Monetarists join the cry for a balanced budget
Boston — Usually economists of the "monetarists school" don't give too much of a hoot about relatively small deficits in the federal budget. They rank monetary policy as of greatest importance to the battle against inflation.
But it is different today. Such monetarists as Dr. Karl Brunner of the University of Rochester, Leif Olsen at Citibank, and Jerry L. Jordan at Pittsburgh National Bank are keen to see the budget balanced.
The reason is to a large extent psychological. They see it as a necessary move by the Carter administration to restore the credibility of its anti-inflationary policy.
The financial community has suspended judgment on the monetary toughness of the Federal Reserve System under its new chairman, Paul A. Volcker. Noted Dr. Brunner of Mr. Volcker: "He talks a good game. We will see if he can deliver."
But the collapse of the bond market reflects to a considerable degree the lack of faith in the Carter administration's "stick-to-it-ivity" in the area of fiscal policy. For one thing, President Carter promised to balance the budget by the end of his term in office. The budget submitted to Congress in January for fiscal year 1981 called for a reduced deficit from 1980. But looking at the fiscal 1980 experience, Wall Street just did not believe the President. It hopes to be persuaded somewhat when Mr. Carter presumably comes up with a tighter budget soon.
That 1980 budget called for a rise in outlays of only 8 percent. By the time Congress decided on a budget resolution last November, inflation had helped push the level of spending 11 percent higher than in the prior fiscal year. Then in January the President submitted an estimate that boosts that percentage to 14 percent.
Since many businessmen have experienced actual cuts in corporate budgets during a recession, they do not consider a 14 percent hike in expenditures "fiscal austerity." It sounds phony to them.
Then they read that the budget projections assumed an 8 percent inflation rate over the next four years. They also saw those assumptions including a 10 to 14 percent increase in nominal gross national production from the fourth quarter of 1980 to the same quarter in 1981. By the laws of economics, such assumptions depend on the Federal Reserve System's easing its tight money policy fairly quickly. In contrast, Mr. Volcker had been saying that it was the Fed's intention to gradually trim money supply growth steadily and surely over the next several years to bring down inflation.
Noted Dr. Brunner: "The financial community believed Carter and the bond market collapsed."
In other words, the nation's financiers doubted that budget deficits would be reduced nearly as much as President Carter talked about. This, they believed, would put pressure on the Fed to finance federal deficits by pumping up the money supply.
Of course, monetarist economists know that the Fed could in theory refuse such pressures and require the Treasury to finance the deficit by selling government bonds and notes to the public rather than the banking system. So deficits don't necessarily swell the money supply and stimulate inflation.
These economists primarily want the deficit eliminated for psychological reasons. If the public believes the government is dead serious about its anti-inflation policies, it will act accordingly.Workers will not demand such high wage hikes. Businessmen will not feel obliged to push up prices so fast.
Thus, greater credibility for the government's anti-inflation policy would help break the wage-price spiral. Presuming the Fed sticks to its targets for growth of the money supply, more of that new money would be used in the real provision of goods and services; less for simply keeping up with inflation.
That would mean a smaller increase in business bankruptcies and less growth in unemployment.
Says Pittsburgh National's Mr. Jordan: "The importance of restoring our central banks' reputation and credibility as an inflation-fighting institution cannot be overemphasized."
To help restore the Fed's believability, he suggested a declaration by all presidential candidates that they will support the central bank's anti-inflation stance until price stability is restored. He also wishes for a joint resolution by Congress mandating that the Fed persevere for as long as necessary.
Dr. Brunner wants similar action from the administration and Congress regarding fiscal policy -- something like a sworn declaration that the budget will be balanced and that future spending increases will be less than inflation, thereby reducing the proportion of national output moving though the federal government.
Only such measures, these economists believe, could reduce the social costs of the necessary anti-inflation program.