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BPEA Article

Federal Government Initiatives to Reduce the Price Level

Robert W. Crandall


THEORIES of the origins of inflation and the effects of price increases on a mixed market economy abound; as a result, there is no widespread consensus as to how to restrain inflation efficiently while maintaining high employment levels and a healthy rate of economic growth. There is little dispute, however, that the government's varied microeconomic policies have substantial price effects. At a time when inflation is a major concern and there is no accepted general policy for its containment, the federal government should explore ways to lower the price level through a variety of basically microeconomic policy decisions. This paper focuses on options that are currently available to the federal government for lowering the price level. While these options are disparate and not easily synthesized into a simple framework, most have a similar theme: pursuing objectives through direct rather than indirect taxation, where "indirect taxation" includes government-mandated cost increases for producers of private goods and services. For a number of reasons, government programs are often financed through increases in producer costs rather than through direct payments from general government revenues. In some instances, such as when user taxes are levied, there is an equity or efficiency reason for doing so. In others, such as health and safety regulation, the reason is largely pragmatic: mandating cost increases for producers is simply the easiest (not the most efficient) means of achieving the desired objective. But in still other cases, such as agricultural policies or minimum wage legislation, programs are financed through increases in the price level because direct payments to the targeted population might not pass the scrutiny of the electorate.