The latest economic news dashes hopes that a short and shallow recession can cure inflation. For the country is already in a recession, and inflaion continues to mount. So the immediate question is how to devise a tax cut that will arrest recession in ways that do not aggravate inflation even further. A larger and more interesting question is whether the tax cut can be made the occasion for developing a comprehensive new economic strategy.
The evidence of recession comes with a new set of employment numbers. In August, the jobless rate rose from 5.7 percent to 6 percent. Total employment went down by over 300,000 jobs.
Behind those figures is a long cycle of connected events. First there was a drop in final sales. Next a rise in inventories. Then orders were cut back. In response, manufacturers reduced production. Only then did businesses begin laying off workers.
The drop in total jobs, in other words, is a lagging indicator. It tells enough of what has been happening in the second and third quarters to announce that the economy is very weak. Even Lyle Gramley, the super-cautious numbers man on the president's Council of Economic Advisers, says, "I wouldn't quibble about using the term recession now."
The onset of recession has not, however, curbed inflation. Thanks in large part to pinches in the supply of crude oil, food and housing, the Consumer Price Index is rising this year at an annual rate of over 13 percent. The underlying inflation rate -- a term that fences our erratic supply pinches and measures the price rises manufacturers need to keep profits constant -- is about 9 percent.
Historically that is very high. Even so inflation continues to mount. The Producer Price Index -- which measures the price of goods before they reach retail markets -- rose in August at a 14.4 percent annual clip. That means that in the next few weeks, the Consumer Price Index and the basic rate of inflation are apt to go up.
The expection of such a rise is working strongly on persons with claims on credit and currency. Business demand for credit drove New York City bank loans to an all-time high last week. Rather than store their values in dollars, holders of currency last week raised the price of gold to a record high.
To discourage borrowing and prop up the dollar, the Federal Reserve Board -- under a new chairman, Paul Volcker -- has recently forced interest rates to new highs. The continuing rise in the price of gold and the volume of bank loans means that the Fed has to continue its tight money policies. With monetary policy thus immobilized, the only way to brake a recession, and to stimulate an economic turnaround, is by fiscal policy -- taxes and expenditures.
While a few old-line liberal Democrats favor stimulating the economy by more government spending, the consensus is that the best and quickest way to force a turnaround is through a tax cut. Despite pressure from Republicans and some Democrats to get moving on a tax cut, the administration has been holding off in the hope that the recession might be short and shallow. But now it is clear that a stimulative tax cut will be pushed through the Congress early next year at the latest.
The administration still has hopes to shape the tax cut in ways that restrain inflation and promote supply. To that end there has been talk of concentrating relief in the area of investment depreciation, which fosters business expansion, and sales and payroll taxes that do not show up quickly in the Consumer Price Index.
But there has been no general agreement around the nature of an anti-inflationary tax cut. The longer the recession rolls, moreover, the harder it will be to develop enthusiasm for anything but straight-out relief to consumers.
In these circumstances, it makes sense, to me anyhow, to think about accompanying the tax cut with a major move to get on top of the complex bundle of interrelated difficulties that make up the national economic problem. To promote energy supplies, there would be a decontrol of gasoline, by the big gasoline tax advocated by Rep. John Anderson (R-Ill.). To hold down inflation, there would be a freeze on wages, prices, interests and dividends.
Most important of all, the president would appoint a National Economic Commission with bipartisan membership from business, labor and government. The office of the commission would be to devise a comprehensive, long-term strategy for dealing with the strange mixture of slow growth and rapidly rising prices, which now impairs the economy in ways that damage the national policy and the American role in the world.