Assessing the economy these days is like trying to find the exact weak spot in a tire gone soft. There is give wherever you push. The one clear thing is that sustaining economic recovery is now the country's foremost priority - the test that will determine the success or failure of the Carter administration both at home and abroad.
Signs of the economic trouble are almost everywhere. Growth in gross national product fell below 4 per cent in the third quarter, and while a pickup is expected early next year, the recovery from the 1974 recession is apt to run out of gas in the third quarter of 1978.
Business investment has been flat all through the recovery and shows no signs of bouncing back. Unemployment continues to hang high around 7 per cent. In the center cities, and particularly among teenage blacks, the rates are far higher.
Then there is inflation. The underlying rate is down from a high of 12 per cent in 1974 to about 6 per cent now. But that is not exactly good. Moreover, a whole series of government actions - including the energy program, a hike in the minimum wage, higher farm price supports, and higher Social Security taxes - work to increase costs and make a cut in the rate of inflation virtually impossible. Any untoward event from the outside - for example, a big hike in prices by the oil-exporting cartel - could touch off a new inflationary spiral of wage and price increases.
The variety of different ills has inspired economists to put forward a variety of different cures. The conservative, or monetarist, position has been recently articulated with great force by Arthur Burns, chairman of the Federal Reserve Board. In a speech at Gonzaga University at Spokane, Burns singled out investor confidence as the big problem.
He attributed some of the difficulty to a lack of faith in the Carter administration. He also blamed inflation and later indicated in congressional testimony that the Fed would continue to hold down the money supply. But he said the big problem was that profits have been too low for too long. As a remedy he wants tax incentives that would increase profitablity and thus stimulate investment.
The liberal or neo-Keynesian position has been put forward by Arthur Okun of the Brookings Institution in a remarkable speech to the Detroit Economic Club. Okun believes that the recovery is apt to run out of gas sometime next year and that some stimulus may be required.
But he is deeply worried by inflation - and even more by inflationary backlash. He thinks it likely that inflation will rise and set in motion a bidding up of prices and wages. At that point the inflationary backlash would set in. The Fed would tighten credit and the Congress would reject the stimulative measure necessary to get the economy moving.
Thus, as in 1974, inflation would beget recession. Accordingly, Okun recommends a composite package - tax breaks to stimulate business, some stimulus for the consumer and a lid on inflation by trying tax benefits to wage and price restraint.
It is possible, of course, that Burns and Okun and all the other economists are wrong. But the penalties for ignoring their warnings are stupendous. A new recession would not only produce more unemployment in this country and postpone increasingly necessary social reforms. It would shake the world economy and, perhaps, produce the conditions for a trade war and a general economic collapse.
Fortunately the Carter administration is taking the danger seriously. The President has read the Okun speech and the Burns speech. Charles Schultze, chairman of the Council of Economic Advisers, has been assigned to prepare a stimulative package for possible presentation to the Congress in January. A main reason for postponing the tax-reform program was to give priority to economic recovery.
But if Carter has the big priorities right, there are smaller, but serious troubles insides the administration. The President is squabbling with Arthur Burns. The Office of Management and Budget, under an acting director, has no high-level economic expertise. The White House is holding Treasury Secretary Michael Blumenthal at arm's length - at least partially because of Treasury's role in the investigation that led to the resignation of Bert Lance as Director of OMB.
So it is question whether Carter and his advisers can orchestrate the variety of different proposals into a policy that gets the economy right. If they can't, the rest doesn't matter much.