A group of leading monetary economists said yesterday that "stop-and-go policies by the federal government over the last five years have contributed to a resurgence of inflation and substantially increased the "risk of recession" next year.
The economists, who call themselves the Shadow Open Market Committee, said that government economists have no good policy options, because the administration has permitted both a burst of spending and excessive monetary growth during the last two years.
However, the committee also warned the government against abruptly reversing course. Any move by the federal Reserve Board, the nation's central bank, to sharply curtail growth of the money supply - checking accounts and currency in circulation - would surely lead to a recession, the committee argued.
Just as surely, the economists contended, were the economy to fall into a severe recession, the government would again move to spend excessively and sharply boost monetary growth, eventually leading the nation to the same economic box it is in today.
Instead, the committee recommended that the Federal Reserve Board move to slowly, reduce the rate at which the money supply is growing - from the 7.75 percent growth over the last 12 months to 6 percent over the next year. After that, the Fed should seek to reduce monetary expansion by one percent a year "until a non-inflationary rate . . . is achieved.
The committee however, in its policy statement, did not specify what that rate should be.
The Shadow Open Market Committee was established five years ago by Carnegie-Mellon University professor Allan H. Meltzer and University of Rochester economist Karl Brunner. It meets semi-annually to examine the nation's economic policies and to make recommendations to the Federal Reserve on the conduct of monetary policy.
It takes its name from the Federal Open Market Committee, the Federal Reserve Board body that meets monthly to set monetary policy.
The 10 members of the Shadow committee (there are 12 members on the Federal Reserve Board committee) are monetarist economists who, for the most part, believe that the growth of the money supply is the most important element in determining the health of the economy.
Beryl Spinkle, chief economist for the Harris Trust Bank of Chicago, said that the best the administration can hope for next year is "slow growth with high inflation; the worst is a recession with high inflation."
Sprinkel, one of the economic forecasters on the Shadow committee, said the administration could avoid a mild recession next year and even push one off beyond the 1980 election. But to do so would require continued excessive stimulus and would result in even higher inflation that the eight percent the economy is experiencing today. When the government would finally take steps to slow money supply growth, it would trigger an even more serious recession with higher unemployment that would be the case if it took steps to gradually reduce money growth today.
Robert Rasche, of Michigan State University, said that even though the size of the federal deficit will shrink to about $42 billion next year (from a projected $49 billion this year) the government will find it harder to finance because foreign governments appear to be slowing up on their purchases of U.S. government securities.
Rasche said that until April 1978, foreign central banks, including many oil producing companies, were using their dollars to buy about 30 percent of the new securities the U.S. government was selling. Froeign governments "will provide little, if any, assistance in the future," he said.
That means that the Federal Reserve Board will find it necessary to help finance the deficit (by creating money) which will in turn make it difficult for the Fed to fight inflation.
The nation's central bank has been boosting interest rates since last spring in an attempt to make borrowing more expensive and in turn hold down on the growth of the money supply. So far, the Federal Reserve's action seems to have little impact.