Blind Faith

THIS FALL KING JIMMY chose Alfred Kahn, a curious cross between the court jester and the court sage, to serve as chairman of his Council on Wage and Price Stability and Adviser to the President. Thus far Kahn has engaged in witty wordplay with his inimitable foe--inflation--and found it doesn't succumb to his funnies as readily as his other, more human audiences. Since the Vietnam war inflation has gained an increasingly prominent position on the roster of the nation's problems--the Consumer Price Index indicates that prices have doubled in the past eleven years. And unless Carter with Kahn's help succeeds in slowing the ascent of prices, the President may find himself rudely deposed in 1980.

In the past couple of months, Kahn has come out with some one liners, as jesters and wise men will, that probably made his boss laugh uncomfortably. After Carter had announced his wage and price guidelines, for instance, Kahn pulled an Andy Young, saying he feared the nation might be in for a "deep, deep depression," words an allegedly Democratic President would rather not hear from one of his top economic advisors. The next morning, Carter summarily dismissed the remark as "idle talk," but the inflation fighter was to be heard from again. On a T.V. news interview he captured the Administration's it-will-all-work-out-if-we-just-pray-hard-enough attitude when, with a mischievous twinkle in his eye, he said that in the future he would say the word banana as soon as that wicked word depression overcame him.

Unfortunately, expunging the word from the executive vocabulary won't remove the danger of Carter's Republican-like policies putting more people out of work. Having replaced "depression," which conjures up memories of the 1930s, with the more innocuous and scientific-sounding "recession," Carter is still trying to preach away the danger implied by the meaning of both words. Rejecting the "myth that we must choose endlessly between inflation and recession," Carter in his State of the Union address assured the American people that "together, we build the foundation for a strong economy with lower inflation without contriving either a recession with its high unemployment, or unworkable mandatory government controls." But moralizing won't stop inflation, so Carter will probably try to summon up the preacher's other techniques of salvation--gentle persuasion and cajolery--talents the President did not use to great effect in the last session of Congress. Before his plan has a chance of success, he will have to convince Congress to accept his "lean and austere" budget, Labor to hold down its wage demands, and Big Business to limit its price hikes. Along with miscellaneous other programs, these are the steps that Carter sees as necessary to curb rising prices.

FOR ALL THE FANFARE about inflation being public enemy number one, Carter's target inflation rate for 1980 of 6.3 per cent is shockingly modest, especially in light of the sacrifices in public welfare his plan would require. In real terms, his proposed budget would reduce the appropriations for social services by about 15 billion dollars while allowing the nation's arms arsenal to continue growing. Though some cuts of redundant or unnecessary programs may be justified, the proposed slashing of federal jobs programs, which would wipe out over 150,000 jobs provided by the Comprehensive Employment and Training Act, and practically eradicate the Youth Conservation Corps., does much more than eliminate wasteful government spending--it exposes the President as a man with little commitment to millions of jobless Americans. Today's unemployment rate of six per cent is fine by Jimmy Carter. And apparently, so is the higher unemployment rate his in-house economists boldly predict for the year's end if Carter's proposed budget cuts and ever-higher interest rates come to pass. It is more than a little ironic that the people who suffer the most from high inflation--the poor, the jobless, the sick and the elderly--would bear the burden of a shrinking federal budget. With interest-group politics at its zenith, the weak and disorganized would, as usual, lose out. According to a Prentice-Hall estimate, for example, the recently passed changes in corporate taxation (from a normal and surtax basis to a graduated tax), will reduce those taxes by about five billion dollars--enough to pay for Carter's job cuts more than five times over.

If the President is counting on big corporations to take up the employment slack caused by his programs, he may have a grim surprise awaiting him. Allowing them to keep more of their profits won't cause them to create many more jobs. The Department of Commerce reports that since 1970 net corporate profits have risen 270 per cent--and unemployment has soared as well.

The question is, will these budget cuts slow inflation? Unfortunately, the answer is a qualified no. While the cuts may shave a little off the inflation rate, deficit spending is not the main source of inflation. As Carter himself has noted, several essential items such as food, housing, medical care and energy are the most pressing sources of inflation. Deficit spending may lower the amount of money in the economy and so affect aggregate demand slightly, but there is no guarantee that it will affect the inflation rate in the guilty sectors.

