Presidential inflation adviser Alfred Kahn, who now regards energy considerations as more important than inflation, said yesterday he favors decontrol of oil prices and use of part of the proceeds of a windfall tax to finance a cut in Social Security payroll taxes.
"The sooner we take this medicine (decontrol), the better off we will be," declared Kahn, who last spring opposed the oil-price decontrol that President Carter later ordered to occur mostly during 1980 and 1981. "I find myself more and more in favor of decontrol and taxing the hell out of the (oil) companies," Kahn said.
In a gloomy speech to the National Press Club Kahn said he no longer is willing to predict -- as he repeatedly has in the past -- that inflation will drop below double-digit rates any time soon.
"I felt until recently that I could continue to say I think we have a real likelihood that by late winter or early spring the rate of inflation would go down below double-digit levels. I just don't see how I can continue to say that," Kahn said.
Kahn said his earlier statements were based on an expectation that energy price increases would taper off, that mortgage interest rates would stop going up and that some "market" prices would come down as the economy cooled.
But now, he explained, "we are in a situation in which energy prices could continue to increase" at rates similar to the 60 percent jump in oil prices this year.
"Montgage interest rates, at least for several months ahead, will keep going up," Kahn continued. And with past increases in energy and food prices still working their way through the economy, other prices -- what he called the "nonvolatile parts" of the consumer price index -- are beginning to rise more rapidly.
Kahn, who emphasized he was speaking just for himself, disagreed with the Carter administration position that the proceeds of a windfall tax on the oil companies should be used only for energy-related purposes, including assistance to the poor to help meet higher energy bills.
Higher energy prices are extracting billion of dollars from all parts of the economy, Kahn said. The proposed windfall tax would transfer billions more from United States oil producers to the government, and that money has to "be returned to the spending stream," he cautioned. "We ought to being talking about using some of those proceeds to reduce the payroll tax."
He favored cutting the payroll tax partly because it would reduced one cost to employers, who must pay half the tax, and possibly lead to a lower inflation rate.
Kahn defended administration economic policies, including its anti-inflation efforts, even though inflation has been far worse -- about 13 percent this year -- than it was when Carter's voluntary wage and price standards were announced last October.
"What we have been doing has been right in every way except results," Kahn declared wryly.
"We have practiced budgetary restraint . . . The president has been firmer than anyone in resisting tax cuts . . . We have practiced monetary restraint," he said. "The wage and price standards have been remarkably effective in the areas they cover, or can reasonably be expected to cover. . . ."
And Kahn ticked off 30 separate actions either completed or in process that involve reducing the burden of government regulations on business, thereby reducing costs or adding to efficiency.
But all these steps by the administration didn't reduce the inflation rate, mostly because of soaring food prices early in the year, steadily rising mortgage interest rates and, above all, the 60 percent increase in oil prices.
Kahn said he now is convinced that inflation cannot be dealt with successfully until the power of the oil cartel to raise prices is limited in some way. Therefore he favors "letting oil prices go" to induce greater conservation, while taxing the oil companies.
Kahn also said he expects President Carter to resist demands from more liberal elements within the Democratic Party for large new spending programs in 1980. There could be some small "targeted" programs, such as for youth employment, he said.
"But if you are talking about large increases . . . to rev up demand, that way is just not open to us," he said. "Fighting inflation is good politics . . .If the president is defeated, I think it will be overwhelmingly because of our failure to bring down inflation."
Meanwhile, the administration's pay advisory committee, which is drafting new pay standards for the second year of the voluntary wage-price program, decided yesterday how to deal with two important pay issues.
The committee of 18 labor, business and public members agreed to set up a small task force to classify certain types of "incentive compensation" as to whether they are subject to the standard. The entire committee would approve the classifications, which will include such items as the annual "experience" increments commonly paid to public schools teachers for the first 10 to 15 years they are on the job.
The group also approved in principle a special catch-up pay increase that wouldn't count as part of the standard. In situations in which there has historically been a close relationship between the wages of two groups of workers, but one group has gotten ahead because it received cost-of-living increases and the other did not, then the "tandem" relationship of wages can be restored.