Interest rates have reached the same record levels they hit last spring, and even those who hate inflation the most are worried that the Federal Reserve's anti-inflation remedy is producing side effects worse than the disease itself.
Chase Manhattan Bank President Willard C. Butcher, whose bank has been more aggressive than most in raising its prime lending rate to cover the cost of obtaining funds, said the other day that "we can't expect our economy to expand in an environment haunted by the twin devils of steadily increasing rates of interest and inflation."
Butcher said high interest rates may be making the price situation worse rather than helping to fight inflation.
Alan Greenspan, the Reagan economic adviser who headed President Ford's Council of Economic Advisers, said rates are high in large part because everyone -- from the corner grocer to the banker in the boardroom -- expects inflation to continue and perhaps even get worse in the months ahead.
Greenspan warned the president-elect that unless the new administration can "somehow dissipate that attitude in six to nine months," the the economy will be in trouble for a long time.
Yet the new Reagan administration, while professing serious concern about rising price level, appears destined to make the same major mistake its predecessor made.
When Jimmy Carter arrived in Washington almost four years ago, one of his first moves -- with the general blessing of a Democratic Congress -- was to pump up the economy to fight a recession that was already over. Two years of higher-than-needed federal spending helped set the stage for the serious inflation the nation faces today. Even the president realizes that now.
This time the administration's programs won't be the standard antirecession nostrums of the Democrats -- public-works spending, increased unemployment benefits and public service jobs -- but the stuff of the Republicans -- a sharp increase in defense spending and a sizable tax cut.
With the blessing of a Republican Senate and a House that may vote as if it were Republican on major issues, the new president will get his way, if that's what he wants. But his way will add to an already sizable budget deficit in fiscal 1981 and do little to assuage the worries of those who count most in the fight on inflation: the public at large.
Economists will say that the size of the federal deficit is less important to the fight against inflation than common wisdom has it. The economists probably are right on this one. But as with Cassandra, their utterances have little impact because the man on the street and the banker in the boardroom believe that budget deficits and inflation are the opposite sides of the same coin.
Henry Kaufman, the resident interest-rate guru on Wall Street, cautioned the new administration that it cannot cut taxes, boost defense spending and help fight inflation at the same time.
The Federal Reserve Board, the object of so much ire in many circles today, is "on the defensive, rather than the offensive" in the anti-inflation fight, Kaufman said.
The central bank bears "95 percent of the burden of fighting inflation," he said. "If we leave the fight to the Fed, all we can produce is zero real growth and 10 percent inflation." Kaufman said the Fed should make that clear publicly.
Some critics of the Fed argue that the central bank is pursuing the inflation fight with too much zeal.
But last spring, when the economy began to sag and the interest rates began to slide, the Federal Reserve was quick to loosen its monetary policy. It may not be so quick this time. But there is evidence that Fed Chairman Paul A. Volcker does not relish the role he has assumed, either.
A strong case can be made that the tax system is a major factor in the woes of the current economic system and that important structural changes need to be made. But the corporate balance sheet is in serious trouble because of the stifling impact of inflation and high interest rates on the capital-raising mechanism. And financially strapped companies find it hard to make the kind of investments that create jobs and increase efficiency.
Chairman Volcker said the other day that the only way "the credibility and actuality of monetary policy can be improved is if it gets some help."
If he can't get it from a Republican administration, where can he get it?