Economic Report of the President

the macroeconomic policies examined in Chapter 1, these too are ameans of reducing inflation and speeding economic growth.INFLATIONThe Nation has for some time now experienced inflation thatwould have been unimaginable in earlier days. Although people'slives and the course of business may not, at first glance, appear radicallydifferent from what they were in 1960 before the recent inflationbegan, inflation has taken a very real toll. The uncertainty it hasbrought with it cannot be measured, but the consequent anxiety hastorn at the fabric of our society. People feel less able to mark theirprogress and fear that the next round of inflation will leave thempoorer. In a number of ways—such as introducing cost-of-living adjustmentsinto wage contracts and indexing the benefits of social welfareprograms—institutions have evolved to compensate for some ofthe uncertainty. But these institutions may sometimes only heightenthe arbitrary redistribution of income brought on by inflation—redistributionthat society often finds undesirable and unfair. In additionto these painful effects, moreover, inflation reduces the Nation'sprospects for growth. The reduction may not appear dramatic, but itimpairs the efficiency of the free-enterprise system and discouragescapital investment, innovation, and risk-taking.Rising prices, it should be remembered, are not in the aggregatesynonymous with a reduction in real income. When prices rise, someonereceives the additional revenues. And for the economy as awhole, rising prices have gone together with rising money incomes.But a wage or salary increase comes infrequently and in a large lump,while prices tend to increase all the time. Furthermore, a pay increasemay be viewed as uncertain and as a reward for effort, butprice increases seem entirely beyond a consumer's control. As aresult, a recent wage increase may be forgotten when the grocery billrises. Thus rising prices are often treated as something that directlylower real incomes, even when in fact for the Nation as a whole theydo not. Of course, the resulting anxiety is no less real.But when the country pays sharply higher prices to foreign oil producers,that does indeed lower its real income. We are poorer becausewe receive less oil than we did previously for the same amountof money. That would be true whether or not general inflation followedincreases in the price of oil. The induced inflation, in the formof generally higher wages, salaries, and prices, is not the cause of thereal income decline—the Nation's higher oil bill is.A similar phenomenon occurs when growth in productivity slows.Slower productivity growth leads to a slower rise in real incomes. A32