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<text> <title> (1980) The Economy:"Scary" </title> <history> TIME--The Weekly Newsmagazine--1980 Highlights </history> <link 07602> <link 07408> <link 07342> <link 00095> <link 00113> <link 00105> <link 00216><link -0001> <link -0001> <link -0001> <article> <source>Time Magazine</source> <hdr> March 17, 1980 NATION The Economy: "Scary" </hdr> <body> Inflation rages on, and everybody is getting angry As cries of alarm filled the air last week over the news that inflation had hit 18% per year, the Carter Administration was orchestrating a symphony of its own responses. "We have reached a crisis state," the President declared. Television crews filmed determined officials, sleeves rolled up and ties loosened, working in normally free hours to cut the budget that Carter himself had sent to Congress only a month earlier. As the week began, Cabinet members slogged through snow-clogged streets to their offices for Sunday meetings to draw up the spending cuts that the President had ordered placed on his desk by 8 a.m. Monday. Hundreds of businessmen from all over the country and scores of Congressmen were summoned to the White House for consultations. Rumors raced through Wall Street that, besides striving to balance the fiscal 1981 budget, the Administration would order tight credit controls. Then, just as suddenly, came delays and equivocations. The Administration's senior economic officials summoned selected reporters to say that no anti-inflation program would be announced for the time being and the spending cuts for fiscal 1981, which begins Oct. 1, probably would total only $15 billion--significantly less than the $20 billion widely touted, and not enough to balance the budget. In fact, though they did not say so, there is good reason to believe that even after all the reductions, the deficit will be almost as large as the $15.8 billion that Carter estimated in the first place. Worse, said the Congressional Budget Office, the deficit for the current year might climb to a stunning $47 billion, more than $7 billion bigger than the Administration's latest projection. And forget broad credit controls: there will be no outright limits on the sums that banks can lend to businesses, and certainly no restrictions on how much consumers can borrow to buy houses or cars. Only a requirement that consumers pay credit-card bills more speedily--maybe. The Administration had some reason for its caution. Carter's advisers stressed that their program had to be credible; they would recommend only the spending cuts that they had some assurance congress could accept. That ruled out any immediate major cuts in the most voracious tax-eaters: the major "entitlement" programs, such as Social Security ($117.9 billion), veteran's benefits ($20.8 billion) and unemployment compensation ($15.6 billion). And Administration officials stressed that there has been no final decision on anything, and will not be until shortly before the President makes a major economic-policy speech, possibly this week--though even that is uncertain. But for the moment, all signs are that the new Administration program, such as it is, will fall far short of supplying the shock treatment that many economic experts believe is necessary to break the whirling inflationary cycle. Meanwhile, there are indications that White House uncertainty is making inflation worse. Said one Senate Banking Committee staffer about credit controls: "The Administration blew it." The mere rumor of controls, he said, caused businesses to borrow extra money so that they would have it before any controls took effect. Similarly, Treasury-Secretary G. William Miller and Anti- Inflation Adviser Alfred Kahn acknowledged in a letter to heads of 500 major corporations that some companies seem to be raising prices in anticipation of wage-price controls. Surveying the scene, New York Investment Banker Felix Rohatyn declared: "We are headed for a national bankruptcy." Said Detroit Banker Robert M. Surdam: "Scary." Across the nation, the worsening inflation and the Administration's inability to deal with it have caused widespread dismay. "It has been six or eight months since I've taken my wife to a restaurant," grumbles John Conroy, and accountant in Canton, Mass. David Traver, a student and part-time department-store clerk in Atlanta, cannot replace a car that blew its engine and could not be repaired. Says he: "When I was 19, I could afford to buy a new car. Now I'm 26 and I can't afford to buy a used car." He rides a bus or catches rides with friends to work. George McCoy, a law-enforcement officer in Chicago says, "I'm trying to find a house but it will take me ten years to earn the down payment." Ted Buchalter, a pharmacist in Beverly Hills, Calif., notes that "even the kids are complaining; inflation has pushed their bubble gum up to three cents." The troubles have caused ugly social strains: citizens blame just about everybody in sight for the inflationary mess. "If anyone is at fault, it's the oil companies and other big business," says Detroit Housewife Eunice Leopold. A Beverly Hills surgical fitter who uses the professional name of Sally Ann sees the villains as "a combination of the unions and the farmers." Some even blame themselves. Says