Business: Search for Stagflation Remedies

Economists today generally agree on one point: many of their old ideas do not work well in controlling that endemic modern problem, stagflation. A stiff dose of Government spending, prescribed by Britain's late Dr. John Maynard Keynes to cure depression, often leads to an inflation high. The monetarist medicine formulated by Dr. Milton Friedman —take a slow, steady increase of money supply—often produces the economic blahs. The radical surgery of wage-price controls is widely recognized as a palliative at best or, at worst, counterproductive quackery.

Small wonder that economists are looking for some new treatments. The most imaginative thinking on how to ease inflation without causing dangerous side effects centers on two plans known by the acronym TIP, for tax-based incomes policy. Both call for a system of federally set guideposts,* and would use federal taxes as a means of discouraging large wage settlements. The main difference between the two plans is that one would employ a stick, the other a carrot.

The stick proposal was conceived by Federal Reserve Board Governor Henry C. Wallich and University of Pennsylvania Economist Sidney Weintraub. In essence, they recommend that any employer granting wage increases of 1 % or more above certain federal guidelines be forced to pay the same amount in penalty taxes. The guidelines would be reckoned by taking the annual rate of productivity increase in the employer's industry and then adding one-half of the nation's prevailing inflation rate. By that formula, the guideline for overall industrial wages would be about 5% (that is, the rate of productivity increase added to one-half of last year's 6% inflation rate). The plan's authors reason that a hold-down on wages would be the surest means to reduce the inflation rate. As Wallich told Congress's Joint Economic Committee in February: "A considerable body of research indicates that prices in the long run are basically determined by wages."

The TIP plan that offers a tempting carrot was conceived by Arthur Okun, a Brookings Institution senior fellow and a member of TIME'S Board of Economists. In April. Brookings will hold a two-day closed-door seminar of economists to debate the Okun proposal; an open meeting of business and labor leaders is planned for midyear. Participation in his plan would be voluntary, but companies that held wage increases to 6% or less and price increases to 4% or less would be granted a 5% rebate on their federal income taxes. As an inducement for their cooperation, employees in such firms would get a yearly tax reduction of 1.5%, up to $225 per person.