Sizing Up a Hectic Four Months

President Carter's sharp turn toward fiscal conservatism in his first months in office has distressed and divided his liberal supporters, while generally cheering up conservatives--but so far at least it has not changed the outlook for a continued strong economic expansion. Those are the dominant impressions of TIME'S Board of Economists, who gathered last week in Manhattan for an all-day discussion of trends and forecasts. The meeting was the board's first chance to size up the new President's performance in shaping economic policy, and during his hectic four months in office Carter's line has changed significantly. He has, for example, abandoned his plan for $50-per-person tax rebates, given balancing the budget by 1981 priority over starting welfare-reform or national-health plans, and stressed containing inflation as much as creating new jobs.

These switches produced some odd shifts in the board's usual conservative-liberal arguments. Grinning broadly, Alan Greenspan, a Manhattan business consultant who was President Ford's staunchly conservative chairman of the Council of Economic Advisers, pronounced himself "probably the happiest of all the board members" with Carter's economic policies; no one disagreed. On the other hand, Democrats Walter Heller of the University of Minnesota and Arthur Okun of the Brookings Institution, who usually back each other up, fell into some good-natured jousting over the wisdom of Carter's dropping the tax rebate. After Okun defended the shift,

Heller remarked: "Now that we have heard from the conservatives, we can hear from a liberal." Replied Okun: "I'm waiting to hear what justification Walter comes up with."

On one point, however, the economists were nearly unanimous: the pace of the nation's business upswing will continue to be fairly brisk, even without as much stimulation as Carter once proposed to give it. Most board members believe that real gross national product (discounted for inflation) could well expand at an annual rate of 7% in the second quarter before slowing somewhat. They foresee the economy rising by 5.8% to 6% from the fourth quarter of 1976 to the fourth quarter of this year.

As a result, most members forecast that the unemployment rate, now at 7%, will by year's end decline to about 6.5%, the lower end of the Administration's target range. Okun noted with satisfaction that in the last eight months of 1976 the economy was creating an average of 125,000 new jobs a month, while in the first four months of this year the rate has speeded up to 325,000. Said Joseph Pechman, director of economic studies at Brookings: "The rest of the year is in the bag."

Small Victory. Except for inflation, that is. The rate of price increases has speeded up with the economy: in both March and April wholesale prices shot up at an annual rate of 14%--in part a result of the winter freeze. While no one expects that pace to continue, most board members think that the rate by year's end will still be 6% or more. Robert Nathan, a Washington consultant, noting sharp rises in industrial commodity prices and the inflationary impact of escalator clauses in union contracts, believes that prices at year's end could be climbing at a pace of 7%. Beryl Sprinkel, vice president of Chicago's Harris Trust & Savings Bank, is worried that a rapid expansion in money supply --about 11% lately by one measure --could lead to sharp price boosts.

That brings up one major element of Democratic dissatisfaction with Carter: most of the board's liberals view his anti-inflation policy as weak. The policy rejects not only controls but wage-price guidelines, and even public jawboning. It relies on business and labor leaders to discuss their plans privately with the White House before seeking wage or price boosts, but does not formally request them to do so.

The Administration did score one small victory last week in getting a steel price boost shaved down. Two weeks ago, Republic Steel and Youngstown Sheet & Tube raised prices 6.8% to 8.8% on some widely used products. At about the same time, however, U.S. Steel Chairman Edgar Speer breakfasted in Washington with Council of Economic Advisers Chairman Charles Schultze, who urged him to hold the increase to 6%. Last week U.S. Steel did so, and the rest of the industry fell into line. Several Board of Economists members nonetheless view such gentlemanly jawboning as inadequate to stop inflation. Nathan and Pechman predict that a disappointed President will eventually move to far more vigorous and public intervention in wage-price disputes.

Discontent with anti-inflation policy is only one part of the general liberal unease about Carter's economic performance. Heller, Nathan and Pechman believe that the economy could use still more stimulus to bring down unemployment faster. They note that Carter is now proposing a fiscal 1977 budget deficit of $48.7 billion--$8.5 billion less than the one projected by Gerald Ford.

