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Income policy: Macro-economic tool of growth and development

Towfique Hassan
26 May 2023 00:00:00 | Update: 25 May 2023 22:46:09
Income policy: Macro-economic tool of growth and development

In the area of macroeconomic policy, we very often hear and talk about Fiscal and Monetary policy.

However, this dominating duet has now been expanded to a trio as many economists conclude that the deep-seated inflation problem facing the economy cannot be solved by reliance on fiscal and monetary actions, however well these might have worked in the past.

A more and more convincing case is being made for Incomes Policy, specifically for some variant of what is known as Tax based Incomes Policy.

Experience with incomes policy has been entirely with what may be called conventional incomes policy. A major issue in incomes policy today is the possible adoption of an unconventional or innovative form known as Tax based Income policy or (TIP). Since the Second World War (1946) it has been the responsibility of the government to work toward the achievement and maintenance of maximum employment, price level stability and a satisfactory level of economic growth.

In 1946, US enacted an Employment Act to achieve maximum employment, price stability and satisfactory level of economic growth.

Although such Employment Act had been a landmark in the economic legislation, its Passage in 1946 did not mean that the government was not aware of its responsibility in the area to which the act refers.

The 1946 act did in this sense replace what at best had been a vague and undefined sense of responsibility with an obligation that was somewhat more precisely defined.

In this regard it is interesting to speculate on what differences there would have been in the actions taken by the government during the years of Great Depression, if the Act of 1946 had appeared instead in 1926. Perhaps the Great Depression would have been much less severe.

As economists refer to in the broadest of categories to the three basic macro-economic goals of full employment, price stability and satisfactory level of economic growth, they similarly refer to in broad categories of monetary, fiscal and incomes policy as the basic types of policy employed as working toward one or more of the specified goals. Monetary and fiscal policies have been introduced in economic development generally. In developing the model of income determination specific monetary and fiscal policies designed to raise the level of real income and employment.

It may be well argued that an Act of the Employment kind could not have been passed in 1926 and that it was passed in1946, only because over the preceding decade legislators had become convinced that the government not only had the responsibility to look toward the attainment of the specific goals, but could make a truly significant contribution to the attainment.

This conviction stands in sharp contrast to one held by many before the World War II that could underlay what many have described as the ‘moralistic economics’. Those who accepted the moralistic economics adopted a “boom and bust” attitude toward business fluctuations. The causes of bust were found in the excesses and maladjustments of the boom speculation, unsound uses of credit, high living the like.

The severity of the downturn also depended on the severity of the ‘economic sins’ committed during the boom. Most importantly because of the moralistic economics did not recognize that with the necessary tools government could contribute substantially to the stabilization of the economy. Those who maintained that the government’s responsibility goes far beyond that imposed as if by1946 Act continued to work or legislation that would impose that greater responsibility.

Over the years the Act’s pros and cons were realized. So the economists refer in a broad category the three basic macroeconomic goals of full employment, price stability and a satisfactory economic growth, they similarly refer in equally broad categories to monetary, fiscal and income policy as the basic types of policy employed in working toward one or more of the specified goals, The macroeconomic goals quite apart from the problem of what is really meant by such loose terms as ‘full employment, price stability and satisfactory economic growth’ cannot really be held within the confines of the three terms that comprise the standard list.

At least two more major goals should be identified the goals of economic justice, the principal characteristics of which is an “equitable” distribution of income and the goal of economic freedom, characterized by the right of every person to change jobs, join a labour union , enter a business, own property, purchase desired goods and so many other things.

Monetary and Fiscal policy have been used in various context of economic growth. However, such uses were incidental to the development of the basic theory of income and employment and of certain growth and inflation theories.

It is through an appropriate expansion of aggregate demand, an economy in recession could be restored to full employment without running in to inflation and if through an appropriate contraction of aggregate demand an economy suffering inflation could have that inflation that inflation wrung out without suffering unemployment, monetary and fiscal policy would be all that is needed.

However, if a contraction of aggregate demand can only wring out inflation by putting the economy y through several years of severe unemployment and Zero or Slow growth, fiscal and monetary policies are inappropriate because they work by altering aggregate demand. This brings us to Income Policy which according to its appropriate support can control inflation in the economy.

In such context, Income Policy advocates do not question the need for proper fiscal and monetary policy, but they maintain that such policies alone are not enough. Income Policy approach that gets right down to the macroeconomics of what determines the prices of goods.

The rationale of Income Policy is inherent in the argument that there is stable relationship over time between the prices of particular goods and the unit labour cost of producing each of those goods. As such, in money wage rate, rise not faster than the productivity of the labour, unit labour cost will not rise. To slow the inflation rate requires that increase in the growth rate of the money wage, in one way or other be cut back until it is no greater than the growth rate of labour productivity. This is the essence of Income Policy.

Having a relatively close linkage between the rate of change inlabour cost per unit of output and the rate of change of the price level, there is little doubt that the goal of reasonable stability in the price level cannot be attained in an economy in which the compensation of labour per man-hour is pushed up at a rate well in excess of the rate of increase in productivity per man hour.

That is why a money wage rate that rises at the same rate as ‘labour productivity’ is described as ‘noninflationary’. On the other hand a money wage rate that rises at a more rapid rate is called ‘inflationary’. Apart from the abortive attempt to introduce a system of real wage insurance, income policy, for example, in US has all been of the conventional kind.

Direct con trolls have been the means of trying to hold price and wage increases to the explicit figure set as the standard for each in the 1970s several Tax based Income Policies ( TIP ). TIPs were an advanced plan. It uses taxes instead of direct control to restrict the rate of wage rate increase.

Economists who believe that the solution to the inflation problem is only to be found through appropriate monetary and fiscal policies. They raise objection to income policy attributing reason to distorting allocation of resources.

A review of US Income Policy reveals that a single national standard for wage and a single national standard for prices applicable to practically all employees and firms. For example, the October 1978 standards were a 7% pay increase limitation for the first year and a price limitation that over eighteen months would hold price increase one-half of a percentage point below the average rate for 1976-77.

There are always some exceptions to these standards, for example, a different approach is needed for firms not in business during the base period—but the general policy is a single national percentage standard. Under these condition what happens to firms in a rapidly growing industries may be unable to attract technical personnel unless more than the standard pay has been offered. These relative prices of different commodities and kind of labour are continuously changing in response to changing supply and demand conditions in free market, a system of conventional wage and price standard maintained over any length of time must unavoidably impose a high cost on the economy through its distorting effect on

resources allocation.

Government’s plan of attack on inflation differed from the conventional ‘demand side’ attack in which the weapons of restrictive fiscal and monetary policy are first brought into the battle, instead the emphasis was on the ‘supply side’ with fiscal policy designed to stimulate work effort, saving and capital formation and thereby a more faster growth rate of output. However, this plan of attack had no place at all in Income Policy. If the advocates of the TIPs are correct in their belief that price and wage setting procedures now in use make it impossible for almost any fiscal –monetary strategy to cure inflation without a disastrous depression there is nothing to turn, but Income Policy.

The writer is former Director General, EPB. He can be contacted at [email protected]

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