Oak Park, Mich., Housewife Marsha Avrushin: "People are to blame in part because they're greedy. They've got to have the bigger house, the extra car, the new refrigerator. And there's no waiting for a year or two; they've got to have it now." Officials agree with her. Chairman of the Council of Economic Advisers Charles Schultze blames 60% of the problem on the inflationary psychology that keeps spreading. But most of all citizens are angry at the Government. Says Troy, Mich., Housewife Marilyn Pallotta: "We've had to get cheaper cuts of meat and cut out snack goodies like potato chips. Well, I resent it when I cut and the Government doesn't." Cassie Marsh, a Detroit secretary and wife of a retired insurance agent, complains that Government bureaucrats "keep getting more raises, adding more and more people and getting fancier offices. You never hear of them cutting back." For many voters the economic mess is overshadowing all other U.S. problems. Says Rick Osban, service manager for a St. Louis truck manufacturer: "I'm more worried about the inflation than about anything the Soviets may do overseas." Just about every economic figure released last week heightened the national anxiety. Producer (i.e., wholesale) prices jumped in February at a compound annual rate of 19.6%. That was a bit less than the January rise, but still an enormous increase, and it occurred despite a drop in food prices that is very unlikely to continue. The figures for January and February taken together, said W. John Layng, assistant commissioner in the Bureau of Labor Statistics, "indicate that price pressure may be accelerating." Interest rates scaled absolutely unheard-of peaks. Several banks raised the prime rate on loans to business to 17 3/4%, and a big bank in Chicago went up to 18%. The rate on U.S. Treasury bills, a risk-free investment, shot to 15%, vs. 10% only last September. The stock market shivered and sank through a nervous week. The Dow Jones industrial average plunged to 821, down 43 points for the week and 83 points since 1980's high of 904 reached only a month ago. Even what would normally be good news had a gloomy tinge. Unemployment dropped slightly, to 6% of the labor force in February from 6.2% the month before, and new orders received by manufacturers rose 3.6% in January. Those reports only intensified a paradoxical fear among bankers, economists and even some politicians. They worry lest the Administration's policies will not bring a recession this year. In their view, only a s slump can curb inflation; if it does not occur, and prices keep skyrocketing, the economy may be headed for a real bust later. "The figures show that we are still probably not in a recession," said Texas Senator Lloyd Bentsen, chairman of the Joint Economic Committee, with disappointment clearly audible in his voice. If the national anxiety has a good side, it is that the mood has finally penetrated to Capitol Hill. Congressman after Congressman asserts that letting inflation rage unchecked--and voting against anything that might seem likely to slow it--would be political suicide. The search for a way out of the economic morass has come to focus on a balanced budget, not as a panacea but as an indispensable first step toward getting the economy back under control. Besides, nothing else has seemed to work. Still, cutting even $15 billion out of the totals devised by Budget Director James McIntyre will be an extremely painful process. Says one policymaker: "The dilemma is that defense costs are going to go higher than even the budget now states. So where are we left to cut? In state and local finances, the poor and the old, the disadvantaged. It's nothing we enjoy doing." To share the pain, and round up support for what in the past has always been a very controversial process, the White House two weeks ago began an unusual attempt to shape a national and congressional consensus. It even brought the Republicans into what it hoped would be a bipartisan economic polity. The effort got under way with a kind of scaled-down version of last summer's "domestic summit" at Camp David. Top industrialists and Wall Streeters, representatives of farmers, blacks, elderly people, consumers and civic groups were called into the White House for a weeklong series of meetings with the President's top aides. Eventually 300 people attended, and their observations filled a 56-page notebook that Presidential Assistant Anne Wexler presented to Carter's economic policy group. The recommendations were, as might be expected, thoroughly mixed. Many of the participants supported the idea of slashing federal spending--but they carefully did not advocate cuts in programs that help the people they represent. The Administration also began meeting with congressional leaders. In a night session at the White House, Senate Majority Leader Robert Byrd of West Virginia suggested that Senate and House Democrats form teams to work with the Administration's policymakers in drawing up a unified set of budget reductions--in Bryd's words to TIME Correspondent Neil MacNeil, "a package with which we can walk the plank"--and then take it to the Republicans for their ideas. Both Acting Senate Minority Leader Ted Stevens of Alaska and House Republican Leader John Rhodes of Arizona