to something like full employment.


Consumer Price Index - All Urban Consumers

All items less food and energy: 12-month percent change


There were three economists/participants in the forum. Apart from me, there was Barry Bosworth of the Brookings Institution who had earlier headed the Carter administration’s effort at incomes policy. And there was Laurence Seidman, then of Swarthmore College, who was known as a promoter of using the tax system to restrain inflation through what was then called “tax-based incomes policy” (TIP). The TIP concept consisted of tax penalties for exceeding specified wage and price guidelines.[1] My own participation on the panel was because of my advocacy of “gainsharing” pay plans (profit sharing and similar arrangements) as potential anti-inflation devices.[2]

I would not have thought of the 1981 forum had it not been for my recent discovery of cassette tapes of the event in a closet. The forum was broadcast on NPR at the time, and the cassettes had been provided to participants afterwards, either by NPR or by the sponsoring organization, the Center for Democratic Policy.[3] I have digitized the one-hour recording put it on the web at:


               Above: Seidman, Press Club Official, Mitchell, Bosworth


The three participants in the forum were united in two beliefs. All three agreed that dis-inflating the economy via monetary policy alone was going to be a painful exercise. And, indeed, the depth of the recession that later unfolded proved that expectation to be true. All three of us were thus looking for some way to make the dis-inflation less painful. All three sought to make wage and price setting more responsive to macroeconomic restraint. In addition, all three agreed that, given the emphasis on such restraint by the Reagan administration, a tax cut (fiscal stimulus) made no sense in the face of monetary restrictiveness. But beyond those agreements, the policy suggestions diverged.

My own view at the time was that gainsharing programs, which were well known – but not especially widespread – would have the indirect effect of making wage adjustments more sensitive to the ups and downs of the business cycle. That effect wasn’t the reason employers installed such plans; they were seen by employers who used them as incentives for productivity improvement and some versions, in addition, received tax incentives. My proposal was to re-target existing tax incentives toward those plans that had the beneficial macro effect. There was some increased interest in Congress in gainsharing at the time and in subsequent years – mainly because of the productivity effect. But nothing much emerged from that interest.


Number of work stoppages idling 1,000 workers or more beginning in period


Bosworth’s proposal was to limit union contracts to one year’s duration (the typical contract at the time was 2 or 3 years) and to impose compulsory final offer arbitration in the case of impasses in negotiations for new contracts. At the time, however, unions were down to around one fifth of the private workforce and were experiencing a wave of “concession bargaining.” Put another way, about four out of five private-sector workers were nonunion and thus had no long-term contracts. Strikes – which are virtually all union-related – were rapidly declining in frequency, as can be seen from the chart above.

Bosworth seemed to think that arbitrators would take account of macroeconomic externalities in making decisions – which in fact they don’t typically do. And there was no reason to think that use of final offer arbitration, as opposed to conventional arbitration, would change their criteria.[4] In any case, pay increases had already peaked, as the chart below illustrates, and never returned to anything like the rates of the early 1980s.



Seidman had less focus on the labor market and primarily promoted his two tax policies. One was a progressive personal consumption tax to replace the personal income tax. The idea was to tax consumption rather than income, thus promoting saving. You can think of this concept as something like the tax incentive given to IRA accounts (dating back to 1974) and to 401k plans (dating back to 1978). The idea would be to give a similar tax treatment to ALL forms of saving.

Under such a tax system, you would presumably start with determining your income. Then you would deduct your saving and be taxed on that remainder. Of course, a sales tax or European-style value added tax (VAT) also taxes just consumption, but it would be regressive. So there would have to be progressive rates applied to the consumption remainder.

For people at the top end of the income scale, the tax rates would have to be very high to match the current progressivity of the income tax. And folks who dissaved, as they might if they became unemployed or otherwise faced hard times, would presumably be taxed on more than 100% of their income. This proposal – a complete rewriting of the tax system – was not going to go anywhere. And it related to inflation only indirectly. One connection was in the vague sense that by encouraging saving (and thus investment), it might - over the long run - raise productivity growth. In the shorter run, a sudden shift to such a tax might boost saving, diminish consumption, and thus be contractionary.

The other Seidman tax proposal was the TIP plan under which violations of guidelines for non-inflationary wage and price guidelines would be subject to a tax penalty. In the abstract, this idea was appealing to economists: if you don’t like an activity, impose a tax to discourage it. The problem is in the implementation.

On the wage side, you would need detailed regulations to deal with such things as merit increases, promotions, deferred pay, etc. These complications arise under wage controls, too, but when taxes are involved, there needs to be a level of precision that would be difficult to define and administer. The price side is also complicated. What about tie-in sales, discounts, quality vs. quantity, coupons? Again, the concept was appealing but impractical.

So what do we conclude from this historical exercise? One is that while there are current worries about inflation (but not much sign of it), no one talks about the kinds of remedies that were on display in the 1981 forum. For one thing, with unionization in the private sector down to around 7%, the labor market focus on collective bargaining is largely gone. At most, there are occasional references to labor shortages leading to wage increases and maybe thus to price increases.

What may be lingering from the inflationary period of the late 1970s and early 1980s is the concern about inflation among senior policy makers, such as those who make policy for the Fed. The median American would have no memory of that period. But Fed chair Janet Yellen will be celebrating her 71st birthday in August.



[1] In his remarks, Seidman made a joke about his promoting the TIP plan to “TIP” O’Neil, the Democratic Speaker of the House, which seemed to go over the heads of the forum’s audience.

[2] Later in the 1980s, (then) MIT economist Martin Weitzman produced a theory of the “share economy” (not to be confused with the current notion of a “sharing economy”). The share economy involved promoting profit sharing and similar plans to improve macroeconomic performance including reducing the “stagflation” that characterized the 1970s and 1980s.    

[3] The Center was founded as a Democratic Party-oriented think tank in 1981 in response to the Reagan election. Its name was later changed to the Center for National Policy.

[4] Under final offer arbitration, the arbitrator receives an offer from management and an offer from the union. No compromise decision is allowed. He/she must choose the one that is most “reasonable.” The notion is that there will be an incentive to make reasonable offers, thus promoting a convergence of offers (and possibly a settlement without the need for an arbitrator in the first place). Conventional arbitration, in contrast, is said to produce a divergence of offers because the arbitrator will somehow split the difference. The incentive to diverge is sometimes characterized as the “chilling effect” of conventional arbitration, i.e., the presence of arbitration as the eventual decision maker in the event of an impasse is said to chill the chance of a private settlement. There is a substantial literature on these ideas. 

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