ON THE ENERGY PRICING front, Carter's maneuverings to raise oil prices--allowing the maximum increases permitted by law and even considering other regulations to further raise prices--are appalling. When discussing deregulation of competitive industries in his State of the Union address, he shrewdly avoided mentioning his efforts to raise prices in one of the most concentrated, oligopolistic, profitable industries in the economy--big oil. Not only do the top eight petroleum refining companies possess 14.5 per cent of the the market, they also control the other stages of the production process. And as anyone who has taken Ec 10 knows, the oil industry does not fit the classical model of perfect competition. The vertically integraged oligopoly does not set its prices at MC equals MR, but at the highest prices consumers will pay without hurting the corporation's profits. Combined with OPEC's 1979 price increase of 14.5 per cent, Carter's hikes will push the price of gasoline and the size of utility bills even higher.

At Carter's most recent press conference, one reporter asked the president to react to the fourth-quarter profits of the oil companies which reached 48 per cent, 72 per cent, 44 per cent and 134 per cent in light of the president's request that workers in the oil industry hold their wage demands to seven per cent. Carter answered that, like all good Americans, he would "like to see a good balance between prices and profits."

What happened between 1977 and 1979 to the president who was committed to regulation of oil prices and who launched this broadside on the oil industry at an earlier press conference:

We live in a nation and we believe in the free enterprise system, where market forces determine prices. But the oil and gas industry is not part of that system because prices are not free. They're heavily influenced by decisions made outside our country by the OPEC nations and they are heavily influenced by some control over the rate of production by American companies.

And with an inevitable shortage of oil and gas which we all recognize, I believe, without dispute, prices have gone up drastically in the last few years; they're going to go up some more. That is inevitable.

But the question is: Who will profit from these prices and to what degree?

Carter seems to have decided the question in the oil companies' favor. His actions with regard to oil prices make a mockery of his anti-infaltion rhetoric, and probably more than counteract any decline in inflation that would be achieved by his budget cuts.

THE PRESIDENT'S SUPPORT of higher interest rates at the Federal Reserve Bank is inflationary, as well. Since January of 1977, the Federal Reserve Bank has increased its interest rate ten times, pushing the commercial rates even higher. In January of 1977 the interest rate offered by private banks was 6.25 per cent. T. Rowe Price Associates, a large Baltimore investment firm, predicts the rate will double to 12.5 per cent in 1979.

The impact of this usurious interest rate will be both inflationary and recessionary. The high cost of interest, which directly increases the cost of everything consumers buy, especially for a home which is paid for over many years, will inflate prices while constricting demand for goods and labor. Though the latter may tend to depress prices, the former, given the exorbitant interest rates, will in all probability overwhelm the deflationary advantages. And in the case of high interest rates, it is once again the less wealthy who are priced out of the market, or to put it in more human terms, kept from owning homes and buying cars.

While Carter advocates stricter enforcement of anti-trust laws, even if they were rigorously applied, the American economy would still be dominated by oligopolies. And as the chairman of Carter's own Council of Economic Advisers, Charles Schultze, noted in his 1959 study Recent Inflation in the United States, when the structure of the market is such that prices rise in response to greater demand, but do not fall when demand declines, the result will be an increase in average costs, hence a rising inflation rate. As consolidation of the market has quickened in the last several years (there were twice as many mergers and acquisitions in 1977 as in 1975), the Fortune 500 have gained even more power over pricing. These days, big corporations don't use their profits to increase their own productivity--they just buy someone else.

THE IDEA BEHIND Carter's wage and price guidelines is good, though the price increases allowed to industry are not exactly miniscule (they are asked to hold their price hikes to a half percentage point below the average rise in 1976-77). If corporations are setting their prices at inflationary levels, the government should intervene. But the President has acknowledged that he has no tangible means of enforcing them except through the pressure of public opinion. He can't encourage a consumer boycott of violators or withhold federal contracts from them because it would be over-stepping his presidential authority. If it becomes clear that big business is flaunting his guidelines, smirking at them as they did at Gerald Ford's ridiculous WIN buttons, Carter should reconsider his vehement rejection of mandatory controls.

When President Carter formulated his anti-inflation program, he either forgot or dismissed the rhetorical question he posed two years ago in a statement to the American people: Who will profit from these prices and to what degree? The answer to the question is sadly predictable.