brought groups of their followers to meetings with Miller to trade budget-cutting ideas. The Republicans at first were extremely suspicious. Some feared that the President was trying to get them to take the risk of voting for unpopular spending reductions that Democrats would not support. "Who wants to be the fellow who votes against the veterans or cancer research?" asked Stevens. Nonetheless, the Republicans agreed to look over whatever the Democrats came up with. Despite all the careful orchestration, the partial list of potential cuts that emerged by week's end was not impressive. The White House ordered its budgeteers to try for only a $5 billion whack out of the entitlement programs--a timid move, since these programs swallow 77% of the entire budget and are rising at a dizzying pace. One option that Administration officials say they are considering is to slow the rise in Social Security benefits by modifying the formula that ties those benefits to the Consumer Price Index. That brought an outburst that typified the inflation fighters' problems. Cyril Brickfield, head of the American Association of Retired Persons, wrote to President Carter that doing so would "cause millions of older people to suffer a severe reduction in their purchasing power." The remaining $10 billion in cuts will fall largely on relatively new programs that have not yet developed a powerful constituency. Some samples: at the Labor Department, $1.6 billion will come out of job programs. For example, the number of public-service jobs to be created in 1981 will be cut by 70,000. The Department of Energy is targeted for a $1 billion slash, mostly by buying less oil to put in a national reserve to guard against future supply interruptions. The Department of Health and Human Services will cut $700 million primarily from training and research activities. Much more could be done, if the President and Congress could summon the will, and many possible reductions would cause little if any hardship. One example: Government departments go on a spending spree at the end of each fiscal year to get rid of every cent that Congress has authorized them to pay out. The Government has built a ten-year stockpile of office furniture that is being stored in warehouses. Aid to so-called impacted school districts dishes out tens of millions to some of the wealthiest districts in the country. Balancing the budget will not by itself stop inflation. It must be accompanied by other weapons: a continuing curb on growth in the money supply, measures to increase productivity and lessen U.S. dependence on foreign oil--and, unhappily, probably a recession. But the biggest current spur to inflation is a feeling among citizens that prices will rise forever, so that they must spend before their dollars get still cheaper. The spending in turn boosts prices. Some signal of Government determination to check the spiral is needed to break this inflationary psychology, and a balanced budget is the best--indeed, nearly the only--one available. When You Start to Squeeze" The current inflation has been largely fueled on credit (as has U.S. prosperity). Collectively, Americans owe $150 billion in commercial bank loans, $115 billion in car loans and $29 billion on bank credit cards. Groping for new weapons to fight inflation, the Administration is taking a look at whether credit controls will help. The prospects are not good. Under the never invoked Credit Control Act of 1969, the President has the authority to ask the Federal Reserve Board to restrict bank lending and/or consumer borrowing in any of eleven specified ways, including flatly forbidding "any extensions of credit under any circumstances the board deems appropriate." Thus the President could ask the board to put a ceiling on the dollar amount of loans that any bank could make, or restrict particular types of loans, or accomplish the same purpose indirectly by regulating rations of banks' loans to their capital. He could ask that consumers be required to make larger down payments on purchases of houses, cars, refrigerators or indeed just about anything, and to pay the rest of the price more quickly. Selective credit controls have been tried several times, most recently during the Korean War years, 1950-52, but economic experts say that they had little measurable effect. As long as people have money to lend, borrowers will find a way to tap it. Large corporations unable to borrow from domestic banks could borrow from abroad, or issue bonds or commercial paper (in effect, big short-term IOUs); a consumer could take out one of the personal loans that were permitted or borrow on his life insurance to buy a car. Says J.H. Tyler McConnell, president of Delaware Trust Co.: "When you start to squeeze one area, the money just bursts out somewhere else." Also, bankers argue, controls unfairly hurt small companies and low-income consumers who need credit the most. The Administration seems convinced. It has been considering a number of possibilities, but the only significant step it is believed to ask the board to take is to impose some kind of curb on all credit cards. It might put a lower ceiling on the debt that a consumer could run up on a card, or require speedier repayment of outstanding balances. </body> </article> </text>