Trying Anew to Bash Inflation

As prices soar out of control Carter searches for new economic ideas

"It's really scary. This inflation thing is frightening because we do not know what causes it, or what to do about it. The economists go to their computers, plug in the data,' and out comes information that says that nothing like this should be happening. It's very, very scary stuff."

Rattled ruminations of an inflation-dazed economist? Hardly. The grim statement, a shockingly frank assessment of the price explosion that is menacing the U.S., comes from a senior official of Jimmy Carter's Administration. Moreover, it accurately reflects the drift and disarray that have characterized the Administration's economic policy over the past three years. As Federal Reserve Chairman Paul Volcker and Treasury Secretary G. William Miller fiddle with the depressing statistics, Carter seems able to do little more than cast his eyes heavenward. Meanwhile, a frantic search for another new anti-inflation program, which could be announced as early as this week, is under way.

Though he came to office with inflation at less than 5% and the economy growing briskly, Carter has presided over economic and financial turmoil that has nearly tripled the rise in consumer prices, flattened growth, ballooned the federal debt and pushed interest rates to their highest levels in the nation's history. Last week the rate banks charge their best corporate customers rose a quarter-point to 16.75%. The so-called leading economic indicators, which seek to portend future business trends, fell in January, the fourth consecutive monthly decline. Many economists regard this as a sign that the nation is near a recession.

The renewed upward thrust of inflation was pushing the topsy-turvy economy stage center as the public's biggest single concern. With the 1980 presidential campaign now in high gear, the question of what to do about the nation's worsening economic malaise is fast becoming the key election issue. Complains Houston Housewife Betsy Clark, 48: "I don't think there's a candidate running, including the President, who can handle inflation. My family is fighting high prices by putting off major house improvements and putting our money into art and antiques instead."

All across the land, the call has gone out to "do something, do anything" to slow runaway prices. Democratic Presidential Challenger Edward Kennedy continues taunting Carter to come out and debate the Massachusetts Senator's recommendation for mandatory wage and price controls. On Wall Street, respected Investment Banker Felix Rohatyn last week called for a yearlong wage and price freeze and other inflation-fighting measures to stop "a slide toward national bankruptcy." Even in normally free-spending Congress, cries went up to fight inflation by slashing budgets. A bipartisan group of 44 Senators signed a petition calling for $26 billion in spending cuts next year.

Meanwhile the President began mulling over the hard choices in the renewed war on inflation. The major options: 1) draconian cuts in the fat budget for fiscal 1981 and perhaps even for 1980; 2) Executive action to enact a program of credit controls that would curb the growth of bank lending to businesses or consumers; 3) a new excise tax on gasoline in order to cut energy consumption and curb the inflationary import of foreign oil; and 4) a request to Congress for permission to levy wage and price controls.

There was no indication, however, that the emerging program would solve the fundamental befuddlement in Administration economic management. Carter himself exhibited the confusion last week by saying at separate points in a single interview that the nation's economic situation had "reached a crisis stage" and that his economic policies "suit me fine."

Others were hardly complacent. Snapped J. Robert Fluor, chairman of Fluor Corp., a leading manufacturing and construction firm: "Carter has vacillated so much that I find it difficult to know what he wants or doesn't want." Sneered a New York banker in reference to the President: "Inflation has caught us between a marshmallow and a hard place."

The Administration's scramble to re-tune its policy began almost from the moment that Carter first received his routine advance copy of the Labor Department's latest Consumer Price Index data on Feb. 21. As expected, January's 1.4% increase, or a compound annual growth of 18.2%, was the steepest of any month since August 1973. The figure made plain enough what White House Economic Advisers Charles Schultze and Alfred Kahn had been warning about since well before Christmas: rising oil prices, higher interest rates and a frantic "buy it now before it costs more" inflation psychology were pushing prices out of control.

That, coupled with the fear that any rise in inflation was bound eventually to benefit Senator Kennedy in the Democratic primaries, galvanized the Administration into action. Though he had originally been scheduled for a Sunday-night telephone session with voters before last week's New Hampshire primary, the President himself scrapped the politicking and plunged into an anti-inflation brain-storming session. From 6 p.m. to 8:15 p.m., Carter, along with Chief Domestic Adviser Stuart Eizenstat, Budget Director James Mclntyre, Chief Economic Adviser Schultze, Energy Secretary Charles Duncan and Treasury Secretary Miller, reviewed the glum news and options in the Treaty Room of the White House.

One adviser urged an immediate Camp David summit of national leaders. Eizenstat proposed mandatory wage and price restraints and won some support. The President, though, remained opposed on the basis of the Nixon freeze and controls in 1971-73, when prices exploded once the controls were removed.

The conflicting advice at the meeting exemplified the confusion of Carter's economic policymakers, who increasingly resemble an orchestra in search of a conductor. Treasury Secretary Miller is described by White House economic aides as "very slick and facile," but has been distracted by questions as to the accuracy of his testimony to Senate investigators about $5.4 million in bribes paid while he was chairman of Textron Inc.

So economic policy runs constantly at sixes and sevens. Anti-inflation actions, such as the wage and price guidelines, have repeatedly been half measures taken halfheartedly. Says Yale's William Nordhaus, a former member of the President's Council of Economic Advisers: "The Administration backed off from its anti-inflation policy all along the way. The policy has been a hollow shell."

