What Price for Price Stability?

MR. MACDONALD:

When Oscar Wilde defined a cynic as "a man who knew the price of everything and the value of nothing," he was presumably commenting on a society which ranked economic returns higher than artistic achievements. However, he attached insufficient weight to the fact that few people will acquire anything of value without paying some price and that price is a highly effective measure of worth. As one sardonic and unrepentant capitalist is reported to have said: "Money isn't everything, but it will buy a lot of Cadillacs and yachts to go looking for happiness in." Moreover, in an industrial society, even the traditional free goods require a price to ensure their pristine purity. It costs our nation millions to retain air that is fit to breathe and water that is safe to drink. It even costs money to get to the countryside to take a free walk, and, of course, few "old masters" are given away by the art galleries.

Prices are key ingredients in the process of buying security, of securing a better standard of life, and of living within our means. Surely, these goals of security, an improved standard of living, and living within one's means are particularly relevant to the people of Canada. This country was not only founded, but continues to be developed, by people seeking some assurance that the rewards of hard work will not be swept away by the floods of inflation, floods which have periodically engulfed so many older currencies.

These are among the reasons why inflation is such a significant word today. Whether it is defined as "too much money chasing too few goods", or "wage increases outstripping productivity growth", or "the pull of demand exceeding the capacity to produce", the fact remains that it has the effect of reducing purchasing power and diminishing the appetite for fixed-income securities. Many of us now understand, more sympathetically than ever before, the plight of those traditional textbook casualities of the inflationary wars--widows and orphans.

I shall leave for Dr. Young's consideration the question whether economic slowdown will dampen the fires of inflation and, thereby, remove our problem. What, then, is to be done about inflation? Ignore it, immunize ourselves against it, or control it directly? Preach against it, picket it, or succumb to it? For a start, we have the Prices and Incomes Commission. Canada is not exactly a pioneer in the creation of a quasi-governmental body on prices and incomes, but we have chosen a form in a pragmatically Canadian style a Prices and Incomes Commission that is to find its own "modus operandi"! As a result of the announcement two days ago concerning the steel industry, the Commission has already embarked upon a course which will not readily be reversed.

We have also chosen an economist who is particularly well-suited to be its first Chairman. Not only are John Young's credentials exemplary, but his attitude could not be improved upon for a task such as he now faces. During the formal beginnings of economics, the subject was known as "the dismal science" as a consequence of the rather gloomy predictions of T. R. Malthus about the population problem. From long acquaintance, I can assure you that Dr. Young is perennially cheerful and always optimistic.

Dr. Young left an important position as Dean of Arts at the University of British Columbia on July 1, 1969, to become Chairman of the Prices and Incomes Commission. I trust that he did so not in any sense of repentance that education was contributing unduly to public expenditure and, thereby, to inflation. Certainly, he represents a fine example of the economic value of education, for he belongs to that distinguished company of World War Two veterans who had left school to work in the depression and then went to university after the War. In John Young's case, his story is that of a young man who was a clerk with the Bank of Toronto from 1938-40 in his native Victoria and later earned a doctorate from the University of Cambridge in 1951.

During 1940-45, he served as a pilot with the R.C.A.F. in Canada and Newfoundland, retiring as a Squadron Leader. Undoubtedly, he used that experience to learn how to navigate through storms and turbulence such as he must have experienced as Dean of Arts at the University of British Columbia and now faces in his present position. Presumably, he also recognizes what can be considered an acceptable ceiling, he must know how best to approach a target for a safe landing, and he should understand how to bring the machine back to earth without undue shock and without swerving off course. Each of these skills will be just as severely tested in finding a means of battling inflation and in piloting our price system.

Dr. Young was on the staff of Yale University from 195360 and, since 1960, has been Professor of Economics at the University of British Columbia in addition to his administrative duties. He wrote an important study for the Royal Commission on Canada's Economic Prospects in which he produced a much-quoted opinion that the Canadian tariff added 3.5 per cent to our cost-of-living, an early indication of his concern for the Canadian consumer. He must also have felt a sense of poetic irony when the former bank clerk became Assistant Director of Research for the Royal Commission on Banking and Finance.

I shall not impose on your time, Gentlemen, to describe his numerous writings and other activities or to inflate this introduction further. Dr. Young is a first-class product of our economic system, one who knows the price of everything and is, for that very reason, of great value to Canada at this time. I am delighted to introduce him to you and to ask him to speak on the subject: "What Price for Price Stability?".

DR. YOUNG:

It is always risky to put a question mark after the title of a speech--somebody always expects the question to be answered. You will see, however, that while I can offer some thoughts on the alternative answers to this question, the choice among these answers is one that can only be made by the Canadian public.

What price, then, must we pay for price stability?

What will it cost us individually and, as a nation, to bring the present inflation under control?

