Prudent and Responsible?

Carter's program draws blasts from both Democrats and Republicans

"There are no economic miracles waiting to be performed."

So declared Jimmy Carter last week in his annual Economic Report to Congress. For a President plunging into an election year, the message was unprecedentedly candid: a 183-page catalogue of woes, pain and frustration that contained a frank admission that the nation was heading into a recession. It also made clear that Carter fully expected to be campaigning for renomination and re-election in a period in which inflation would still be hung up in double digits and unemployment would be growing. But for all the President's candor, the policy he outlined in his message and the new budget that preceded it were getting blasts last week even from Democrats. Said Arthur Okun, chief economic adviser to President Lyndon Johnson: "This is a program for muddling through an election year. It does not make hard choices."

As Carter himself conceded, the nation is suffering the kind of economic ills that demand hard choices. The outlook for 1980, as set forth in the message: recession. After growing by a paltry .8% in 1979, the nation's output of goods and services is expected to decline this year by 1%. Administration officials tried to turn that lemon into lemonade by wistfully predicting that the slump "would be largely over by midyear." But that may prove optimistic.

Unemployment. By year's end the number of jobless is expected to climb by 1.5 million to almost 8 million, or 7.5% of the labor force, the highest level since February 1977. The rise is already under way: the Government reported last week that unemployment, which had been in the 5.9% range for 17 months, jumped in January to 6.2%.

Inflation. Despite weak growth, price pain will abate only slowly, if at all. Through the year, the rate is forecast to drop from today's 13.3% to 10.4%. Even if that happens, the 1979-80 period will go into the record books as the first peacetime case of back-to-back years with double-digit inflation.

The economy last week continued to throw out confusing signals about the long awaited recession, but the general trend was underlying weakness. The index of leading economic indicators, which foretells business trends, was absolutely flat in December, after pointing down in October and November; three months of consecutive declines in these indicators is normally considered evidence of a coming slump. Steel and auto orders sank sharply in December, but general factory orders were up a surprising 1.3%. Productivity, as measured by the output of workers per man hour, declined by 1.6% during last year's fourth quarter and dropped .9% for the whole of 1979. That was only the second time since 1946 that productivity had fallen for a whole year.

Carter's assertion that no forceful new policy moves, miraculous or otherwise, should be expected or called for in the face of the gloomy facts drew a burst of rebuttals. In making his demand for a six-month wage and price freeze and gasoline rationing to deal with the inflation and energy problems, Carter's fellow Democrat Ted Kennedy lambasted the President for following ineffective "Republican economics." Republicans, and a good many Democrats as well, took vigorous exception to Carter's claim that his 1981 budget of $616 billion--including a deficit conservatively estimated at $15.8 billion--is "prudent and responsible." With considerable justification, they charged that it was just the opposite: an overfed package of programs that could only help to fuel inflation further.

As outlined in the budget and economic report, the Carter economic program for this election year is one of fighting inflation, but not too fiercely, lest the battle offend some members of the Administration's fragile coalition. The budget proposes increases in both defense and social outlays. Spending on the military is to rise by $15.3 billion, or 3.3% after inflation. But spending on "butter" will also rise; there will be $5.2 billion more for housing subsidies, for example, and $2 billion in additional funds for youth unemployment programs. The budget suggests only a token $9.7 billion in reductions, most of which are expected to be rejected by Congress. Complains Republican Alan Greenspan, chief economic adviser in the Administration of President Gerald Ford: "In conditions such as these, business-as-usual on the non-defense side is irresponsible. The budget is much too inflationary."

The budget also rests on a very unstable financing foundation of spend high and tax high. The real tax burden on individuals and corporations is expected to increase by more than $50 billion in the fiscal year starting Oct. 1. The President holds out the possibility of a reduction later this year if the economy weakens sharply and unemployment soars. Many economists agree with Carter's decision to bypass a tax cut now. Alice Rivlin, director of the Congressional Budget Office, told a House committee that "such a simple prescription" would worsen inflation. But a cut may prove politically irresistible, if the backlash from the highest level of taxation since World War II grows.

