The Carter administration never seems to grasp the implications of its own actions, and consequently, is always tripping over some misplaced piece of furniture, causing itself acute pain, public embarrassment or both. The resignation of United Nations Ambassador Andrew Young is a case in point: as Washington Post political commentator David Broder noted, Young probably never should have been appointed in the first place. Right man, wrong job.
Six to nine months from now, the White House could easily find its economic policy entangled in a similar episode of unanticipated consequences. By naming Paul A. Volcker as chairman of the Federal Reserve Board, President Carter may have unwittingly surrendered much of his remaining control over the economy to a man over whom he has little, or no, control. Ironically, Volcker's appointment stemmed directly from the President's decision to gain more control by dismissing Treasury Secretary W. Michael Blumenthal.
The Fed's recent interest rate increases only underline Carter's risk: that Volcker's policy will lean so decisively against inflation that it will aggravate and lengthen the current economic slowdown. In the long run, that tough stance may or may not be a good thing, but, for the President, its political dangers are obvious. Any staunchly anti-inflationary policy may affect prices only a couple of years from now -- after the election -- while its impact on the unemployment rate could be far more immediate and visible.
To pit the White House against the independent Federal Reserve -- which regulates interest rates and the money supply -- is, of course a staple of Washington economic journalism: a story that is usually squeezed for more dram and significance that it's worth.
But Volcker's appointment could be the exception that proves the rule. Prevailing upon former Fed Chairman G. William Miller to replace Blumenthal left Carter desperately needing a suitable substitute for Miller. Specifically, he required someone whose impeccable anti-inflationary credentials would show that the Fed had not become a White House satellite dedicated to a juiced up economy and the President's reelection.
Volcker fitted the job description perfectly. As president of the New York Federal Reserve Bank -- and a former top Treasury official in the Kennedy and Nixon administration -- he is well known and respected among bankers and government officials here and abroad. But, as a member of the Fed's Open Market Committee, he also voted at least twice recently for tighter money policies -- that is, higher interest rates -- than Miller. Once nominated, he trumpeted an aggressive anti-inflationary rhetoric.
By embracing Volcker, Carter has, in effect, given him license to exercise his biases in ways that the President may ultimately regret. The result of the President's power play is paradoxical: With Blumenthal and Miller, Carter had the strongest anti-inflationary zealot in a firmly subordinate position; now, the combination of Miller-Volcker reverses that alignment and diminishes the President's influence.
To think that Volcker wants to put the country into a 1930s-like Depression is nonsense, but he faces novel difficulties in creating an effective anti-inflationary policy without doing unintentional damage to the economy.
Inflation itself confuses judgments about whether or not money is "tight." The commercial bank prime lending rate now stands at a record 12 percent, but that's less than the rate of inflation, which convinces economists such as Henry Kaufman that "it still pays to borrow."
Kaufman, chief economist for the investment banking firm of Salomon Brothers, believes that rates will rise higher: The prime, he thinks, will go to at least 12.5 to 13 percent, and the rate on highquality bonds (AAA utilities) will rise to 10.5 to 11.5 percent from about 9.5 percent today. That would be a record. Rates are high because inflation is high; lenders have to get back more because it's worth less.
Inflation has also blurred the meaning of the money supply statistics, the other major guide used by the Fed. In theory, if the Fed pumps out too much money, inflation results. But defining "money" has become increasingly difficult, because higher inflation has caused consumers and businesses to transfer large amounts of traditional "money" -- cash, checking accounts balances -- into short-term interest-paying investments.
Some of these shifts have been astounding. For example, money funds -- mututal funds that invest heavily in short-term, high-interest bank deposits -- have grown from $10.6 billion at the beginning of the year to $31.5 billion in mid-August, according to Donoghue's Money Fund Report. They aren't counted in money supply numbers, though they can easily be converted to cash. The Fed, of course, knows of these changes, but no one is genuinely certain how they should be interpreted.
To these technical problems must be added another new factor compromising the Fed's maneuvering room: the international value of the dollar.
No longer can the Fed raise or lower interest rates -- as domestic economic conditions seem to warrant -- without considering the international impact. Lower rates tend to push down the dollar, because they make it less attractive to hold assets in dollars rather than marks or francs. A lower dollar not only raises our import prices (and thus inflation) but also shakes foreign confidence in the United States, because the dollar is so widely used as an international currency.
Volcker is especially sensitive to this. But he wields a blunt instrument for controlling an inflation that stems largely from administered wage-price decisions and underlying pressures -- oil scarcity and a huge generational housing demand -- that assures higher prices in these areas.
So far, the Fed's tough talk has failed to contain this sort of inflation. Possibly, the Fed was misled by confusing statistics. The scope for miscalculation, in either direction, remains substantial. But, if Volcker is as committed to change as he sounds, his strivings could be far more jarring than President Carter ever expected.