It is impossible for policy to avert significant fluctuations in the economy. There are variations in the fundamental factors determining demand: population changes affect housing; the abundance or scarcity of fixed capital and major new technological innovations make plant and equipment spending unstable; sales expectations will occasionally be exceeded or disappointed, creating fluctuations of inventories. Psychological and other ill-understood factors lead to variations in consumer spending attitudes.

It has been the ideal of stabilization policy to neutralize these variations in the private economy to achieve stable growth and reasonably full utilization of potential. In actual practice, public policies have, at times, added to the instability of the economy. The two wars of the post-war period, Korea and Viet Nam, were the biggest single shocks to the economic system. Imperfections of diagnosis or inability of the political process to produce rational policies have added to instability.

The analysis presented here does not reduce the need for economic. management, and indeed in some respects increases it. If it really is dangerous to have the unemployment rate drop below 4 percent or to have major variations of demand near full employment, the needs for stabilizing policy become greater. Further, once unemployment is high, the case for demand management to hasten recovery is unimpaired. But the analysis does argue that the cost of "stop-go" policies is high if they add to the variability of the economy: the long run Phillips Curve is worsened.

C. THE POTENTIAL OF INCOMES POLICIES AND CONTROLS

The analysis of the preceding chapter showed that the wage guideposts of the mid-1960's lowered the rate of inflation, and particularly delayed the moment when the inflation severity factor came into play to make the wage-price system unstable. Given the significance of this factor and of price expectations in general, our analysis seems to point toward the use of such incomes policy measures.

The operational question is not whether such policies should be used at all, but whether their use should be episodic or permanent. Many countries have suffered the gradual deterioration of the short run. Phillips Curves until the point was reached where all the choices open to government were unacceptable. As drastic disinflation and deliberate creation of massive unemployment became less acceptable, governments turned to various kinds of incomes policies and controls. The half-life of these programs has been rather short, but perhaps sufficient to lower the short run Phillips Curves by changing inflationary expectations, thereby setting the stage for another cycle of gradual deterioration.

The current wage-price program is the strongest effort of this type that the United States has attempted in normal times, and probably would rate high in the international scale of such programs as well. It is too early to tell how effective the program will be and how quickly it will become unacceptably unpopular. Our work suggests that such a program should probably be maintained at least two years and with sufficient rigor to bring the price record outside of the severity region,

i.e., to lower the annual inflation rate to 2.5 percent or less and to keep it in that range. Once inflationary expectations have been brought to their normal, more moderate pattern, there would be no need to continue to maintain these policies if the society is willing to limit its unemployment goals to the 4 to 4.5 percent area. If we want to set more ambitious goals, we will need a better economic structure and more permanent incomes policies.

D. IMPROVING THE STRUCTURE OF THE ECONOMY

It is at this point that it is conventional to recommend expanded manpower policies and stronger anti-trust actions to shift the long run Phillips Curve. Since the United States has kept its manpower policies of rather limited scope compared to the fraction of the population that is inadequately prepared for the modern job world, and since we have not attempted a qualitative leap in anti-trust policy in many years, one cannot assess whether such policies could succeed in significantly shifting the Phillips Curve.

During the 1960's manpower policies had three strategies: there was a regional emphasis with particular attention to depressed areas, particularly Appalachia. As the economy tightened and some shortages appeared, there was an effort to add to the supply of the bottleneck skills. Later, the manpower programs increasingly focused on training the disadvantaged segment of the population.

Holt, MacRae, Schweitzer and Smith (1971) have related manpower policies to the Phillips Curve problem. Their theory of the Phillips Curve emphasizes the frictional elements in unemployment: the turnover rate, the efficiency of job search, the responses of wages and prices to job vacancies and unemployment, and the dispersion of unemployment rates among separate labor market compartments. These authors see great potential in measures designed to improve the efficiency of the market. Recently Robert E. Hall (1971) has prepared a detailed analysis of these proposals and reached more pessimistic conclusions. Hall questions the relative importance of the cited job market factors in explaining the prevalence of unemployment and doubts the practical potential of such measures as a centralized computerized federal employment service. He argues that the solutions to the manpower problem lie in much broader measures which will provide incentives to employers to change their hiring practices. This conclusion is consistent with the companion study to the present paper by Thurow (1971) who, with others, [Galbraith, Kuh, Thurow, 1971] has advanced a broad plan which sets employment quotas for women and racial minorities.

As for anti-trust policy, continuous vigilance is needed to avoid expansion of the degree of monopoly in the American economy. Whether the present type of anti-trust policy can be strengthened to the point where it would seriously affect the ability of business to fully pass on cost increases in periods of weak demand is questionable. Perhaps a stronger anti-trust policy would reduce the average profit rate which in earlier studies was seen to be one of the determinants of industry wages. Foreign competition remains the major factor in limiting market power.

E. CONCLUDING COMMENTS

We are not attempting to offer basic solutions to the structural problems which so deeply embed an inadequate Phillips Curve in the American economic system. In terms of priorities, the initial task is to return the economy to that portion of the long run Phillips Curve which contains the normal tradeoff between unemployment and inflation. That task is likely to absorb the energies of policy for the next year or two.

When we are again ready to turn to the structural questions, a solution which would not attempt to change the fundamental economic system may well have these ingredients:

1. A major tax incentive to stimulate on-the-job training and employment of the disadvantaged.

2. The beginnings of a quota approach for minorities in the hiring practices of large companies.

3. More direct government concern with the meeting of the skill requirements of a high employment economy, particularly of those skills where entry is controlled by the private parties at interest.

4. New government policies designed to make product markets more competitive and to reduce the protection of industry through tariffs, quotas and internal regulations.

5. A permanent incomes policy which reconciles wage and profit claims with the economy's ability to meet them.

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