OPEC's tentative agreement to increase the price of oil again is but the latest unpleasant reminder of the inflationary pressures which will continue to beset the United States until it gets its economic and energy house in order. American public attention is shifting away from inflation to the deepening recession deliberately induced to curb it. But the fact is that curing inflation remains the longterm goal. The danger now is that election- year politics may spur the Carter administration to abandon a steady monetary and fiscal policy in the interests of getting the economy moving again. Congressional politicians, too, will be tempted to spend more money as a way out of the recession.
The temptation has to be resisted.
Most economists agree that some stimulus is needed. Unemployment, now at 7.8 percent, threatens to climb to 9 percent by year's end. The economy is experiencing a sharper decline than anticipated; real output is expected to drop in this quarter at an annual rate of 7 percent or more. To offset this gloomy news, inflation has begun to moderate as a result of the Federal Reserve's tight money policy. But if some stimulus is not provided now the recession will worsen. The question is, how much stimulus?
After the last recession, in 1973-75, the Fed began pumping up the money supply at high and even double-digit rates, thinking this would turn the economy around. It did, but it also produced another burst of inflation, the highest in the post-World War II period.
This time around more restraint and backbone are called for. Citibank of New York suggests that if the Fed pursued a policy of steady monetary growth from now on (that is, getting back to its original target rates after letting money supply decline at an 8 percent annual rate in the latest reported four weeks), economic recovery would be slower and unemployment would exceed 8 percent. But, it adds, the benefits would offset the higher social costs -- inflation would drop to an annual rate of 6 percent by the end of 1981 and to below 5 percent before mid-decade. This in itself would spur real economic growth.
An alternative course looks inviting in the short-run but, once again, holds out perils over the long term. The government, concerned about mounting unemployment, could opt for a swing to massive stimulus by increasing the monetary base at a 10 percent annual rate. In such case, forecasts Citibank, recovery would begin in the fourth quarter of 1980 instead of 1981 and joblessness would decline more rapidly. But, in its sobering words, "the costs of those ephemeral gains would be intolerably high." Interest rates would begin to soar again, inflation would be back to double digits by the end of 1981, and real economic growth would again be threatened.
It is clear that returning to stable economic growth in the US will be a slow and painful process. But we see no viable choice to the Federal Reserve continuing to exercise restraint and toughing it out.
This is not, however, to rule out a tax cut for the beleaguered American public -- and tax incentives for business to spur much- needed investment. The huge increases in Social Security taxes next year, the phasing in of the windfall-profits tax on the oil industry, and the added taxes paid because inflation is pushing people into higher tax brackets are expected to boost the overall tax burden by some $44 billion next year. Some relief is warranted and it is only a matter of timing. President Carter has avoided tax-cut talk because of his promise to balance the budget. But, with that goal already frustrated due to the recession, and with the election looming, it is not unlikely he will support a tax reduction (more accurately, prevention of an inordinate tax increase) if applied in 1981. Balancing of the budget, moreover, while it is desirable and might give the nation a good psychological lift, is not crucial at this juncture; a budget deficit will have relatively little impact in a $3 trillion-a-year economy.
There are, in short, no quick fixes for a difficult situation. Legislating big federal spending programs, or excessively accelerating the money supply, to stimulate the economy may seem attractive, especially in today's charged electoral climate. But this is a time for the national interest to prevail over politics. It seems to us that the presidential candidate will do best who has the courage to explain to the American people that the United States must lick the inflation ogre if it is to restore sound growth for all segments of society and compete effectively once again in the global marketplace.