Hard Times Ahead

...Unfortunately, much of the rest of the economy—the bulk of manufacturing, agriculture, banking and insurance, medical and legal services—is subject, in the chaste language of economics, to market imperfection and downward price inflexibility...

...What would Teddy do about the economy...

...When the climate is favorable, tax subsidies represent windfalls for corporations which would have taken the same investment decisions in their absence...

...As a hedge against inflation, real estate is a splendid choice, so long as the inflation lasts...

...On the rare occasions when the Fed has seemingly defied an irate President, it is fair to assume that the Chief Executive was privately relieved to have the Fed to kick around for policies felt to be simultaneously essential and unpopular...

...Moreover, all parties are quietly aware that the Federal Reserve's independence will endure only so long as the agency isn't too outrageous about acting independently...

...The rules as exemplified by the fanciful scenario sketched in the preceding paragraph apply to a competitive economy...

...Jimmy Carter, to vary the zoology of a season that has celebrated human and equine asses as well as aquatic rabbits, is a gone goose...

...If you see one, please let me know...

...So, pace Vonnegut, it went...

...It would be pleasant to glimpse on the political horizon a Presidential candidate capable both of getting himself elected and presiding over effective economic measures...

...Inflationary expectations are stronger and inflation is more rapid...

...When business is genuinely bad, the investment outlook is too bleak to be transformed by tax policy...

...Senator Edward M. Kennedy (D.-Mass...

...praised the trio of dissenters in these terms: "For the first time, Fed members are wondering out loud whether it really makes sense to throw men and women out of work, and business into bankruptcy...

...Soaring gold and silver prices register popular distrust of paper money...

...is another joker...

...That sophisticated and cautious student of the economy, House Banking Committee Chairman Henry Reuss (D.-Wis...

...Blacks and women would lose recent employment and income gains...

...That's Jimmy Carter's bad luck...

...By institutional tradition, all Fed chairmen swear allegiance to sound money and stable prices, though the heavens fall...

...Now, if his fellow citizens were less cynical, and markets were genuinely competitive, this display of practically Roman virtue would suffice to calm down the country's big spenders...

...In plain English, auto manufacturers, steelmakers, aluminum producers, doctors and hospitals, among many others, exercise enough control over their markets so that they can choose between maintaining (or raising) prices when sales diminish, and slashing prices on a larger volume of business at smaller per unit profits...

...He has put the President on probation until the New Year...

...But Teddy opposes mandatory controls, which might have some actual impact upon inflation, no less firmly than Jimmy...

...They include effective limitations upon increasese in profit margins as well as wages, imposition of downpayment and maturity controls over consumer and mortgage credit, and a sharp cut in the Social Security payments made by both employers and their employees...

...Regrettably, it is probable that a large part of the proceeds will be misdirected to corporations as investment incentives...

...Reassured that economic policy is in the firm grasp of a principled central banker, real estate speculators would contemplate the end of the long boom in home prices, businessmen would shrink their inventories, and the rest of us, the rabble of consumers, would start saving a bit, paying off some of our debts and resuming faith in the value of the dollar...

...One of the dissenters, Nancy Teeters, a recent Carter appointee previously affiliated with the mildly liberal Brookings Institution, commented that "There is some point at which interest rates contribute to inflation rather than restrain it," an utterance of common sense rare among economists and virtually unique in the rarefied company of central bankers...

...Worse still, a growing number of Americans now have a stake in continued inflation—notably home owners, the bulk of whose net worth is locked into real estate...

...His constituents' misfortune is that at best they can look to a New Year that will bring a little less inflation and only a moderate increase in unemployment...

...This historical reminder is the clue to a superficial puzzle...

...When in the middle of September the Fed raised its lending rate to commercial banks to 11 per cent, thereby stimulating a rise of the prime rate to above 13 per cent, Volcker's margin of victory among his own Board colleagues was 4-3...

...Well, he has confided to assorted interviewers, including the omniscient Evans and Novak, there really isn't very much wrong with the Administration's economic policies that, as Britain's Harold Wilson used to say, the smack of firm government cannot cure...

...The Fed's policies have done some damage and will probably do more before they are amended...

...In addition, while their impact upon consumer and investor confidence is a psychological intangible, the lame duck status of the Carter Administration and the deadlock between the White House and Congress over energy policy are likely to confirm the public impression that the President's grip upon domestic policy is no firmer than upon foreign affairs...

...The Administration has run out of ideas...

...William McChesney Martin, who served five Presidents, and Arthur F. Burns, who counseled a mere three, spoke, wrote and testified incessantly in favor of balanced budgets, universal frugality, a return to long-held American values, and the importance to constitutional democracy of the Fed's independent role...

...Almost alone, G. William Miller, now Secretary of the Treasury, believes that the recession is half over...

...During the sharp 1974-75 contraction, the deepest dip in economic activity since the 1930s, Ford and General Motors raised sticker prices an average of $1,000per vehicle...

...Carter, need I say, is no Eisenhower, and to his credit he has so far at least refrained from exploiting foreign policy for domestic electoral advantage...

...If there is any agreement among the forecasters, it is with Paul Samuel-son's Newsweek guarantee that in the waning months of 1979 the economy is certain to deteriorate...