The Carter economic rhetoric has long diverged from the Carter reality. Having campaigned on a promise to balance the fiscal 1981 budget, the President piled up a mountainous and inflationary cumulative deficit that by the end of this fiscal year in September is expected to total $116 billion. The fiscal 1981 budget that the President submitted to Congress last month is now likely to add as much as $30 billion more to the federal debt.

Though the Administration clearly runs the risk of raising expectations too high over what is likely to emerge from its policy review, economists both in and out of Government now increasingly expect to see at least some stiffer measures to limit the explosive and inflationary growth of credit. Says Gary Wenglowski, director of economic research for Wall Street's Goldman, Sachs investment firm: "I'd give odds of 60 to 40 that the Administration's new package will include credit controls."

Unlike wage and price restrictions, which require congressional authorization before enactment, the President could impose credit controls immediately under a 1969 federal law. Anticipation that the White House was on the verge of actually issuing such an order kept the bond market, which is highly sensitive to inflation expectations, in a state of wild agitation all week.

Federal Reserve Board Chairman Volcker, who would be responsible for administering any program of credit controls, remains opposed in principle to the concept. He objects, in addition, because any limitation on consumer credit would have a disproportionately severe impact on two sectors of the economy that are already suffering: housing and auto sales.

Although Volcker still retains enormous respect from the business and banking communities, he is beginning to come under some criticism for failing to tighten down on credit and the money supply enough to cool off inflation. Says John F. McGillicuddy, chairman of New York City's Manufacturers Hanover Trust: "Money has not been particularly tight in large money-center banks. It has been expensive, but not all that tight." Selective credit controls, which could perhaps include a boost in the down payment required for a house or auto loan or an increase in the minimum monthly payment on a Master Charge or Visa card, would be a quick and easy way for the Fed to try to accomplish what a rise in interest rates has so far failed to achieve. Predicts a top Administration policymaker: "Volcker is still philosophically opposed to controls, but I think he's beginning to budge."

A renewed effort to cut federal spending is also gathering force. The 1981 budget submitted only five weeks ago is virtually a dead letter. Administration officials are now hoping to reduce the proposed $15.8 billion deficit to zero. Some top economists like Arthur Okun want an extra $15 billion or so in federal fat removed from the current budget, which ends in September.

There is plenty of room to cut and trim in Carter's bulging budget. A study by the Congressional Budget Office shows that $50 billion could be saved in the 1981 budget, and fully $544 billion over the following five years, by trimming such boondoggles as impact aid for schools, a program that dishes out tens of millions of dollars yearly to some of the richest school districts in the nation. Carter aides last week were examining potential cuts in Social Security programs, food stamps and veterans' benefits. A whopping $6.9 billion could be saved by discontinuing federal grants to often wealthy state and local governments, but the President has avoided that politically unpopular move.

Despite the new frugal spirit on Capitol Hill, Congress may still blink when it comes to actual budget reductions. Senators and Congressmen have long records of willingness to cut every program --except ones that affect them or their districts. The result is lots of spending and few cuts. But if inflation is ever to be controlled, Congress must be willing to reduce even its sacred pork-barrel programs.

Cutting the budget and reducing the explosive growth of money and credit are both essential to the long-term improvement in the nation's inflation prospects. But the most vital task of all is the adoption of an energy policy that sharply and lastingly reduces dependence on foreign oil. During 1980, the nation's ever climbing bill for imported oil will rise to $90 billion, a 20-fold increase since the 13-nation OPEC cartel first began pushing up its prices seven years ago.

Last week a House-Senate conference committee approved a key measure in President Carter's energy program by adopting a $227.3 billion windfall-profits tax on oil companies. This tax is part of the phased decontrol of oil prices. By allowing the controlled U.S. price to rise to the world level, which now averages $30 per bbl, the Administration hopes that energy consumption will be reduced and domestic production increased. The President is expected to sign the bill later this month.

Foreign money markets and finance ministries will be closely watching the development of the new Carter anti-inflation program. Although the dollar has remained strong on exchange markets during the past few weeks, a weak policy from Washington could set off another run on the dollar. Former West German Central Bank President Otmar Emminger urged the President to adopt an "emergency package." Said he: "Gradualism is not the answer when you have such a deeply embedded inflationary psychology." But officials abroad remain skeptical. Concluded a top official in the West German Economics Ministry: "They know what they have to do in Washington. But they're afraid to bite the bullet."

The demands from all quarters to do something--do anything--about inflation show the deep American concern about this malignant problem. President Carter's attempts to slip the blame off onto Congress for failing to adopt his energy program fast enough or onto OPEC for raising prices are not being accepted. Only 2.2% of last year's 13.3% inflation was caused by OPEC price increases. West Germany has faced the same OPEC problems, and imports more of its oil than does the U.S. Yet 1979 inflation in that country was 5.5%. Says former Federal Reserve Chairman Arthur Burns: "The American people are now refusing to believe the demagogic cry that OPEC and the oil companies are to blame. The people are asking for leadership, but unfortunately, they are not getting any. We need more pain and more leadership."

Carter's herculean task in drafting and then selling another anti-inflation program is to propose measures sufficiently tight that they will break the inflationary psychology. He must prove to the U.S. public that sharply rising prices have not become a permanent part of the American way of life. If the President fails, the consequences would be serious, both politically and economically. Says former Carter Economic Adviser Nordhaus: "If this keeps up, we're going to be living in a world of 10% or 11% inflation indefinitely." In fact, if present trends continue, inflation at those levels could look like the good old days.

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