A little less stag and a little more flation. Those are the economic prospects set forth by the batch of year-end figures released last week.
Emergence from the summer doldrums was confirmed by a big drop in unemployment and a wealth of collateral evidence. But other figures demonstrated that more government stimulus was required to keep the economy from going stagnant, and the need for additional stimulus imparted new seriousness to the spectre of inflation.
The deadline in unemployment was striking. The total, under a revised index, was down to 6.4 per cent of the working force - a gain of over a point from a year ago, and of 0.3 per cent in December over November.
The size of the drop from the previous month, and the use of a revised system for seasonal adjustment, suggested a statiscal quirk. But collateral figures showed that there had been a steady gain in economic activity since the pause of last summer.
Retail sales, despite a slight drop last month, advanced at a heady clip (about 15 per cent per year) from September through December. The layoff rate dropped steadily all fall, reaching in December the lowest figure since the recession. That suggests production going up as factories begin filling orders to replenish the inventories depleted by consumer purchases.
But those signs of a surge in activity immediately raised fears of overactivity, or inflation. The basic inflation rate (which is the difference between wage increases and productivity increases) is still running high at around 6 per cent.
A series of government actions - including higher Social Security taxes, various protectionist measures, and efforts to meet energy and environmental goals - all worked to increase the cost of goods. A decision to resume acreage controls and increase price supports curtails the prospect of a further fall of food costs.
Government stimulus programs are also working to fuel the economy. The aggregate boost of demand, which was running at an annual rate of $1.5 billion for the first quarter of 1977, will jump to $21 billion for the first two quarters of this year. On top of that the administration plans to ask for a tax cut of $25 billion beginning in fiscal 1978.
In those circumstances, the good news on unemployment immediately produced calls - notably from chairman Al Ullman of the House Ways and Means Committee - for a reduction in the projected tax cut. But administration economists asserted that without the tax cut, economic growth, now calculated at around 45 per cent, would fall to levels sure to generate more unemployment. These warnings were reinforced by a disappointingly low figure - only 10 per cent - on estimated private investment in plant and equipment for 1978.
Another way to break inflation is through the raising of interest rates by the Federal Reserve Board. Presumably the incoming board chairman, William Miller, who replaces Arthur Burns at the end of this month, will not be averse. He has to prove that he is a central banker sensitive to inflation.
But raising rates works in a discriminatory way against certain interests - notably housing. Last week one of the board members took the unusual step of voicing public dissert to a board decision to raise rates for the narrow and temporary purpose of sustaining the dollar.
Finally, there is a long-standing commitment by the Carter administration to take direct action against inflation in the form of restraints on prices and wages. But controls have been rejected, as have wage-price guidelines. So was a proposal to tie tax cuts to restraint in prices and wages.
The administration is now working on another approach. Apparently the idea is to get business and labor in each sector of the economy to discuss with government long in advance any plans for price and wage hikes. But that is not exactly an iron barrier - especially given the President's tendency to retreat before pressure from business and labor.
What all this means is that economic policy shapes up as a major battleground for the coming year. The administration has yet to come up with an approach that widens the choice between stagnation one moment and inflation the next, that gets the country out of what Arthur Okun has called the "great stagflation swamp."