Congressional leaders pointedly criticized the President for failing to fulfill his 1976 campaign promise to balance the budget this year. Oklahoma's Henry Bellmon, ranking Republican on the Senate Budget Committee, charged that the new budget would "worsen our inflation problem." The committee chairman, Maine Democrat Edmund Muskie, praised the Administration's candor about the likelihood of a recession, but added: "I must confess disappointment that the proposed budget does not show a balance."

Although the deficit will be inflationary enough even if it stays close to Carter's $15.8 billion forecast, critics worry that it could rise much higher. For one thing, the 3.3% hike in military funds was decided upon before the Soviet invasion of Afghanistan; congressional hawks are already saying that the defense proposals should be increased. In any case, the Carter record on holding down budgets, for all the Administration's talk of austerity, is poor. Under the 1980 budget, which is in effect through next September, spending will rise at least $32 billion above the original projections; the deficit, originally forecast as $29 billion, has expanded to $40 billion. It is only because 1980 spending has grown so markedly that Carter can claim that his 1981 budget is "virtually level" with the present one.

Another aspect of Carter-nomics that drew fire last week was National Security Adviser Zbigniew Brzezinski's assertion that defense spending had to go up because previous Republican Administrations had neglected it. In a letter to the Wall Street Journal, former Ford Aide Brent Scowcroft noted that Carter has actually cut the defense outlays projected by President Ford by $38 billion since 1977; he has also canceled the B-l bomber, shelved the neutron bomb and slowed work on the MX missile. Said Scowcroft: "Even in an election year there ought to be some limits to the manipulation of history for partisan purposes."

The President's program is weakest, however, on inflation. Anti-Inflation Czar Alfred Kahn is now left with little more than a hope and a prayer. Since the budget remains in the red, the burden of fighting higher prices falls ever more heavily on the Federal Reserve and its policy of tight money and high interest rates. The inflation struggle received another setback in January, with the recommendation of the President's Pay Advisory Committee that the Administration's wage guidelines be increased from 7% to a broader 7.5%-to-9.5% range.

Carter's economic message stressed the importance of stopping the spillover of 1979's inflation into higher wages, which would turn the price spiral up another notch. Yet the new standard was an invitation for steeper wage settlements this year and more inflation later.

In answering charges that his anti-inflation policy has not worked, the President has adopted a blame-it-all-on-OPEC strategy.

Two weeks ago Carter said: "All the increases for practical purposes of inflation rates since I have been in office have been directly attributable to increased OPEC oil prices."

Aides quickly admitted that the President had misspoken and that OPEC was not the sole cause of inflation. But last week Economic Adviser Charles Schultze was again using the OPEC alibi and blaming price problems on "oil-led inflation."

Of last year's 13.3% inflation, only 2.2% was traceable to OPEC price rises (see chart); this year, says Sara Johnson, senior economist at Data Resources Inc., that number may rise to 3%. An equally important factor in inflation has been the Administration's self-inflicted economic wounds: the rise in the minimum wage from $2.30 to $3.10 per hour; $132.1 billion worth of deficit spending in the past four budgets; encouraging the Federal Reserve to follow an easy-money policy; and the "cheap dollar" tactic that fostered the buck's 28% fall, against the West German mark since Carter's Inauguration. The economic report conceded that since 1976 the underlying inflation rate, independent of all temporary factors like oil and food price increases, has risen by some 3%, to about 9%.

Carter aides figured a 15% to 20% run-up in oil prices as part of their 1980 forecast. M.I.T. Oil Economist Morris A. Adelman argues that OPEC has adopted a tactic of "permanent brinkmanship," which will keep the oil supply just short of world demand, while continuing to raise prices. The U.S. must fight back by substantially cutting consumption. But Adelman fears that "our national rhetoric is balanced by our reluctance to do anything."

The Administration's election-year economic policy attempts to please most of the voters most of the time by avoiding the difficult choices among defense and social priorities. By trying to have both, it is likely to ensure only higher prices and lower growth. During the twelve years that inflation has been building up, Presidents have looked for painless, quick solutions that would get them past the next election. Carter now anticipates that national attention will remain focused on foreign concerns and off inflation. Says Economist Okun: "The President is running for re-election as military Commander in Chief. He has good reason to hope that nobody pays much attention to the domestic economy."

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