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Authors

Dumas

Abstract

Traditional economic theory holds that there is a tradeoff between inflation and unemployment, and that accordingly price stability (i.e. 0% inflation) can only be achieved at the expense of increased unemployment, while full employment (corresponding to an unemployment rate of about 3%)' requires acceptance of an ongoing inflation. In 1960, the noted economists Paul Samuelson and Robert Solow published an analysis of annual data for the per d 1933-1958, from which they quantitatively estimated this tradeoff. It was their rough estimate that the elimination of inflation would require acceptance of a 5%-6% rate of unemployment while the achievement of full employment would impose a continuing 4%-5% rate of inflation. In a later study Lawrence Klein and Ronald Bodkin looked at quarterly data from 1946-57 and concluded that an unemployment rate of 6.9% would have to be maintained In order to achieve price stability, thus implying a slightly more severe tradeoff.

The fact is that over the last several years, inflation and unemployment have both been persistently near, and often substantially beyond, these high tradeoff limits simultaneously. During the calendar year 1975, the U.S. national unemployment rate was averaging 8.5% at the same time the consumer price index was rising by 6.5%.4 Something had clearly changed in the U.S. economy to produce this unprecedented high inflation/high unemployment situation. The question is what?

An important part of the answer lies not in the events of the last few years by themselves but rather is rooted in a much longer process of cumulative economic deterioration stretching over the past few decades. Furthermore, this process does not derive from a fatal flaw in the workings of the U.S. economic system. It is neither necessary nor inevitable. Rather it Is the unintended result of a conscious decision, with broad popular support, to adhere to a system of national priorities which has given primacy to the development and maintenance of a sector which is particularly unproductive from a purely economic viewpoint -- the military. When the U.S., for the first time in its history, entered into a protracted era of high military spending following the close of the Second World War, it sowed the seeds of the economic decline whose bitter harvest it is just beginning to reap.

The initial section of this analysis traces the mechanism by which the persistence of high military spending has played a major role in producing the economic deterioration underlying the present U.S. recession/inflation, and highlights the implications of this deterioration for social welfare. The second section deals with the nature of the serious economic and political barriers that have developed to the reversal of this economic and social decline. Finally, we consider the kinds of policies which should be effective in overcoming these barriers and accomplishing the transition from military to civilian orientation which is a necessary pre-condition of a serious and successful effort to improve the economic and social welfare of the people of the United States. Some of the plethora of conceivable productive uses of the resources freed from the military are discussed.

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