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Rapid growth of productivity has undoubedly contributed much to the low inflation rate in recent years. But this has also been partly due to temporary factors -- such as the low oil prices, high dollar exchange rate and depressed conditions in most of the rest of the world, that have reduced import prices. Moreover, it is important that the near-full-employment labor market that is slowly increasing poverty-level wage rates be allowed continue, without causing price increases.
Therefore, if the Fed is to remain happy with continued full-employment economic growth, it is imperative that we build an effective kit of anti-inflation policy tools other than the traditional socially and economically destructive resort to recession and increased unemployment. The following list includes some that haven't been tried in a long time.
1. A mandatory tax-free COLA price index. Tax increases that are quickly reflected in prices (such as energy, tobacco and other sales taxes) tend to cause an inherent spiral effect through automatic cost of living adjustments (COLAs). The purpose of a tax is to transfer income from the taxpayer to the taxing authority, and when COLAs try to prevent this transfer, it causes an inflationary spiral. To prevent this effect, there needs to be a special price index that excludes the effect of these taxes in all COLA-escalations of incomes (including Social Security and wage contracts). It is unfair and economically unsound that some lucky people should be exempt from paying taxes that everyone else has to pay.
To prevent repetition of the disastrous 1970s inflationary spiral caused by the the OPEC oil cartel's quadrupling oil prices, any sharp increase in a monopoly-controlled price above the long-run costs of production should be treated as a private "tax" in calculating the tax-free COLA price index.
Now that there is serious discussion of reducing income taxes by instituting European-style value added taxes (a form of national sales tax), the tax-free price index should be developed immediately to prevent this tax change from causing spiral inflation.
2. A progressive value added tax with steeply higher rates on high-priced luxury goods.
3. A tax on the repetitive advertising of well-established brand-name products by large monopolistic companies that control a large share of the market. The main purposes of most of this advertising are to maintain competitive market share and persuade people to buy, with costly credit, things they don't really need and can't afford. It provides little reliable consumer information, and is mainly a public nuisance. A tax on this advertising could be used to finance Consumers-Union-type product research and evaluation, and much better consumer education in schools and TV. That could increase effective competitive pressure on the brand-name prices and give new and smaller companies a better chance to compete. Genuinely new products should be exempted from this tax for their first few years on the market.
4. An undistributed profits tax to reduce the stock market booms that fuel the maldistribution of income and the consumption of high-price luxury goods.
5. Effective enforcement of all kinds of anti-monopoly legislation.
6. A comprehensive single-payer national health service -- to reduce the costs of health care and business "benefit" packages.
7. More efficient national employment services, and better education, training, and other means of adequately preparing high-school students, adult workers and present welfare recipients for the job opportunities actually opening up -- to increase the effective supply of labor with less resort to competitive wage incentives.
8. Promote more labor participation in productivity planning -- facilitation of labor union organization combined with an economic "social compact" which makes labor an equal partner both in corporate productivity planning and national policy,
Last revised: January 2000