US economy -- it could be nettlesome whoever lives at 1600 Pennsylvania Ave.
Washington — It is probable that neither Jimmy Carter nor Ronald Reagan can carry out his economic program in the way his supporters hope. * President Carter for three years has chosen the classic anti-inflation course, the credit crunch (demand and restraint) and there is still inflation and unemployment.In its main goal, the program has failed, at least till now. There is a remission of recession, however, temporarily at least.
* Mr. Reagan pins his economic hope on loosened regulations, reduced federal controls, and a massive, stimulative three- year tax cut. If the plan works, many doubtful economists will attribute success as much to additional outside factors as to Reagan's plan. They also see the possibility of more inflation.
External forces, domestic and foreign, have intruded on the American economic scene, probably for good. The days when economists thought that Keynes had flattened out the business cycle, once and for all, by alternate government spending and taxing are all but forgotten.
For more than 40 years we assumed that America would have an inexhaustible supply of indispensable oil, says US Transportation Secretary Neil Goldschmidt.
For more than 40 years we assumed that America's wealth was unlimited and that we could buy our way out of any problem.
For more than 40 years we assumed that American technology and American productivity were so advanced and so superior as to be unassailable in the world.
These assumptions are fading in the face of a more realistic world that is a challenge to the resilient United States. This past week the government intervened to support the steel industry, hard hit by foreign competition.And the giant automobile industry, which led the world from the Model-T to the postwar limousine, missed the turn on the demand for small cars, and is only now fighting to return to full-fledged competition with foreign imports.
The domestic economy seems to be improving, against a backdrop of a global economic slowdown. Unemployment at home is about 7.6 percent, and is expected to rise to 9.5 percent in early 1981.
Inflation, at a basic rate of about 10 percent, may also be higher by year end. But there now have been three successive months of improvement in estimated gross national product, the latest being August. US Treasury Secretary G. William Miller as long ago as May told Congress he thought that the worst of a "fairly moderate recession" was about over, and now other economists widely agree.
How about 1981? Will the Federal Reserve Board (Fed) play cat and mouse with the recovery by again raising interest rates as it already has begun to do? After all, that's the disagreeable job that Congress and executive branch wished on the unfortunate Fed -- to apply the anti-inflation brakes of higher interest rates when Congress and the President do not balance the budget, and when management and labor, by higher prices and wages, seek to run ahead of inflation rather than resist it.
Rejoicing over the end of a relatively mild and short recession is tempered here by the anxiety that inflation has not been checked, that various factors at home and abroad may set it off again, and that neither Carter nor Reagan may be able to control affairs in the new circumstances.
What are the new circumstances?
The US is now subject to the discipline of the international economic system much like any other country. This involves considerations of foreign exchange, oil, gold, trade, and other factors. Attempts by other nations to recover from the global slowdown will strain international cooperation. Will nations impose tariffs and try to "export" unemployment? Some nations may resent the new federal aid to the US steel industry.
At home, another factor will affect either a newly elected Reagan or re-elected Carter. There is a striking popular decline of confidence in government in America at all levels. It came out of Vietnam, Watergate, Iran, and was exacerbated by double-digit inflation, the energy crisis, the gasoline lines, and the sense of America's loss of world dominance as a nation.
They all influence the authority of Washington, the ability of government to intervene strongly in a complicated crisis in which there are sharply conflicting views and interests. There also has been a trend to assertiveness in Congress accompanied by a fragmentation of authority in the Legislature.
Suppose America's new president in 1981 asks for national self-sacrifice in the nation's wage-price policy. Currently the wage-price spiral seems unlikely to be broken save by moves that carry a high political and economic cost. One way is through credit restraint by the Fed. In time, this could produce unemployment and perhaps another recession. The cruel economic rule of thumb is that an increase of 1 percent in the jobless rate (about a million workers) will reduce inflation by about 1 percent, if maintained over two years.
The Fed's efforts to fight inflation by discouraging borrowing and raising interest rates have caused a surge in local mortgage rates across the country. If a home mortgage rate rises from 12 percent to 14 percent on a $75,000 mortgage, it adds $100 a month to the payments, and over the life of a 30-year mortgage $36,000 additional interest.
There is another choice in curbing the wage-price spiral: wage-price controls. Sen. Edward M. Kennedy (D) of Massachusetts urged these in the pre-Democratic National Convention primary battle. Many deplore such controls on the basis of past experience. It is possible that a combination of voluntary controls and demand restraint might curb inflation. But can an administration impose them? Once government adopts a system of voluntary or mandatory wage-price restraints it becomes responsible in the view of many people for all prices.
The battered economy offers challenges as well as difficulties.
In the years of full prosperity the US threw away its cities and moved into sprawling suburbs, neglected the railroads, and built superhighways for gas-guzzling cars. It allowed productivity to slide as industries aged into obsolescence. America now enters a tougher, more competitive, world. But that only makes the challenge greater.
Abroad, there is a different challenge. World population is swelling (though the rate of increase has declined) and vital materials, like oil, are approaching exhaustion. Retiring World Bank president Robert S. McNamara said this week that by the year 2000 some 600 million people may be living in "absolute poverty." Starving people create social instability. Global economics indicates a turbulent period ahead. The United States can do much to help the undeveloped third world to be self- supporting.
There is the immediate problem of oil. Here, fortunately, even as the Iran-Iraq war continues, there is a temporary global glut of oil. World reserve stocks are momentarily at an all-time high. The countries of West Europe as well as Japan have a 100-day oil supply, it is estimated. President Carter says the US could get along for perhaps six months if there were a complete shutoff.
Economics today is both an international matter and increasingly intertwined with domestic politics: rarely more so than in 1980.