Democratic members of the House Banking Committee, comlaining that both interest rates and unemployment are too high, yesterday asked Federal Reserve Chairman Paul A. Volcker for assurances the Fed would ease its tight money policy if unemployment rises further.
Volcker would give no such assurances, instead declaring at a panel hearing, "I don't think we can deal with these economic problems [interest rates and unemployment] in a context of rising inflation."
Committee Chairman Fernand J. StGermain (D-R.I.) said that some members of the Federal Open Market Committee, which sets monetary policy for the Fed, have estimated that the number of people unemployed could rise as high as 9 million before the year is out and that the United States could have "the sharpest downturn in real GNP [gross national product] since 1947."
"Is it a necessary result to have a large increase in unemployment," St Germain asked.
"Result if you will," Volcker replied. "I don't know what policies you would have to follow to avoid that result in the short run. . . . We can't undertake a policy now that will cure that problem in 1981. . . . We would not be facing an unemployment rate in the neighborhood of 8 percent in 1981 if we had not let inflation build up over the last decade."
D.C. Delegate Walter E. Fauntroy, a committee member, urged Volcker to "reexamine what you project will be the future course of monetary action.Specifically, I would ask that you not lower the monetary targets for this coming year."
Volcker, however, had come before the committee to annunce, as he did the day before at the Senate Banking Committee, that the Fed had lowered its target ranges for growth of two of the four key measures of money by half a percentage point compared with last year.
Separately, the Democratic members of the Joint Economic Committee also recommended, as part of the JEC's annual report on the economy, that the Fed not lower those targets in 1981.
The JEC Democrats, led by Chairman Rep. Henry Reuss (D-Wis.), also recommended that Congress cut personal income taxes only in an amount sufficient to offset recent increases in the Social Security payroll tax.
"Other proposed immediate tax reductions, particularly if they imply a commitment to large fiscal stimulus in future years, present the risk of reigniting inflation," the report said. "Congress should consider a further tax cut when we can be sure that we have made progress against inflation, that the budget is under control, and that the investment incentive measure urged here [increased depreciation allowances for business] have improved the nation's stock of plant and equipment and their productivity so that they can accommodate the new surge of demand."
And it added, "We should avoid commitments now to long-term proposals whose consequences are unpredictable."
The summary of the report declared, "The administration wants a vast personal income tax cut, mostly effective in the future, and we are told that, for some reason, it must be enacted now. We favor more modest tax cuts, less oriented toward the wealthy, right now, and for the future, we favor a long, hard look before we leap."
The Republicans on the committee, who for the last two years had joined in a bipartisan report, criticized the Democrats for abandoning "the supply-side approach which formed the basis for consensus in the past. The Democrats have chosen instead to endorse thoroughly discredited monetary policies of fine-tuning and easy money, fiscal policies to redistribute income and stimulate aggregate demand, and government allocation of credit and other scarce resources."