Bipartisan Panning. As to the President's energy program, most Democrats believe that it goes in the right direction, but they agree that it has flaws. For example, the proposal to return to consumers money collected in higher taxes will boost living costs and add to the Consumer Price Index. To hold down the C.P.I., the Democrats would prefer that the money be used to pare payroll taxes or increase revenue sharing to states and cities. Republican Greenspan would push for greater decontrol of prices despite congressional antipathy toward oil companies. Greenspan believes that the very existence of a price-regulating bureaucracy creates uncertainty for oilmen and inhibits investment for increasing production.

Carter's proposals to shore up the sinking Social Security trust fund also came in for some bipartisan panning. The President plans to ask Congress for sharp increases in Social Security taxes paid by employers, much smaller increases in taxes paid by workers, and a diversion of general tax revenues to Social Security financing for the first time (TIME, May 16). Republican Sprinkel objects that the tax on employers will raise their labor costs and discourage them from hiring workers. Okun believes that employers will pass the increase on in higher prices, adding to inflation. He would shift the cost of paying medical expenses out of Social Security and fund them from general revenues.

Otto Eckstein of Harvard, sounding rather Republican, complained that not only the Social Security proposal but the

Administration's energy taxes and ideas on general tax reform are "hostile to middle-class people. It looks to me as if he is evacuating that territory to whoever chooses to pick it up." Several board members also viewed Carter's flat commitment to balancing the budget by 1981 as dangerously naive. Asks Okun: "How can he know what conditions will be in four years?" Heller argues that the only way the President can achieve his goal is to increase tax collections and reduce welfare and unemployment outlays --and that would require a stronger push toward full employment than Carter now plans.

One problem, board members believe, is that Carter does not circulate proposals affecting economic policy for wide comment within the Administration. The President has a keen analytical mind, the members agree, and he delights in making quick decisions.

He also prefers to deal directly with a single senior official: Adviser James Schlesinger on energy, the Secretary of Health, Education and Welfare on Social Security reform. As a result, Carter falls into errors that would not occur if he gave such officials as Schultze and Treasury Secretary Michael Blumenthal more chance to study the economic impact of major proposals.

On the international front, the economists gave Carter somewhat higher marks. By and large, they expressed cautious optimism about the results of the May 7-8 Downing Street summit. Among other things, Carter and the heads of government of the six other leading industrial powers set economic growth targets for each nation, indicating a commendable determination to get the world economy moving again. They also pledged more aid to hard-pressed underdeveloped countries, agreed to establish some kind of fund to help poor countries stabilize commodity prices, and disavowed any thought that inflation could stimulate employment.

Empty Rhetoric. While all these were the right sounds to make, Robert Triffin, a board member who was a chief architect of the West's postwar monetary system, said that after reading the final communique, "in the whole list I don't see a single concrete agreement." His point: the seven summiteers had expressed good intentions rather than committing themselves to specific policies. Almost to a man, Triffin and his board colleagues were concerned about a rising global trend toward protectionism, which could inhibit the needed expansion of world trade, and a failure to check inflation, which is now running at a rate of 9% in the European Community. They fear that these developments, which can be corrected only by tough and usually unpopular government actions, could turn the London summit into another exercise in empty rhetoric, like its two predecessors in Rambouillet and Puerto Rico. The summit seven did come out against protectionism, and board members note with bipartisan approval that Carter has so far stuck to his word, rejecting demands for higher tariffs on shoes and tighter quotas on sugar imported into the U.S.

For the present, most board members are willing to attribute Carter's lapses and his efforts to get so much done so quickly to his newness in the Oval Office. They expect that in time the President will be able to establish a better rapport with his liberal constituents. Greenspan in particular notes that the President's economic conservatism is personal; many members of his Administration are far more liberal than he is, and will put pressure on him to move a bit to the left. If the President does not yield, however, the board meeting indicates that the hottest criticism of his Administration will come not from the Republicans but from some of the most influential members of his own party.

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