Dangerously Naive'

To the Editors of The Crimson:

Your March 20th editorial entitled "Common-sense Economics" is one of the shoddiest commentaries which The Crimson has printed in many months. The editorial is not merely internally inconsistent, but the remedies it proposes are dangerously naive.

The inconsistency arises when the piece criticizes Carter for using "indirect tactics based on complex theories" to improve the health of the economy, and then chides him for not using such tactics adequately.

More serious are most of the "remedies" to combat recession which the editorial proposes, namely a wage-price freeze, permanent controls on oil prices, "an end to the current crazy policy of high interest rates," cutting subsidies to agribusiness to "yield cheaper food," national health insurance to "calm fevered medical costs," and a shift from spending on the war budget to such items as mass transit and energy conservation.

I am convinced that less military spending is essential, and that emphasis on mass transit systems and energy conservation are highly desirable, but the reasons for this conviction are not economic but philosophical.

A wage-price freeze would be difficult to administer, as firms and individuals seek to bend the rules. Thus new labor contracts will raise non-cash benefits, suppliers will demand cash prepayment, and unrecorded payments for goods or to workers will rise.

A wage-price also undermines the role of price as a signal of change. Growing industries such as coal or computers or home insulation would soon be short of new labor because the freeze would prevent them from raising wages to attract workers from declining or stagnant industries. Oil-using industries, facing rising prices abroad, would have to pay more for oil. Are they to go broke? Or again, suppose there is a poor world harvest, so that at current prices there is an excess demand for grain. How is this grain to be allocated if not by price? Another administrative machinery?

Finally, a wage-price freeze, if temporary, would have little or no effect on inflation. The inflationary spurt after Nixon lifted his price controls in 1974 simply reflected pent-up pressures. The freeze did little to dampen expectations of inflation, and in the views of some economists may ultimately have led to even higher price levels! A more permanent freeze would have the defects mentioned earlier. It is not clear that such a system of permanent administrative price setting--approximating the system in a centrally planned economy--would be desirable, despite the many drawbacks of a market-based economy.

Permanent controls on oil prices would soon imply either subsidising imports or foregoing imports entirely--for who would sell to a country which is not prepared to pay the market price for oil. Such price controls, by keeping the price of oil low, would not reduce domestic consumption, hence rationing would be needed. The equity of this depends entirely on how ration coupons are distributed. For efficiency ration coupons should be sold, and this would raise the price of oil (including coupons) to at least free market levels. If oil companies make excessive profits, then it seems more sensible to tax the profits.

Interest rates only seem high because they largely reflect inflation. A $10,000 6-month treasury bill currently yields about 14 per cent. But with inflation at about 15 per cent this represents a negative real rate of return on buying such a T-bill. This diminishes the incentives to save. With less saving where are resources to come from for investment (Including housebuilding)?

A national health insurance system might cutprivate medical costs, but would certainly raise the total expense of the medical system. If one need not pay anything towards medicine or treatment (apart form an obligatory tax), one is likely to use medical services more, and hence more doctors, drugs, and facilities would be required. There is no clear incentive here for "calming fevered medical costs." Jonathan Haughton