II: Politician's Nightmare

Inflation exists when prices are rising at an abnormally high rate. It exists right now. It will be with us just so long as there is enough purchasing power in the public's hands to make price rises possible and inevitable.

If spending increases faster than the stock of consumer goods, exhortation and direct price and wage controls cannot keep price down. Price-tags may be fixed, but goods go under the counter. Whether or not inflation is "suppressed" by controls, the effect is the same; commodities go off the market into hoards and people with relatively fixed income suffer a sharp cut in their living standards.

The Federal Reserve Board, if it chooses, can limit credit-creation by member banks, but private loans are only a minor source of inflationary spending power. The chief source is government expenditure for armaments, which generates a vast amount of income unmatched by consumer goods. The one way to master inflationary pressure of such size is taxation.

A pay-as-you-go plan raises no difficulties at the present rate of expenditure. If taxes were raised to balance the current budget they would take a share of the national income only slightly greater than during the war, when the level of income was much lower. The government could close the contemplated inflationary gap between revenue and outlay by increasing corporation taxes, excises on luxuries, estate and inheritance taxes, tax rates for high income groups, and removing present loopholes in the tax structure.

When military expenditures reach the expected level of $75 billion yearly, the volume of durable consumption goods will actually decline. Unless educed consumption is to be concentrated within the fixed-income group, taxation must enforce a lower standard of living for the nation as a whole. At that time, if not sooner, a general sales tax and increases in the basic rate of personal taxes will the needed to cut into consumption outlay by low and middle-income groups.

Either Congress must devise a tax structure that will distribute the costs of mobilization equitably power the population, or consumers must take their chances in an inflationary rat-race. The first choice challenges politicians' faith in the willingness of their constituents to face unpleasant facts--such as the fact that some of them will go without new automobiles. If Congress shies from honestly informing the public of the prospect, pretending instead that face-saving halfway measure can be effective, representative government will have failed major test.