Seeking That Soft Landing

The trick is to keep a slowdown from becoming a slump

Overlaying the wrangle about tax policy is the growing debate on how, after more than three years of solid expansion, to guide the economy into a "soft landing"--to use the current Washington catch phrase. That is, how to shake the wind out of inflation without tipping the country back into recession. More signs of gathering trouble on the price front arrived with last week's reports. The cost of living jumped another .9% in May, which was as bad as the April rise and translates into an annual inflation rate of 11.4%. Once again, the chief villain was the rising cost of food, although meat prices, the top offender in the past, seem to be receding.

At the same time, the cost of money ticked upward, reflecting both high demand for funds by business and the Federal Reserve Board's determination to try to hold down prices by curbing the growth of the money supply, which has been expanding rapidly since March. The Fed once again raised (to 7 1/4%) the discount rate, which is the interest it charges on loans to Federal Reserve system banks. Meanwhile, several large banks, led by New York's Citibank, raised their prime lending rate for top corporations by a quarter percentage point, to 9%, the second such increase in the past two weeks.

Indeed, about the only sign of cooling down in the economy last week was the Commerce Department's trade figures for May. Having deepened alarmingly earlier in the year, the overall trade deficit showed a slight decline, largely as a result of a drop in steel imports. Still, petroleum imports jumped another 5.8%, reflecting the nation's still increasing dependence on foreign oil.

Testifying before the Congress's Joint Economic Committee, Federal Reserve Chairman G. William Miller said that policymakers would be "walking through a very narrow valley in the next few months" and would need "tremendous skill" to avoid either another surge in prices or a quick slump back into recession, or perhaps both. Although Miller opposed his colleagues at the Fed on the need for another discount rate increase, he is persuaded that inflation is a more immediate peril than recession; he recommended that Congress postpone the 25-c--an-hour increase in the minimum wage (now $2.65) that is set for next Jan. 1.

Treasury Secretary W. Michael Blumenthal quickly seconded the Fed chairman's appeal. By Miller's calculations, the increase could boost inflation by one-half of 1 % next year, as the higher wage costs in such businesses as restaurants, motels and supermarkets ripple through the economy.

Miller, who expects that inflation will average more than 7% this year, insists that prices must be brought under control if a downturn is to be avoided.

But others argue that the Federal Reserve's tight money policy is making a recession much more likely. In a forecast released last week, Economist Arthur Okun, a senior fellow at Washington's Brookings Institution, warns that a soft landing would be impossible in a "very soggy economy" and charges that the Fed's moves to push up interest rates are creating a "very severe risk of recession" later this year or early in 1979.

Okun puts the chance of an approaching downturn at 55% and urges that carrot-and-stick income tax policies be adopted to encourage labor and management to hold down wage and price raises. Unions and companies that settled for low increases would pay reduced taxes, while those that helped aggravate inflation would suffer tax penalties. Such an approach has been used successfully in Britain, where in the past year and a half inflation has plunged from some 20% to about 8%. But with the Administration's entire tax policy tangled up in Congress, Okun admits that his proposal for a Tax-based Incomes Policy (TIP) is a non-starter for now. Meanwhile, inflation seems to remain a non-stopper.

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