President Carter's Council of Economic Advisers yesterday warned that "the world may well face a darkening economic future" if leaders fail to reverse "the poor performance of 1977."
In the annual economic report, the three advisers, led by Chairman Charles L. Schultze, said the world economy could be seriously harmed by protectionism and slumping international trade unless policies change.
Schultze and his two colleagues, council members Lyle E. Gramley and William Nordhaus, reiterated the administration view that 1978 will be a good year for the economy, but they also laid stress on underlying trends that "point clearly to a reduction in the pace of expansion later this year or early in 1979."
The council also urged monetary policy that would be supportive of fiscal policy in fostering economic growth and an increased rate of business investment.
The report does not deal directly with the impending change of leadership at the Federal Reserve Board, where G. William Miller is scheduled to take over from Chairman Arthur F. Burns.
But it warns that restrictive monetary or fiscal policies adopted in a mistaken effort to lower inflation rates "would result mainly in a slowing of real growth rather than a reduction in the rate of price increase."
The report says if the President's proposed voluntary anti-inflation program wins wide acceptance, "gradually slower growth of the monetary aggregates will be consistent with a strong and healthy economic expansion."
In essence, the report seems to be suggesting to Chairman-designate Miller that he not move too quickly to slow the rate of growth of the money supply.
On the other hand, the three CEA members concede that "a level of short-term interest rates moderately higher than in 1977 would be consistent" with the expansion in business demand for money that is expected this year.
The report also spelled out additional details of the administration's anti-inflation plan, designed to achieve "a significant decelration" in wage and price increases from the averages of the past two years.
Earlier, the administration had mentioned as a goal a half-point reduction in the underlying rate of wages and prices. The reference to "wages" was not specific, in terms of hourly wage rates or anything else.
Yesterday's report, however, indicated that to get an average drop of one-half point in unit labor costs, a larger average moderation than one-half point would be required in wages and fringe benefits. The reason is that payroll taxes - one of the elements in unit labor costs - will increase sharply in 1978 and 1979.
There are other matters of domestic economic concern in the 381-page document, including a critical assessment of the effectiveness of manpower training programs in cutting unemployment. But the major new elements in the report were in its gloomy assessment of the current world economy and future outlook.
The report rejects the notion put forward by some that the world must set more limited economic objectives. But to achieve higher employment and output, Carter's economists say world governments must meet four main challenges:
Restoration of economic health, mainly by giving new incentives to investment.
Dealing with external imbalances without cutting back domestic economic objectives.
Achieving greater stability of commodity prices.
Maintaining growth of world trade.
In enunciating these general goals the CEA had some interesting things to say about U.S. problemes in the international area.
It makes clear, for example, that although the administration will intervene in exchange markets to prevent disorderly market conditions, it has little faith in intervention as long-term policy to bolster the dollar rate.
"The historical experience with attempts to fix exchange rates is not an enviable one, "the report says. It adds that while fluctuations sometimes are too wide, "the evolution of the system of market-determined exchange rates has been a major achievement of this decade."
And although not explicit, the report uses language seemingly critical of the recent increase of one-half point in the discount rate, promoted by Fed Chairman Burns as part of efforts to stem the decline of the dollar.
". . . For large countries like the United States," the report says, "where the economic cost of changing domestic growth is largely relative to the improvement of the current account that would result, it is not appropriate to modify domestic objectives for economic growth in order to reduce the current account deficit."