Economists approach the subject of credit controls with the enthusiasm of a small boy asked to wash a large lion. The subject is unpopular, but in fact we already have some credit controls, and we are likely to get more, if only because administration economists have failed to reduce inflation and do not know what else to do.
Credit controls can be effective for the simple reason that the economy runs on credit. A major portion of total demand comes from consumer credit, business loans, mortgage debt and government borrowing, so controlling those forms of credit could have a substantial impact on the economy. Most of the legislative authority to impose credit controls is already in place, in contrast to wage and price controls for which Congress would grant legislative authority very reluctantly.
Credit controls could counter the current consumer psychology of "buy now on credit before prices go up." For example, controls could reduce the demand for autos by increasing down payment requirements or by shortening the payment period to three years from the current four to five years.
Nonproductive business activity such as mergers and acquisitions could be reduced by eliminating loans for that purpose. The current boom in business inventories could be cooled by reducing the commercial and industrial loans that finance it.
Credit constrols also could reduce the nonproductive speculative activity that accompanies inflation. Traditionally, the government raises margin requirements to curtail stock market speculation, but stocks have been moribond for years. The prime focus of speculation today is real estate, which is very amenable to credit controls because of its credit-intensive nature.
The swift and decisive use of credit controls could have a beneficial shock effect on inflation. Nixon used the shock effect of wage and price controls to reduce cost-push inflation sharply in 1971, but they have little shock value today. The administration's current anti-inflation program has no shock element but instead centers on a gradual tightening of monetary and fiscal policy that is likely to maximize the pain of recession and minimize the pleasure of reduced inflation.
Credit controls can shift the economic balance from consumption toward saving to enhance the productivity gains that reduce inflation. One way to do this is to revise the Rederal Reserve's Regulation Q to raise the amount of interest paid on small savings accounts at banks and savings and loan associations to the free market levels that large deposits receive. Currently large depositors receive about double the 5 percent rate paid on passbook accounts at the same bank.
The administration is trying to modify Regulation Q to raise passbook rates, a step that should be popular with millions of small savers who would benefit. There is predictable resistance, however, from banks and savings and loan associations because their current record profits depend in part on their ability to use small savers as a low-cost source of funds. The points out the unpleasant fact that effective credit controls are likely to be unpopular, particularly since they would be applied in a selective and, from the standpoint of those people controlled, a discriminatory manner.
Except for such overdue reforms as the relaxation of Regulation Q. credit controls should be viewed as a temporary measure, probably not lasting over one year. Beyond that time, their effectiveness would deteriorate in the same way that wage and price controls have deteriorated. No controls would be effective for very long because millions of ingenious consumers and businessmen would find a way to circumvent them.
Finding capable, enthusiastic administrators to implement a temporary and unpopular program may be difficult. Keynes was a protean man who was equally at home in economies, finance and investing, but that is not true of most economisis. Since the worst economic crises frequently accompany a credit collapse, the person who runs the program should understand how to bend the credit system without breaking it.
The current attempt to impose a constitutional amendment on federal spending is really an attempt at selective credit control. By controlling federal spending and eliminating deficits, its proponents hope to reduce both inflation and the government's role in the economy.
The most persuasive reason to use credit controls is also the worst reason. The administration's anti-inflation program simply is not working and there is an urgency bordering on desperation to find another program that will be more effective or at least appear so.
The urgency to find an effective anti-inflation program simply is not matched by the ability of administration economists to do so. Most of Carter's economists are old Keynesians who made their reputations stimulating the economy to solve yesterdayhs problem of recession, but that very stimulation is a major cause of today's problem of inflation. Confronted by a problem that they helped cause but do not understand, administration economists recommend more of the same policies that have been so ineffective so far.