Economist Arthur Okun broke with the Carter administration yesterday over its reliance on old economic policies that he said are failing to pull the nation out of stagnation and inflation.
In a speech to the Economic Club of Chicago, Okun said Carter's over cautious strategy is similar to the efforts of the Ford administration.
Okun, chairman of the Council of Economic Advisers in 1968-69 under President Lyndon Johnson, is now a senior fellow at the Brookings Institution here. He was an adviser to Carter during the 1976 election campaign. His name has been mentioned in speculation on a possible successor to Arthur F. Burns as chairman of the Federal Reserve Board.
He said his main message is that Carter's reliance on traditional fiscal and monetary measures, designed to produce a gradual reduction in inflation, and a gradual return to full prosperity, won't work. "The time has come." Okun said, "to face the likelihood that we have a losing hand, and to deal a new one."
Okun said that he could be cheerful about the short-term economic outlook because the current expansion has a good deal of vigor left. That checks with the views expressed Tuesday at the Detroit Economic Club by his former Brookings colleague, Economic Council chairman Charles Schultze.
But the sharply diverged from Schultze's optimism on the longer-term outlook. The current strtegy, Okun said, "probably does not lead to a happy ending" - that is, "sustainable prosperity accompanied by reasonable stability of the price level."
He called on the administration not only to try some unconventional and unproven remedies, but to postpone the $15 to $20 billion in tax cuts for business and individuals revision being prepared by the Treasury Department as part of its tax package. That would of course, scuttle the tax revision proposal, because it would leave only the tax-raising parts of it.
Okun said that a more urgent priority than traditional tax relief is a four-point program designed to break the nation out of stagflation, involving less conventional tax reduction of about the same amount scheduled in the context of tax reform. None of his proposals involves a return to formal wage-price controls.
But a critical part of Okun's program is a voluntary "social contract" that would limt wage increases to less than 6 per cent and price increases to less than 64 per cent, with $15 billion in tax rebates for employers and workers as the inducement to participate in the program. Variations of this idea have been brusquely rejected in the past as impractical by both union and business leaders.
Another $5 to $6 billion in tax benefits would flow from an incentive program designed to encourage state and local governments to cut sales taxes. The federal government would defray half the revenue loss for local authorities tht reduced or repealed sales taxes during 1978. The local governments could recoup the other half by raising personal income taxes. Okun said the objective is to accomplish a reduction - by lowering sales taxes - of about 1 point in the cost of living index - holding down consumer prices and dampening the escalator effect on wages.
Okun said the social contract plan would break the present inflationary cycle, under which wages have been going up 8 per cent and prices 6 per cent a year.
The "8-and 6 combination" he argued, has become self-perpetuating: "New wage decisions are made against the background of 8 per cent advances in other wages and 6-per cent increases in prices. And so they tend to center on 8 per cent. Then, with hourly labor costs rising by 8 per cent, business find their labor costs per unit of output up about 6 per cent, and so their prices continue to rise by 6 per cent.
This country can not tolerate a 6 per cent level of inflation, Orkin said. Cost-of-living adjustments don't control inflation, but merely is an effort "to learn to live with it," he said.
He was sharpy critical of a new and insidious wave this year of cost-raising legislative actions - higher payroll taxes, minimum wages and farm price supports among them - that he said could add 1.5 points to the inflation rate later in 1978.
Among the measures in his four point program would be a pledge by the administration of a target of zero net cost-raising measures for 1978. Thus, a government program that would tend to be inflationary would have to be offset by one providing a cost-cutting effect.
Here is the way Okun's "social compact" on wages and prices would work: A participating company would get a 5 per cent rebate on its income-tax liabilities on domestic profits, if it held its average rate of price increase below 4 per cent (apart from a direct pass-through of material and supply cost increases.)
The employees of the participating firm would get a tax rebate (by reduced withholding during the year) of 1.5 per cent of their wages or salaries, with a ceiling of $225 per person.
Okun said that workers who would otherwise have received pre-tax wage boosts of 8 per cent would come out ahead under his program. A company covered by a collective bargaining contract would be required to clear its participation in the program with the union.
The economist estimated that the increase in purchasing power and in higher corporate profits generated by the rebates would stimulate the economy, with the added benefit that the anti-inflation aspects would increase capital investment.
A final point in the Okun program is a revision of fiscal and monetary targets by the White House and the Federal Reserve that aim for more growth and less inflation for 1978. The target would be a 10.5 per cent increase in the money value of GNP the gross thenational product- the same as in 1977. For 1979 and 1980, the aim would be to reduce the money growth in GNP progressively into single-digit territory.
Okun's speech, copies of which were released here, expressed the Democratic economist's personal views, not those of Brookings.