Riding the Volckerwagen

FED TAKES STRONG STEPS TO RESTRAIN INFLATION, SHIFTS MONETARY TACTIC --Wall Street Journal, October 8

DOLLAR UP SHARPLY; EUROPEANS APPLAUD U.S. ECONOMIC CURBS   --New York Times, October 9

DOW IN WORST DROP IN NEARLY SIX YEARS   --New York Times, October 10

VOLCKER ASSERTS U.S. MUST TRIM LIVING STANDARD   --New York Times, October 18

40 PER CENT IN SURVEY SAY INFLATION IS MAJOR ISSUE FOR 1980 RACE   --New York Times, October 19

ECONOMISTS aren't the only people who don't understand what's happening to the American economy; their confusion just shows more than anybody else's--they're supposed to understand. But the public today hears only conflicting reports--"We're sailing in uncharted waters," "This is unexplored territory," and a growing fear that the 50th anniversary of the 1929 disaster may be more than a mere commemoration.

Paul A. Volcker, the cigar-chomping chairman of the Federal Reserve Board, sent America off on its latest economic wilderness adventure by announcing two weeks ago an anti-inflation program that did not just raise the discount rate--the Fed's interest rate on money it lends to member banks--but changed the very nature of how the Fed controls the money supply. Instead of trying to curtail the boom in credit by manipulating interest rates, Volcker announced, the Fed would henceforth apply direct controls to the money supply, raising member banks' reserve requirements and using other methods to keep cash out of circulation.

The world jumped, in different directions. International financiers praised Volcker's move; after all, he announced the policy immediately after returning from an International Monetary Fund conference in Belgrade, where those same financiers had most likely given him a pep talk for such a program. Stock market investors ran scared, seeing only the deepening recession Volcker's plan would induce. Liberal politicians didn't like this talk of lowering the standard of living for the sake of such unromantic concepts as "managing the money aggregates." Bankers, who had always looked to the Fed as a bellwether for interest rates, were now free to set their own rates, and became insecure, as well as a bit surly.

But the most turbulent reaction came from the economists. Called upon to use their science to explain one of its most unsettling real-world applications, they broke ranks in characteristic confusion, and gave the nation nothing more than a picture of academe at its worst--a group of grown men playing with charts, tables and numbers, more interested in defending their own theories and schools of thought than in helping the nation understand its economic agony.

The monetarists, those epigones of Milton Friedman who are among the only Americans with reason to rejoice over Volcker's moves, waffled. For the first time a financial official seemed to be taking their advice to heart; conservative monetarists have called for direct control of the money supply for years. But Friedman wrote a week after the program's announcement that the new Fed policy had to be fully carried through or it wouldn't work. In other words, if the policy reduces inflation then the monetarists will take credit, but if it doesn't they can say their ideas failed because Volcker adulterated them.

WHILE ACADEMIC ECONOMICS roils in disagreement, Volcker has set the terms for a larger national debate from now till the 1980 elections. No one doubts that inflation is the American public's white whale, the unknown menace the government must first locate and then destroy. But experts and laymen alike disagree over where to begin looking. Liberal economists and their political bedfellows argue that narrow monetary policy can't solve domestic inflation when well over half that inflation traces its lineage to the tankered waters of the Persian Gulf. If OPEC intends further price hikes--as it apparently does--then to make headway against inflation Volcker will have to squeeze America's economic arteries tight enough to cause gangrene. Paul Samuelson, Ec 10's law-giver, calls this "sadism."

But for now the monetarists are in control, and they have tied President Carter's hands as well. He couldn't come up with an anti-inflation policy of his own that businessmen wouldn't laugh at, so he's stuck with Volcker's by default. And we will suffer, in the coming months, through the recession that will, undoubtedly, cause the "drop in living standards" Volcker and businessmen everywhere prattle about, with all the compassion of a Hammurabi.

The standard of living, however, can crumble in different ways. Volcker's chosen poison is to take up inflation's slack by letting prices and business production outstrip the consumer's buying power. As Andrew Tobias has pointed out, though, the U.S. pays $65 billion annually to foreign oil producers, and that by far should be the chief target of any anti-inflationary program. Let the "living standard" that has Americans riding mammoth cars and wasting electricity fall, not the standard that keeps food on their tables and money in their savings accounts.

Instead of fooling with "monetary aggregates" and free-floating interest rates--which the public doesn't understand, and would probably fight if it did--the federal government could take steps to enforce gasoline conservation, either directly by legislated requirements for Detroit or indirectly by an exorbitant gas tax that would force car-makers to produce more efficient autos. There would be inevitable problems to work out, but the public would see a concrete step against inflation much more comprehensible and palatable than Volcker's fiddling.

WHEN Carter and Sen. Edward M. Kennedy '54 (D-Mass.) face off in the coming economic debate, as much will depend on the wording of questions as on what people answer. That New York Times poll of October 19, for example, states that 40 per cent of Americans believe inflation is the country's worst problem. Another 20 per cent say energy is the biggest problem. For so many people to sunder the two issues--and for the Times to go along--is appalling, as though you could separate the political problems of oil and gasoline from their price per barrel and gallon.

But why should people understand that inflation and oil prices are bound up when their top economic officials and their media economists, like Newsweek's Friedman, tell them they aren't? Volcker's path leads to economic chaos, not because economists don't understand how it will work, but because it ignores principles even non-economists can understand.