And once this inflation has been brought under control, what would it cost us over the long run to stay out of the next inflation, and the next inflation after that?

Would we get any lasting economic benefit from letting the value of money shrink by an average five per cent a year for a decade or two, that we couldn't get if we managed to keep the value of money reasonably stable over the same period?

If our aim is to maximize the growth of production over the next twenty years, is the best strategy to embrace inflation ardently, to fend it off half-heartedly, or to fight hard to control it?

Many of you whose experience has included some personal knowledge of countries which have been plagued by large and continuous price increases may well feel that the answer is obvious. In many of these countries inflation not only provides little apparent benefit, but also causes a host of difficulties as people strive to adjust their behaviour to a standard of value which changes at varying rates.

This evidence has, however, not been found compelling by many economists, and there continue to be endless debates on the costs or benefits of reasonable price stability over the long run.

The interesting thing is that no one has been able to come up with very convincing arguments or evidence to lead to the conclusion that the long-run growth of output is likely to be any higher with large and continuous price increases.

This is not surprising. Once people have learned to expect what is likely to happen to the future value of money and have adjusted their economic behaviour accordingly, it is hard to see why the course of events in the real world of production should be in any way improved. Moreover, if, as has happened in many countries, the domestic rate of price increase exceeds that of the rest of the world, then, with a fixed exchange rate system, the country concerned goes through a series of balance of payments crises and devaluations, with the disruptions which accompany these events. Some have thought that these difficulties could be avoided by a continuously depreciating flexible exchange rate, but the uncertain consequences of such a system on trade and capital movements cannot be taken lightly in a country such as Canada.

If, then, taking one decade with another, a condition of reasonable price stability provides a level of well-being as high, or higher, than that attainable with inflation, why talk at all about the price for price stability?

Unfortunately, one cannot always take a long-run view of human affairs. The famous economist, Lord Keynes once pointed out that in the long run we are all dead. This reflects an attitude towards economic policy which is by no means always appropriate, but it does remind us that at any point of time we cannot ignore the short-run consequences of our actions.

This is particularly the case when the problem is one of bringing an entrenched, pervasive inflation under control.

The present inflation is not a recent phenomenon. It has been with us for over four years and has developed a considerable momentum. It has occurred in a period when the economy has enjoyed an unbroken period of economic growth for almost a decade.

In the early years of this expansion, prices were relatively stable as the economy absorbed unused capacity and unemployed workers. The consumer price index increased at an annual rate of about 1 1/2 percent during these years and, as is usual in such a period, productivity rose at an above-average rate.

Since 1965, things have been different. As the economy reached or exceeded capacity in some sectors and regions, prices and money incomes began to rise rapidly. At the same time, the rate of productivity growth declined as the gains from more intensive use of under-employed resources were no longer possible.

The results of this process can be illustrated by a simple example. Over the four-year period ending in 1964, "take home" pay per person employed in Canada (that is, wage and salary earnings after income tax deductions and social insurance contributions) rose on average by about $120 a year. Over the subsequent four-year period of substantial inflation ending in 1968, the average annual increase in take-home pay was considerably larger--about $205 per year.

The fact that the money incomes of wage and salary earners rose more rapidly during a period of inflation does not mean that the real purchasing power of these incomes rose any faster. On the contrary, the more rapid rise in consumer prices quickly cancelled out most of the real benefit from larger pay increases. If we measure take-home pay in 1961 dollars of constant purchasing power, we find that the average annual increase in real take-home pay during the four inflationary years ending in 1968 was only about $52--somewhat less, in fact, than the average real increase of $67 annually during the previous four years.

The basic point I am trying to convey here is that any increase in average real income per head in our economy depends entirely on the average increase in productivity that is, on the growth of production per head. If the increase in average money incomes outstrips the increase in average productivity, prices must inevitably rise enough to cancel out the difference.

How can the present inflation be brought to an end?

Much of the answer must continue to lie in the application of the traditional remedies--monetary and fiscal restraint of the kind being used in both Canada and the United States today.

The central bank must keep a tight rein on monetary and credit expansion and let the scramble for funds drive interest rates to high levels.

Governments must prune their budgeted expenditures and increase their revenues through higher taxation.

The combined effect of these policies is to squeeze the main sources of private spending and to relieve the pressure of demand in markets for goods and services.

In areas of the economy where markets are highly competitive, any substantial weakening of demand is likely to have an early deterrent effect on price increases. In our economy, however, many markets are insensitive to short-run changes in demand, and prices may continue to be marked up for some time, even though sales volume, production, and employment have ceased rising or begun to fall. In part, this is because continuing increases in labour, material and other costs are likely to be squeezing profit margins, and firms may be seeking immediate relief by raising prices where they feel they can. Firms will also be under pressure, of course, to slow down the rise in their costs, and in particular, to resist more strongly the wage and salary demands of their employees.

