* The Carter administration still underestimates inflation. * Balancing the budget is only half the battle; to quench the fire, the government must stimulate productivity.
* An "explosive catch-up effort of wages and prices" seems likely unless checked by controls.
These are parts of a sweeping study of America's economic difficulties, sponsored by Brookings Institution, written by Barry Bosworth, one-time Carter wage-price czar, and part of an annual global survey issued by the institution.
The Bosworth survey comes against this background:
With assorted economic and diplomatic troubles, America's power has been declining in the world. Added to energy shortages and exploding prices, America is experiencing a collapse of its productivity growth. The cry heard around the nation is to cut spending and balance the budget: The House Budget Committee recommended a $16.5 billion budget cut only last week.
But economist Bosworth's message is that balancing the budget is, by itself, a negative step and that the times demand affirmative action to stimulate production. The government, he argues, is trying to check rising prices by reducing demands. It does this by tightening the supply of money and letting the cost of borrowing money rise sky high. This has the side effect, according to the Bosworth school, or reducing production, drying up investment capital, creating unemployment. And the amount of unemployment necessary to check inflation by the demand-restraint policy could be horrendous, says Mr. Bosworth. Increasing unemployment by 1 million people for two years will reduce inflation only 1 percent, he figures.
Joseph A. Pechman, director of Brookings economic studies, also emphasized the "sharp slowing of productivity growth." He said "some direct government intervention in price and wage decisions will probably be needed."
At a press conference, Mr. Bosworth recommended wage-price controls. This is a change since his days as director of the Council on Wage and Price Stability, when he told Congress (July 20, 1978) that controls "are simply not applicable in the kind of inflation we have today. Controls are short-term solutions to emergency situations."
Mr. Bosworth now sees a different, more lasting, and more sinister crisis. He says, "The role of the US in the world economy has changed significantly." Other countries have "sharply reduced" American dominance.
Mr. Bosworth comments:
"One of the most surprising aspects of the current inflation is that there has not been an explosive catch-up effort of wages and prices. . . . How long this can last is a cause for concern.
" . . . To reduce inflation to a tolerable level, fiscal and monetary policies of demand restraint must induce a recession. . . . A mild recession will have little effect on inflation. . . . The choice is rapidly being reduced to severe recession vs. wage-price controls."
" . . . Each successive round of government policy has consistently underestimated the magnitude of the problem. Each failure contributes to the loss of public confidence."
He proposed that the government establish a "regularly published scoreboard" that estimates the inflationary impact of relevant government actions and proposals.