...The last measure is the only genuinely anti-inflationary and anti-recession policy available...

...Today's prospects for inflation fighters are even grimmer than they were in '74-'75...

...But much more probable is unemployment that will climb to the 9 per cent level of 1974-75 and a recession that will endure into 1981...

...Here and there, to be sure, our economy really is competitive...

...Alas, there was usually less consistency in Federal Reserve conduct than in the rhetoric of its leaders...

...As president of the New York Federal Reserve Bank, he was noted for favoring higher interest rates and slower growth in the money supply than his remarkably enlightened predecessor in Washington, G. William Miller...

...However, unemployment, up to 6 per cent in August, is likely to touch 7 per cent by Christmas, enroute to 8 per cent (one of the Administration's own internal forecasts) or worse in 1980...

...If against precedent the Fed set a ruinous course of monetary policy, the White House and Congress would jostle each other for the honor of reducing its powers, curtailing its independent role, and converting it into an agency subject to the instructions of the politicians...

...It reduces business costs for employers, maintains consumer purchasing power, and eases the pressure for wage boosts to catch up with the cost of living...

...Although the standard forecast envisages a comparatively mild downturn in 1980, there is good reason for the gloomier view...

...Teddy would implement the wage-price guidelines with more "vigor...

...For the record, then, the Fed talks a tough line and, soon or a bit later, yields to determined White House pressure—sometimes, unhappily, doing damage along the way...

...Unless the economy improves (some hope...

...Carter has foresworn the mandatory controls that as a candidate he sensibly espoused...

...A few weeks ago, the London Economist, usually an indulgent observer of American politics, sadly noted, perhaps a trifle belatedly, an embarrassing absence of original thinking on the part of Carter economists...

...In brutal fact, an effective assault upon inflation implies running the economy for several years at 9-10 per cent unemployment and destroying the capital assets of millions of homeowners...

...Newly installed Federal Reserve Chairman Paul Volcker is running the only economic policy show in town, and he was a third choice after David Rockefeller and General Electric's Reginald Jones, who found the President's offer one they could readily refuse...

...The outlook is far from promising...

...We should all be grateful that no sane politician will pay the political price for such a program...

...Hundreds of billions of dollars of potential Gross National Product would be sacrificed...

...In other words, nobody's acting according to the hopes of central bankers and the rules of economics because nobody, even one suspects Volcker himself, believes that tight money will last much longer and that the inflation pace will significantly slow...

...Retailers, garment manufacturers, textile converters, commercial printers, and small entrepreneurs in general respond sensitively to the fluctuations of demand for their products and services...

...Thus far, Volcker has behaved in precise congruence with his public reputation...

...It is conceivable that the sickening 13 per cent escalation in the cost of living will slow a percentage point or two...

...As unemployment rises and Gross National Product declines, pressure for a major tax cut will mount...

...It is true that a sufficiently severe and protracted recession will in time compel even our friendly price-setters to lower their charges...

...The social costs would be even more fearful...

...Common sense and a quantity of econometric evidence agree that these incentives are ineffective...

...On the Fed's Open Market Committee, which sets interest rate policy, he was a consistent hawk...

...Teddy, an all but announced candidate already, will be compelled to challenge Jimmy, a narrow victor over his killer rabbit, in the primaries...

...The policies that are essential are politically impossible...

...Inventories have already begun to accumulate and as consumer purchases continue to shrink, layoffs will spread through the economy...

...He also has refused to exercise one of the few powers he does possess, authority to issue credit restriction instructions to the Federal Reserve...

...Although the '74-'75 episode did noticeably reduce inflation, long before inflationary behavior and expectations were squeezed out of the economy, the exigencies of the 1976 campaign season compelled the Ford Administration to revert to expansionary action...

...The last President re-elected in slack economic times was Dwight D. Eisenhower, who was helped along by the Middle Eastern and Hungarian crises, as well as by the inexplicable affection Americans felt for him...

...That paladin of financial probity, Arthur F. Burns once again, conveniently pumped up the money supply and promoted a preelection boom in 1972 for the greater glory of his old friend and political ally, Richard M. Nixon...

...There of course is the rub...

...On humane grounds, there is something to be said for a parliamentary system that would spare us the painful spectacle of a President whose term has ended an inconvenient 15 months before the expiration of his White House lease...

...Although General Motors' initial bargaining offer to the United Auto Workers exceeded the 7 per cent limit set by the government's wage guideline, Alfred Kahn, the Administration's now invisible anti-inflation tiger, surfaced last month to applaud the news of a peaceful settlement before its terms became generally available...

...Energy distortions, the failure of wages to keep up with inflation, and the heavy burden of consumer debt are disquieting elements...

...Certain that the primary economic problem in the country is inflation, Volcker, like many another fully employed professional type, professes himself willing to endure recession as the price of controlling inflation...

...Faced by shrinking demand, sellers would cut prices, inflation would obediently subside, and soon the economy would perform on a sounder basis...

...Where have I seen that word before...

...Matters will never arrive at such a pass...

...Youth unemployment, perilously high already, would double or triple...

...Classic British understatement...

...But as Burns complained eight years ago when he occupied Volcker's hot seat, "The rules of economics are not working in quite the way they used to...