In the end, a policy of fiscal and monetary restraint will have the desired effect of stabilizing the price level, but, by itself, such a policy is likely to be rather slow and costly in its working. The basic reason for this lies in the degree of resistance which business concerns and wage and salary earners are able to put up in the face of market pressures to accept smaller increases in their money incomes than they have become used to. So long as prices and incomes continue to rise strongly in the face of a weakening of demand, there is no way of avoiding adverse side-effects on sales, production and employment. But without some weakening of demand, there is no way by which the rise in prices and costs can ever be brought under control. That is the dilemma we face today.

Some have expressed doubts about the desirability and effectiveness of a programme of fiscal and monetary restraint.

The Commission does not share these views.

We are firmly of the view that the present inflation should be brought under control, and until there is strong evidence to the contrary, believe that the traditional methods will work if carried through with sufficient vigour and persistence.

It is evident, however, that no one welcomes the consequences which may flow from the use of fiscal and monetary measures alone.

That is why, from the very outset of its work last July, the Commission has been exploring as a matter of urgency possible ways of reducing the potential loss of production and jobs as inflation is brought under control during the period immediately ahead.

What we have been looking for is some means of bringing a direct influence to bear on price and income decisions, an influence beyond the indirect one of softer market conditions. If the recent rate of price and income increase could be scaled down through some such means more readily and rapidly than seems likely as a result of market forces alone, fiscal and monetary restraint could be made correspondingly less severe and protracted.

Accordingly, the Commission decided to embark on a series of intensive exploratory discussions of a programme of restraint with representatives of business, agriculture, trade unions, other groups, and with the federal and provincial governments. It seemed to us that the best hope of securing voluntary co-operation in restraining price and income increases was to begin by examining the feasibility of a comprehensive programme, and to do it with the active participation of those affected.

The restraint programme we had in mind would have relatively modest economic objectives. It would be of limited duration, beginning as early in 1970 as possible and expiring at some time during 1971. It would aim at achieving a significant reduction in recent rates of increase in prices and incomes, but not a complete freeze.

We have now held more than a hundred meetings, both large and small, in which the possible contents of such a programme have been discussed. It is evident that, although there are numerous practical difficulties to be overcome in working out any meaningful programme, there are also various forms which such a programme could take, some of which look more workable than others.

It seems clear that, if one thinks of a programme which is tightly drawn and intended to cover as wide as possible a range of prices and incomes, it becomes difficult to avoid considering supplementary governmental measures in areas of the economy where it is not feasible to seek voluntary commitments.

It was evident from the start that we would be very lucky if we discovered any quick or easy solution to so puzzling a problem, and you will have heard that we have encountered difficulties. But we have learned a great deal from our discussions to date about where the possible answers may lie, and we hope to learn more from discussions which are taking place now.

The suggestion has been made from time to time that the Commission could exert a restraining influence by intervening on a piecemeal basis in particular price and income situations. It has been our view that before any attempt could be made to decide whether a wage, salary or price increase was justified, it was necessary to have a set of rules defining what, in fact, was justified. This is what we have been trying to work out, but have not yet achieved, in the various discussions in which we have been engaged. At this time, therefore, the Commission does not feel in a position to render a judgment on what is, or is not, justified in a particular case. Under conditions of general inflation and in the absence of announced criteria for justifiable behaviour, it would be manifestly unfair to select any one union or any one industry and rule that actions which have become typical are contrary to the public interest.

What is not unfair, and may be helpful, is to illustrate for the public as a whole one of many examples of how an entrenched, pervasive inflation is reflected in the wage and price behaviour of one among many industries. With this objective in mind, the Prices and Incomes Commission has decided to undertake as of today a fact-finding study of price, wage and other cost increases in the Canadian steel industry.

If the Commission should meet with success in its search for agreement on a set of criteria defining justifiable behaviour--even a more limited set of criteria than has been discussed up to now--the Commission would be prepared to examine particular situations and to make such judgments. But such agreement has not been reached yet, and indeed many have wondered why we have continued to press on with our efforts to find some consensus among the main economic interests in our society.

The reason is a simple one that takes me back to the title of my speech. What price for price stability? The Commission believes that the price of restoring price stability over the period ahead may turn out to be--but certainly doesn't have to be--an unnecessarily high one. There are thousands of jobs and millions of dollars' worth of production at stake.

Clearly, there is more than one way of coming at the problem, and it would be foolish to pursue any particular approach to the exclusion of all others. Any course of action which is intended to have constructive and practical results, however, will have far greater chances of success if it commands widespread acceptance in the community and enlists the active co-operation of as many Canadians as possible.

That is the spirit in which the Commission embarked in the first place on its search for a less costly way of bringing inflation under control, and that is the spirit in which it is continuing its efforts now.

Dr. Young was thanked on behalf of The Empire Club by Mr. R. A. Robertson.