Two leading economists, both mentioned in speculation as possible successors to Federal Reserve Board Chairman Arthur F. Burns, yesterday split in their appraisals of the board's current policy.
In testimony before the Senate Banking Committee, former board member Arthur F. Brimmer said that new moves to restrain the growth of the money supply, announced Wednesday by Burns, could only be considered "a further step toward monetary restraint and higher interest rates."
Brimmer, now a consultant in Washington, said that the Fed policy would reduce money available for mortgage loans, and "the (resultant) loss of momentum from housing" would have an adverse effect on the economy as a whole.
But New York banker Robert V. Roosa, a former Treasury Under Secretary in the Kennedy Administration, disagreed. Roosa said he thought the Fed policy "is about right". He suggested that the essential element is that the Fed maintain unchanged its target for the basic money supply, M-1 (cash and checking accounts).
The Federal Open Market Committee, Burns also announced, had on October 18 reduced by one-half point the upper and lower targets for M-2, which also includes bank savings deposits, and M-3, which adds in savings at thrift institutions. But Roosa labeled these targets merely "predictions", adding: "I don't see how they can reach it".
Roosa and Brimmer did not differ materially on their economic forecasts for 1978, both seeing the need for some stimulus to counteract weakness, particularly after mid-year.
But where Brimmer focused on a more liberal monetary and fiscal approach, including a tax cut of $20 to $23 billion. Roosa stressed the need for restoration of business confidence, and "an undergirding of massive new investment," especially for energy.
Roosa delivered an unusually sharp off-the-cuff criticism of the Administration in general, and of President Carter in particular, for stirring "an air of distrust and contention" between business and government.
He made special reference to Carter's press conference blast last month to "the greatest rip-off in history" by American oil companies.
"We're creating an atmospher of defensive suspicion, (in the business world) by aggressive and at times abusive criticism by government officials," Rossa said. "There has to be an understanding of the (industrial) earnings process, not a marginal change in tax laws."
He then added that "the tax system is there to catch undue earnings" and the government is wrong to suggest "that all increased earnings are somehow a rip-off."
Roosa answered "yes," when Committee chairman William Proxmire (D-Wise.) asked if his reference to "abusive criticism" was to President Carter's press conference statement on the oil companies.
The banker, credited with innovative moves in the 1960s to help solve the balance of payments problem of that era, urged that "the great potential for the economy is the energy program." He argued for a massive effort, to solve the energy problem, on the scale of the war-time Manhattan atomic project.
"I don't care what it adds to the fiscal deficit," Roosa said," and if someone moves in and makes money for a few years, it shouldn't be regarded as a heinous crime against the world."
Brimmer made clear he was surprised by the Fed's move to leave M-1 unchanged, and to lower the targets for M-2 and M-3. He had anticipated that the Fed might lower the upper end of the M-1 target from 6.5 to 6.0 per cent.
The Fed's new policy, he said, "won't starve the economy," in the sense of creating a liquidity squeeze, but he predicted it would result in failure of the economy to grow sufficiently to cut unemployment.
"I'm disappointed with the conduct of monetary policy over the past couple of months," Brimmer testified. His analysis is that the Fed in late summer made too sharp a response to the excess rise in the money supply. Between the lines of FOMC reports, he noted, there is a much greater real division within the Fed than is indicated by the last 10-2 open market committee vote supporting the Burns policy.
One implication of Brimmer's comment was that without Burn's strong leadership, current Fed policy could tip the other way, especially if the economy continues to lag.
Brimmer said he would split his proposed $20 to $23 billion tax cut into $13 to $15 billion for individuals and $7 to $8 billion for business, a contrast with Burn's recommendation for giving the lion's share to business.