Treasury Secretary W. Michael Blumenthal admitted yesterday that President Carter's sweeping moves to protect the dollar involve some chance of recession next year, but said "I am satisfied we can have moderate growth and prevent a major recession."
It was the most direct statement by a leading administration official that the president had accepted the probability of some economic slow-down in 1979 as the price for halting a debilitating slide in the dollar.
Blumenthal said that Carter is now so convinced that whipping inflation is the nation's "number one problem" that any necessary actions will be taken, "not through the straitjacket of wage and price controls, or a policy of consciously leading the country into a recession."
The Treasury secreatary, who had a key role in formulating the new program of high interest rates and massive intervention in foreign exchange markets said "we think there is a middle course, and that's the one we're committed to."
He predicted that economic growth next year would be 3 percent "or a shade above or below." The administration has steadily dropped its forecast for growth next year from 4 percent to a range of 3.0 to 3.5 percent, and Blumenthal's mention yesterday of a "shade below" 3 per cent was the lowest yet.
Economists such as George Perry the Brookings Institution and Otto Eckstein of Data Resources, Inc. now put the year-to-year growth rate in the range of 1.5 to 2.0 percent for 1979.
Blumenthal said that there had been extremely close consultation with Federal Reserve Chairman G. William Miller on the decision to raise to discount rate one full point to 9.5 percent.
He said that it quickly became any parent "that we both belivered that (dramatic) action" was necessary and had "discussed the magnitude of the increase (in the discount rate) before it happened."
Blumenthal said that Charles Schultre, chairman of the Council of Economic Advisers, conceded there were some risks of recession next year anyway, but the proposed step wouldn't increase the degree of risk.
The rationale for going to a full point jump in interest rates, Blumenthal explained, was that prior "small steps in interest rates had not had a (beneficial) effect on the dollar."
But the secretary refused to answer a question whether the bold move to a 9.5 percent discount rate meant that the Federal Reserve would not push rats up any higher.
"I can't respond to that," he told a group of reporters, "because I don't know what conditions are going to be like."
He said several times that the administration "is in position" to take additional actions if circumstances "warrant such action," repeating the caveat, however, that mandatory wage-and-price controls are not on anybody's "contingency" list.
Blumenthal said that consideration had been given to imposition of an import surcharge, in the sense it was listed "when I asked for all of the options." But he said that it was immediately discarded, "and there is no intention of going to an import surcharge. That's not the way to deal with the inflation problem."
Some economists have argued that the enormous U.S. trade deficit with Japan - running at a rate this year of about $15 billion, twice that of 1977 - won't be shaved until a surcharge is placed on Japanese exports to the U.S.
He mentioned as other potential policy actions to be considered at the turn of the year for Carter's new legislative program will be business tax incentives for depreciation or research and development as a "carrot" for compliance with price guidelines. This would be a companion piece to the "wage insurance" Carter announced he would ask for to elicit labor cooperation with wage guidelines.
"I think that's worth looking at," Blumenthal said, "but the problem is where to find the money. Don't forget, the President is committed to holding down the budget."
He also said that another look would be taken at the inflationary impact of new social security payroll taxes that come into effect in 1979 and 1980, but that "the health of the trust fund" was just as important a consideration as trying to keep the tax down.