Victims of the Inflation Fighters

WILLIAM PFAFF

September 14, 1992|By WILLIAM PFAFF

PARIS — Paris. -- There were 160,000 American jobs lost in August. This news has been played principally for its political significance for George Bush and Bill Clinton. But why were those jobs lost? Why have wages declined in value? And what does their loss say about the economic philosophy governing not only the American government but nearly all the Western democracies?

This is not just an American problem. There has in recent years been something resembling an international competition in destroying jobs as the supposedly inevitable consequence of suppressing inflation. The United States in this respect is marginally better off than the principal West European economies, other than Germany.

In July U.S. unemployment was 7.7 percent of the active labor force. The figure understates actual unemployment in an economy where many have given up hope of a job and no longer are on the official list of job-seekers -- or lack the qualifications for a job and were never counted. Nonetheless, the American unemployment figure is considerably better than those for Italy, Britain and France: respectively, 11 percent, 10.8 percent and 10.3 percent. And the trend is up everywhere.

Germany's unemployment figure in July 1991 was 4.4 percent and this year it is 4.7 percent. Even that small a rise has been enough to provide fuel for the xenophobic rioting and political uproar of the last two weeks. Japan's unemployment is unchanged over the past year, at 2.2 percent.

Yet in other respects the European economies are in much better condition than the American. Currencies are solid, whereas the American dollar is at its lowest level in modern history, and still falling (evidence of what the financial community thinks of President Bush's re-election economic promises).

Growth in Europe is slow but solid. Public finance is under control everywhere but in Italy. In every one of the Western xTC countries, however, economic policy has in recent years been directed to eliminating inflation, as a result both of the German obsession with inflation and the particular problems posed by German unification, and a post-Keynesian conventional wisdom that has ranked inflation as the chief threat to economic stability and growth.

Thus, every major industrial country except the U.S. and Japan has very high interest rates. Since the deutschemark is the dominant European currency and the others are tied to it, French, British and Italian rates have to be high in order to hold their investment attraction against that of the mark.

However, high interest rates block business borrowing and investment. Slowed business investment means a low rate of job creation, if not an actual decline in jobs. The 1980s saw actual deindustrialization in the countries that took this anti-inflation doctrine the most seriously, the United States and Britain. Nearly a quarter of the British industrial base was wiped out during the early 1980s. In the United States, high-paying skilled manufacturing jobs were replaced with low-pay service work.

All to block inflation. Inflation today, however, is not high. It is low. On Organization for Economic Cooperation and Development figures, the consumer-price rise has been lower this year than the 1970-1988 average in every one of the major industrial countries except Germany and Japan -- the two countries that enjoyed exceptionally low inflation rates in the past.

Governments now are talking about zero inflation. This is a totally artificial idea, probably unachievable at any price society is willing to pay. It may even be dangerous; there is a risk of plunging through zero to disinflation, which means falling prices, falling business and industrial activity, and depression on the 1930s model. Moreover, most people actually like a little inflation; it means the ordinary man's house -- his principal life investment -- steadily goes up in denominated value and his debts are paid off by the currency's loss in value.

Zero inflation means still more company bankruptcies and liquidations, small-business failures, mortgages out of the reach of wage-earners, and still more loss of -- Mr. Bush's phrase -- ''jobs, jobs, jobs.''

Is this really an appropriate policy today? The single European currency sought in the Maastricht agreement among the West Europeans would appear to institutionalize German-style deflationary policy across Europe at the very moment social peace in Germany itself is cracking.

Is unemployment of the scale we have today really the price that has to be paid for a healthy economy? Can an economy with such levels of unemployment really be called healthy? Healthy for whom? Not for the people on -- or off -- the dole.

William Pfaff is a syndicated columnist.

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