Economic Report of the President

large firms. Even among large firms it may be desirable to exemptindustries like retailing, in which competition is likely to keep averageprices in reasonable relationship to costs. Market forces also make itunlikely that exempting small firms and competitive industries wouldlead to substantial inequities or to a failure to pass on to consumersthe benefits of wage moderation.CONCLUSIONSThere are no costless ways to reduce inflation. Using demand restraintalone imposes very large costs of forgone output and unemploymentfor modest reductions in inflation. A successful TIP canshift more of the effect of demand restraint from output to pricesand thus can cut substantially the costs of reducing inflation. Althougha TIP would itself impose administrative and efficiency costson the economy, the costs for a short period of time would be small.They would surely be outweighed by the benefits in reduced inflationand lower unemployment that a TIP would bring.It is useful to distinguish between two broad types of TIP, each ofwhich would have quite different economic objectives. The first wouldbe a continuous TIP that would be made a permanent part of the taxcode and that would set graduated rewards and penalties accordingto the size of a firm's wage (and possibly price) increases. Such a TIPwould be an attempt to make a major and permanent change in themarket system so as to encourage less inflationary wage and price behavioron the part of individual firms. This chapter has suggestedthat the administrative problems and the distortions introduced intothe wage structure would tend to grow over time, while the effect oninflation would decline. Thus, the costs of a permanent wage TIPwould soon exceed its anti-inflationary benefits.A second form would be a temporary hurdle TIP based on rewardsfor wage moderation and would be part of a broad public campaignfor voluntary restraint in wage and price increases. The objective ofsuch a TIP, perhaps applied for 2 successive years, would be to provideseveral downward shocks to the inflationary process, in effect reversingsome of the upward shocks which contributed to today's inflationrate. Although such a TIP would also involve administrativecosts and distortions in labor-market behavior, these costs would initiallybe far less than the benefits of the TIP in shortening the periodof restraint and slow growth needed to reduce inflation.As emphasized earlier, a TIP cannot substitute for demand restraint.The latter must also be present; otherwise, any gains producedby a TIP are likely to vanish quickly under the pressure ofexcess demand. Since a reward TIP would reduce budget revenueslike any other tax cut, it must fit into a budget plan that makes taxcuts possible. But if the growth of Federal spending is restrained, pe-67