Bondage and Discipline

SPEAKING with the tepid fervor of a Calvinist who has repressed even the heat of his Puritanism, President Carter last Friday solemnly painted his own vision of how the nation can at last conquer inflation and recapture past economic glory. It is a narrow vision, with no bold initiatives to harness the energy and resources of the American people. Instead, it demands they submit passively to "pain" and "discipline." Fifteen times those dolorous syllables rolled from the President's pursed lips.

The question, as always, is who will suffer the pain, who will discipline whom. Carter's answer exhibits his bondage to impotent ideas and powerful interests. His proposals are designed for an old-fashioned inflation caused by excessive demand. This approach allows him to administer the pain to those members of the public least able to fight back, while avoiding any assault on preserves of corporate power actually responsible for much of the rising costs behind the current inflation.

Credit controls and a balanced budget are Carter's methods of limiting demand. The balanced budget is a fetish likely to accomplish little. Carter himself points out that every budget but one since 1961 has run a deficit--yet we managed to sustain minimal inflation during many of those years. The $13 billion Carter wants to cut from the budget--even the $18 billion in cuts he mistakenly promised his national television audience--would not significantly cut inflation. John Kenneth Galbraith, Warburg Professor of Economics Emeritus, has said that "in a two-to-three-trillion dollar a year economy, it is hard to see what differences these cuts will make."

The cuts will, however, make a significant difference for those who lose needed programs. Carter, prepared to accept the political benefits of espousing a balanced budget, does not have the self-discipline to disclose where most of the cuts will fall until after primaries in the urban centers of Illinois and New York. Inflation adviser Alfred Kahn implicitly admitted as much in his response to questions about the delay: "I'm not privy to political decisions made at the White House."

Still, many of the targeted areas have been revealed unofficially or can be guessed from comments by Congressional budget conferees. Several job programs are due to be reduced or dropped. School lunches and health care for children will likely be cut back. Energy and food aid for the poor will suffer. Carter is presenting large savings in federal aid to states and cities with typical sleight of hand. He intends to eliminate the states' $1.7 billion portion of general revenue-sharing, about half of which goes to education. Since Illinois, New York and some other states pass their share on to localities, the administration said Monday it would seek several hundred million dollars in compensation for cities and counties that would be hurt the most. But with his other hand, Carter is expected to pull back $1 billion in anti-recession aid to cities and another $265 million in mass transit grants. Local governments should not celebrate too soon.

If reducing the deficit is a political imperative, there are alternatives to disciplining the young, the elderly, the unemployed, and the residents of declining cities. Sen. Edward M. Kennedy '54 (D-Mass.) wants to eliminate tax writeoffs for intangible oil drilling costs and for accelerated depreciation of high-income housing, saving $4.5 billion. He also feels we could maintain our defense without a new nuclear-powered aircraft carrier, Rep. James Shannon (D-Mass) suggests cutting back tax credits for money American companies pay foreign governments. Rep. David Obey (D-Wis) recommends raising the 46-per-cent top corporate tax rate to 48 per cent again, as well as imposing a 5 per cent surcharge on individual incomes above $50,000.

"Our whole society," Carter admonished, "the entire American family, must try harder than ever to live within its means." His proposal to withhold income taxes from dividends and interest, as is now done with wages, is a fair step in the right direction. Otherwise, his measures tend to demand sacrifices in the common cause by those who are already struggling merely to obtain, at inflated prices, the necessities of life. Closing tax loopholes is the more humane route. Last year, profits for 1200 American industrial corporations, banks and utilities surveyed by Business Week, rose an average of 22 per cent over 1978. The loosest belts should be tightened first.

CARTER'S REGIMEN of pain and discipline is designed to ease inflation by slowing the economy, at the price of lost jobs and government programs. But he is accepting this price with little hope of achieving anything but the appearance of action. A "senior Administration official" told The New York Times, "The balancing of the budget will not have an immediate impact on inflation, nor will the other actions." He said the measures were directed at the "long-term aspects of inflation."

Yet Robert Russell, director of the Council on Wage and Price Stability, warned before Carter spoke that double-digit inflation would continue through the 1980s.

Carter's other proposals are destined to be as ineffective as his budget cuts. The credit controls leave the bulk of consumer credit--borrowing for homes, cars and other durable items--untouched. Carter will require smaller companies to report price changes to the Council on Wage and Price Stability, while he is also going to raise the standards for pay increases. The latter move may be justified, but it is hardly a blow against inflation. In addition, the Council will hire more staffers. As Alfred Kahn concedes, "the wage and price program is always a kind of marginal thing."

The oil import fee, amounting to ten cents a gallon of gasoline, will wipe out any gains from the rest of Carter's program by raising the consumer price index by more than half of 1 per cent, by administration estimates. Called a "conservation fee," it is really a budget-balancing hedge against possible Congressional failures to ratify the president's spending cuts. In this case, it may face legal challenge because the 1962 law authorizing import fees stipulates they cannot be used as a revenue source.

The final contradictory element in Carter's program is his pledge to "provide tax relief to encourage investment" once the budget has been balanced. This intent meshes poorly with the administration's stated disappointment that "Retail sales have remained strong," "Employment is still up," and "The widely expected recession has not materialized."

Apart from the obvious political considerations, the administration privately anticipated the only real effect of the program would be psychological. Inflation feeds on expectations of future inflations, so a program that looked like it would work--could work. Thus Fed Chairman Paul A. Volcker comments on the limited credit controls, "What we're talking about is not a huge part of the credit scene, but it's a showy and symbolic one." John L. Murray, president of Universal Foods, sums up the general business reaction to Carter's program when he says it is "essentially symbolic, and it's too late for symbols. Something more substantial would be in order." The Wall Street Journal acidly characterizes Carter's prescription as "Have another arsenic." Most importantly, the financial markets have not responded as hoped.

The kind of policy Carter is pursuing can only succeed if he does more than, in the Journal's words, "trim the fingernails of the federal budget." But budget cuts deep enough to satisfy business would come at too high a human cost and would very likely bring a depression. A new direction is necessary: Carter should impose price controls immediately. Then the task of raising output by putting Americans back to work can begin. Programs to make the nation more energy-efficient are the best way in the long run to stop inflation, by improving productivity and lessening dependence on foreign oil. This entails efforts to revamp buildings, industry and transit which would employ many more people--and which would signal the end of bondage to outmoded economic ideas. President Carter can use his discipline on those, like the oil companies, who could use it, and give the rest of us a shot at the Puritan work ethic.