The Case Against 'Indexing': It Can't Protect Us All Equally Against Inflation
Economists seem to come lip with one fad a year and ÛÏindexingÛ is it for 1974. That is the notion that we can best face inflation by protecting everybody via an escalator clause. Indexing is neither a new idea (it was tried in Massachusetts in the 18th Century) nor a good one. The sooner we can dispose of it, the more quickly we can get on to the really serious business of fighting inflation.</br></br>At first blush, indexing has a plausible ring to it. Because inflation unfairly hits some parts of society harder than others, it would seem equitable to even out the effects via an automatic escalator for everybody and everything. But indexing by itself does nothing to reduce inflation. Worse yet, if this gimmick seems to protect us all against price increases, it will also erode the public and political support necessary to keep inflation from escalating.</br></br>But only at our peril can we forget that anti-inflationary measures are painful, unpleasant and unpopular. Fighting inflation means saying no to large and powerful groupsÛÓÛÏnoÛ to advocates of tax cuts, ÛÏnoÛ to proponents of further expenditure increases, ÛÏnoÛ to many potential borrowers, and ÛÏnoÛ to labor, business and government practices that reduce productivity.</br></br>Weidenbaum, former Assistant Secretary of the Treasury, teaches economics at Washington Univesity. This aticle is reprinted from DunÛªs Review.</br></br>Why worry about inflation if we all will be automatically protected? Unfortunately, we cannot really be completely protected against the effects of rapid price increases. We do not live in a closed economy. We already have seen that accelerating inflation at home means devaluation of our currency abroad. That brings deterioration in the terms of trade and declines in our real standard of living.