There's no such thing as a free lunch by Friedman Milton 1912-

Author:Friedman, Milton, 1912-
Language: eng
Format: epub
Tags: United States -- Economic policy -- 1971-1981
Publisher: LaSalle, Ill. : Open Court
Published: 1975-01-05T16:00:00+00:00

Most important, indexation will shorten the time it takes for a reduction in the rate of growth of total spending to have its full effect in reducing the rate of inflation. As the deceleration of demand pinches at various points in the economy, any effects on prices will be promptly transmitted to wage contracts, to contracts for future delivery, and to interest rates on outstanding long-term loans. Accordingly, producers' wage costs and other costs will go up less rapidly than they would without indexation. This tempering of costs, in turn, will encourage employers to keep more people on the payroll, and produce more goods, than they would without indexation. The encouragement of supply, in turn, will work against price increases, with additional moderating feedback on wages and other costs.

With widespread indexation, in sum, firm monetary restraint by the Federal Reserve System would be reflected in a much more even reduction in the pace of inflation and a much smaller transitory rise in unemployment. The success in slowing inflation would steel the political will to suffer the smaller withdrawal pains, and so might make it possible for the Fed to persist in a firm policy. As it became credible that the Fed would persist, private reactions could reinforce the effects of its policy. The economy would move to noninflationary growth or high levels of employment much more rapidly than now seems possible.

The major objection to indexation is the allegation that escalators have an inflationary impact on the economy. In this form, the statement is simply false. An escalator goes into effect only as the result of a prior price increase. Whence came that? An escalator can go down as well as up. If inflation slows, and hence so do wage increases, do escalators have a deflationary impact?

Escalators have no direct effect on the rate of inflation. They simply assure that inflation affects different prices and wages alike, and thus they moderate distortions in relative prices and wages. With widespread use of escalators, inflation will be transmitted more quickly and evenly, and hence the harm done by inflation will be less. But why should that raise or lower the rate of inflation?

On a more sophisticated level, it has been argued that by reducing the revenue yield from any given rate of inflation, indexation would induce the government to speed up the rate of inflation in order to recoup the lost revenue. Furthermore, it has been suggested that the general public would interpret the adoption of escalator clauses to mean the government

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