Prices, Wages and Woes

One year ago, when Richard Nixon agreed to a cease-fire in Vietnam, he promised the American people peace with honor, stable prices, and full employment. There is now neither peace in Indochina nor prosperity at home. Inflation in 1973 was more severe than it has been at any time since 1947. And the people are worried: Recent polls show that, as a national concern, inflation outranks Watergate.

Federal Bureau of Labor Statistics data reveal the severity of the inflation. During 1973, consumer prices for all goods rose 8.8 per cent, with food prices soaring by 20.1 per cent. Meanwhile, wholesale prices rose 18 per cent. These higher prices, which stores and manufacturers must pay for goods, will be passed on to consumers this year. As a result, the cost of living is expected to rise at least 8 per cent in 1974 and the already low living standards of millions of Americans--especially the poor, the unemployed, and the retired living on a fixed income--will fall even further.

Pro-business analysts often blame inflation on excessive wage increases won by workers. Data from the Labor Department reveal the falsity of this charge. The average worker's real, spendable income rose 5.3 per cent between 1965 and 1972--an annual average increase of 60 cents in purchasing power over a seven year period. The severe inflation of 1973 has eroded this gain, The New York Times reported, because of sharp price increases for food, fuel, and other necessities, the average person's income bought 3 per cent less in late 1973 than it did in late 1972.

While millions of people have suffered hardship, corporate profits have exploded under price controls. Business Week reports that, in 1972, corporate profits rose to a record $52 billion, up 12 per cent from 1971 levels. Recently, profits have risen even more quickly: up 31 per cent between November 1972 and November, 1973. Profits in monopolistic firms and industries rose even more rapidly during that period: Exxon, up 86 per cent; Gulf Oil, up 91 per cent; the steel industry, up 89 per cent.

Four companies control an average of 42 per cent of the market in the 213 U.S. manufacturing industries. The four largest firms control at least 60 per cent of the market in such basic industries as computers, steam engines, tires, automobiles, aircraft, and steel. The power of monopolistic firms is rising; the House Judiciary Committee has found that, while the largest 200 U.S. corporations controlled 47 per cent of manufacturing assets in 1929, they control 60 per cent now. When a handful of companies dominate an industry, they can keep product prices at artificially high levels. Their prices go only one way--up.


Another basic cause of the U.S. inflation is the heavy defense spending which has continued since 1940. Military spending absorbs resources which might otherwise be used to produce consumer goods. The supply of civilian goods is restricted, while demand for them rises, as employees of war plants spend their wages. Prices are forced up, since more money chases a smaller supply of goods.

The most recent period of severe inflation began in 1965, when Johnson escalated the war against the Vietnamese people. Aware of the unpopularity of the war, he was unwilling to raise taxes to cover its entire cost. Vietnam was financed primarily by deficit spending. The government spent more money than it received in taxes, and financed the deficit by selling bonds to private investors, as well as by printing money. Such financing was inflationary, for it increased the money supply available to consumers.

Inflation, like the war, outlived LBJ and persisted under Nixon. The new Administration tried to control inflation by causing the 1969-1970 recession, which raised unemployment while failing to check inflation. During the recession and the year of stagnation which followed it in 1971, business profits fell. As a result, producers of goods as diverse as oil, cattle, and steel refused to commit the money needed to expand production until they were sure of rising demand, prices, and profits. During the boom of 1972-73, the past restrictions on production during a time of fevered boom had clear effects: inflation and shortages. The record of the past four years shows that the two inflation remedies backed by traditional economists--wage-price controls and recession--will not work.

A second cause of the severe 1973 inflation was the devaluation of the dollar. This event had its roots in the late 1940s, when the capitalist economies of West Europe and Japan were in ruins. In order to ensure that these countries remained pro-U.S. and non-Communist, the Government gave them financial aid, while assuming much of the cost of their military establishments. As a result, Western Europe and Japan had the resources to invest in modern plants which produced goods at low cost. After 1958, this foreign competition invaded markets at home and abroad and the U.S. began spending more money abroad than it was receiving. This balance of payments became serious with the escalation of the Indochina War in 1965. Now tens of billions of dollars flowed abroad to prop up the Saigon dictatorship.

The attempts by foreigners and the profit-seeking currency managers of the U.S. multinational firms to sell their dollars for gold and stable currencies led to a series of international monetary crises after 1967. These culminated in the devaluation of the dollar in 1971 and again in 1973. Since one dollar buys less foreign currency than it did in 1967, imports have become more costly.

Devaluation and the resulting imported inflation can be understood as a delayed tax on the American people to support Nguyen van Thieu and Lon No1.

There are few blockades for inflation in the U.S. One traditional means of control is antitrust laws to break up concentrated industry and to create price competition. But Nixon's intervention to stop an antitrust action against ITT and the recent Congressional defeat of excess profits taxes upon oil companies leave little doubt that such an attack on monopoly would be impossible, given the present degree of business influence upon the government.

The government could also cut the defense budget, transferring funds into domestic social programs, and adopt a less aggressive foreign policy. This is unlikely. High defense spending has aided large contractors, and has stabilized a recession-prone economy since 1940, when rearmament for World War II ended the Great Depression. An aggressive foreign policy requiring a large military-industrial complex serves business interests in another way. Monopolistic firms want to increase profits by expanding their markets and investments. Trade and investment abroad can be very profitable if the company is assured stability overseas. The U.S. government now has military alliances with 43 countries on all continents to keep order and to oppose those who rebel against U.S. economic and political domination. To keep these treaties, this country must maintain a costly war machine around the world, and each alliance carries with it the risk of dragging the U.S. into war. Repeated Vietnams and heavy defense spending will remain vital, inflation-causing part of the U.S. political and economic scene until economic planning ends the peril of recession, and until U.S. industry is restructured so that it need not seek prosperity by dominating and exploiting Third World nations.

One avenue remains: The government can try to convince the people that, as Nixon said on October 7, 1971, "All Americans will benefit from more profits." But recession and high unemployment are likely this year, because of the energy shortage and the traditional anti-inflation policy of tight money, invoked during 1973. Most economists agree that inflation will be at least as severe in 1974 as in 1973. As a result, for most Americans, living standards will fall for the second year in a row.

Lee Penn '75 is a student in North House.