The speaker's record of accuracy in predicting interest rates added weight to the implied forecast in his words. "It is a matter of desperate urgency that a move to world economic expansion and inflation succeed," said Albert M. Wojnilower, chief economist of the investment banking firm First Boston Corp.
It wasn't so much that Wojnilower, speaking to a conference on relations between the United States and Japan, predicted a pickup in inflation. Lots of people are doing that these days. Morgan Bank, in its latest Economic Quarterly, estimates that higher prices for imported goods resulting from the dollar's decline against other currencies will bring inflation up 1 percentage point to 3.5% next year.
But Wojnilower, looking beyond a near-term rise to 4.5%, sees a gradual renewal of the inflationary pattern that we had in the 1970s. Moreover, he suggests that we welcome inflation's return because it stems from the U.S. government's new policy, established last fall, to force down the value of the dollar and cut interest rates in order to help our farmers and manufacturers regain their footing in world markets.
Increase Market Share
The policy, initiated by Treasury Secretary James A. Baker III--first in New York, where he met with the finance ministers of Japan, West Germany, France and Britain, and then in Seoul, South Korea, where he called for a new deal for the developing countries--aims to increase market share for U.S. agriculture and industry. By weakening the dollar, it removes an advantage from the competition, and, by pumping new money into developing countries, it gives a helping hand to customers.
And it had better succeed, because if it fails, the reaction will be devastating to world trade. The Congress would then see no alternative to imposing harsh protectionist legislation similar to the Smoot-Hawley Tariff Act of 1930, which would probably have the same effect in the 1980s that it had in the 1930s, when it helped pitch the world into economic depression.
But a question right here: Why should the threat of protectionism be any more real today than it ever was? Textile producers, shoe manufacturers and the like have been relatively unsuccessful for years in their push for protection. What's different now? They've gained allies among the multinational Du Ponts and IBMs.
Not that big companies want Smoot-Hawley, but they want a weaker dollar because the strong greenback was hurting them competitively in overseas markets. Baker's demand that Japan and Germany boost their economies and revalue their currencies has their support.
Another Side to Coin
If that approach fails, however, the big companies could hurt their competitors another way: by backing laws to keep them out of the world's largest market.
Secondly, as a recent Business Week cover story reminds us, the disinflationary, import-bargain prosperity enjoyed by many parts of our country has an ugly underside in towns of the Midwest, where farming and manufacturing have declined, and in the Southwest, where the ladder of economic betterment is being chopped away for a lot of families and businesses. Anyone who thinks that a large section of the nation will sacrifice its standard of living on the altar of free trade is dreaming. And James Baker, 56, a leading lawyer in Houston for 24 years before spending the last five in Washington, is no dreamer.
He doesn't admit, of course, that we're trying to buy worldwide economic growth at the price of a little inflation. But that is almost certainly the case with a policy that urges developed economies to open the spigots on their money supplies while feeding new funds to pent-up demand in developing countries. Our own money supply is growing at more than 11%, and a Federal Reserve governor said Thursday that the board has no intention of slowing it down.
Look on the positive side. A little inflation will make Third World debt easier to pay--to say nothing of the load of debt that has built up in our domestic economy. And, given the outlook for wages and commodity prices, even with better growth inflation could be mild for some years to come. Corporate profits will benefit, and the stock market along with them.
But no, there won't be a free lunch. Inflation will be no more containable this time than last. Eventually, perhaps in the early 1990s with oil prices rising, the economy will develop bottlenecks and excesses, and inflation will get back to the high single digits. The bond market will suffer, and we will have to endure once more the prophets of doom and the hawkers of precious metals as inflation hedges.
Finally, the specter of 1979-style inflation will scare everybody back to a corrective 1982-style recession--back to the future.