The past few weeks have provided fresh evidence of the difficulty - perhaps the futility - of trying to navigate the economy as if it were an airplane. This exercise used to be called "fine tuning" a phrase that has fallen into disuse, if not disrepute, but the practice continues without any convenient, identifying label.
It doesn't work.
That reality finally may have impressed itself on President Carter. From the start, he treated the economic as if it were his private jet. He proclaimed ambitious 1981 goals - a balanced budget, an unemployment rate approaching 4.5 percent, and an inflation rate nearing 4 percent - and told his economists sitting in an instrument-lined cockpit. It's more like a crude raft that's tossed about by unpredictable seas and winds. The economists adjusts the sail, turn the tiller - and hope.
Thus the raft now may be drifting in a familiar direction: "credit crunch." The economy grows for a period, unemployment drops, inflation accelerates, and then the Federal Reserve Board - fearing yet higher inflation - allows interest rates; to rise; that slows the economy or, perhaps, produces a recession.
Tell-tale signs of this cycle have now surfaced. Unemployment dropped to 6 percent in April - the lowest since October 1974 - and industrial production and retail sales have revived impressively from the cold winter and long coal strike. At the same time, inflation and interest rates have risen. Bank prime rates (the rates charged to the best customers) may soon rise to 8.5 percent from 7.75 percent in December, and government-backed mortgage rates have just increased from 8.75 percent to 9 percent.
Many economists now assume that a slowdown in 1979 is inevitable. The only question is whether the economy will experience a "soft" or "hard" landing. A soft landing would mean that growth would drop from an estimated 4 to 4.5 percent in the 1978 to about 3.5 percent in 1979. A hard landing would mean much slower growth, possibly even a recession - an actual decline in economic output.
Such fears, of course, may prove groundless if - as other economists believe - underlying demand for new homes, cars and appliances (much of it coming from "baby boom" children now forming families and buying houses) is strong enough to sustain rapid growth. The point is not who's right but that economists have a difficult time seeing the future and, when they do, prescribing the right economic medicine. Consider two current problems of prediction and prescription.
First, prediction. It is well known that economists do not predict inflation rates very accurately, but less well known is the growing problem of forecasting unemployment.
For more than a decade, economists have done that by something called "Okun's Law," named after Arthur Okun, chairman of the Council of Economic Advisers under President Johnson. Okun's Law correlates economic growth (or lack of it) with changes in the unemployment rate. But the equation isn't working. If it were, unemployment would be closer to 7 percent now than today's 6 percent. Okun himself is baffled about what has caused the change and whether it is permanent. So is everyone else.
The implication are immense. If it takes less growth to reduce unemployment, then there's less social cost to slightly lower growth - and more inflationary risk to higher growth. On the other hand, if the change is a statistical fluke or a passing aberation, then an economic slowdown may cause a significant rise in unemployment. The economy won't be expanding rapidly enough to absorb new job seekers.
Now consider the problem of prescription: sprucing up the economy through government "stimulus." That is what the White House proposed with its $25 billion tax cut. Carter's economists reasoned that unless taxes were reduced, consumers - with less spendable earnings because inflation pushes taxpayers into higher tax backers - would cut purchases and economy would slow.
This approach sounds sensible, but a respectable case can be made that a personal tax cut (or at least part of it) would be self-defeating. The reasoning goes like this:
A tax cut reduces government revenues and increases the deficit and the amount of federal borrowing. Greater borrowing raises interest rates, which discourages private mortgage lending for homes. This is not only blunds housing construction - and the sales of new appliances - but also decreases sales of existing homes. And, in today's economy, that could cut other consumer spending. Profits on the sales of existing homes have provided a source of cash for many families. Consequently, any reduction in home sales would decrease this extra spending.
There are no safe exits from this dilemma. The Federal Reserve could attempt to ease interest rate pressures by increasing the money supply, but only at some risk of extra inflation. And the Fed simply may not be willing to take the gamble. In part, that is why the White House recently reduced its proposed tax cut by about $5 billion.
All this seem unnecessarily theoretical, but such problems - and uncertainties - constitute real limitations for Carters economic policy. As a practical matter, all of the president's 1981 economic goals have been abandoned, and, if some of them are reached, it will be more accident than design. In the main, Carter's economists are simply struggling to sustain growth (and keep nudging unemployment down) and contain inflation. This an imprecise, inelegant process.
In contrasts sharply with the dreams of many economists in the mid-1960s. They thought they could deliver the country into a state of near utopia: an almost perpetual prosperity that would allow the solution of long-standing social problems while satisfying ever-rising material wants. They would steer the economy along a path of "full employment" without entering the danger zone of high inflation. Now they have discovered they are not piloting a plane and that the passengers on the raft complain constantly about spraying off course and getting wet.