President Carter and the Federal Reserve Board intend to keep squeezing the American economy until it cries "ouch" and falls into a recession.
Nothing short of that will spell success for their latest anti-inflation push, administration and Federal Reserve officials believe.
The revised and balanced budget that Carter produced Friday as part of that push will apply the fiscal brakes harder toward the end of this year than has any other budget since the mid-1940s, just after World War II.
Carter's choices, forced upon him by inflation running at nearly a 20 percent annual rate, mean that, among other things, taxes, gasoline prices and unemployment will be going up, while credit availability and spending for the poor will be going down compared to earlier plans. Defense spending, marching to its own drummer, will still be on the rise.
One repsonse to these indices of anti-inflationary pain came yesterday from Douglas A. Fraser, president of the United Auto Workers. "President Carter's budget cuts are Herbert Hooverism resurrected," he complained. "It is an absoulte outrage that they should be proposed by a Democratic administration."
But the lines between Democrat and Republican, between liberal and conservative, are becoming blurred by the surge of inflation and the prospect that it will not improve any time soon. Carter, for instance, has assurances from the Democratic leaders in Congress that they fully support this drive to balance the 1981 budget, even if it means painful cuts in some social programs.
Through a combination of tax increases and spending cuts, Carter plans to turn a budget deficit of more than $36 billion in 1980 into a surplus that could run as high as $13 billion in 1981. Moreover, this is supposed to happen in the face of a mild recession that will lop billions of dollars off tax collections as incomes and profits drop and will add other billions to outlays for unemployment benefits and other income-support payments.
Altogether, the budget effectively will put about a $75 billion squeeze on the economy, an unprecedented move toward restraint that is equal to 3 percent of the gross national product.
Separately, the Federal Reserve decided consumers and businesses were still finding it much too easy to borrow -- except for home mortgages, which can hardly be found these days at any price -- despite record-high interest rates.
The Fed has made a mighty try at allowing the marketplace to ration credit through steadily rising interest rates. But it discovered that in a time of high inflation, high interest rates do not discourage enough borrowers. t
So, with the help of a presidential declaration invoking the sweeping powers of the Credit Control Act of 1969, the Fed put a new financial burden on lenders who increase their total consumer lending and took other steps to limit bank loans to business.
A new set of voluntary bank-by-bank limits on increases in lending will give lenders "an excuse to say no" to business borrowers, Federal Reserve Chairman Paul Volcker said. Officers of several major banks agreed with Volcker, saying they expected the voluntary program to be very effective.
Meanwhile, the "core" of the Fed's monetary policy is getting tighter, too. As prices rise, more money is needed just to finance the same level of economic activity. Since the central bank's targets for money growth have not changed even though inflation has worsened, the targets have become more restrictive.
The entire purpose of this is to slow down increases in credit use so as to reduce the demand for goods and services throughout the economy -- in other words, to bring on a recession.
But everyone from the president on down carefully cautioned that inflation would not subside for several months. It will not even be back into the "high single-digit range" until early in 1981, one of Carter's advisers predicted.
Some private economists believe prices will be rising 1.5 percent a month or more until summer -- an annual rate of almost 20 percent. On top of that has to be added, they said, the impact in May and June of the 10-cent-a-gallon increase in gasoline prices due to the $4.62 fee Carter imposed yesterday on crude oil imports.
Charles Schultze, chairman of the Council of Economic Advisers, argued, however, that the proper measure of the latest anti-inflation effort is not its immediate impact on the price indices compared to where they are now. The real concern is what might have happened if the administration and the Fed had not acted.
He had no precise estimates of what would have happened if "we had sat on our hands and the Fed sat on its hands, except it would scare the very devil out of me."
"It was absolutely necessary for the president, for the Federal Reserve, to take the kinds of steps they have taken jointly," Schultz declared. "We also believe it will make a major difference in what would otherwise have happened."
Schultze, along with many other economists, has been deeply worried by chaotic conditions in credit markets. Some businesses and state and local governments have been unable to borrow money to make investments in new plants, highways, and schools.
At the consumer level, those wanting to use a credit card may find one harder to get, or perhaps more costly to use, though the Fed has put no new specific conditions on any credit card or other unsecured lending.
On the other hand, a consumer finding his credit more expensive or harder to get might at the same time benefit from his community's ability to still borrow money and at less astronomical rates. That could pay off in lower local taxes, for instance.
Someone who loses a job because of a recession will feel the full brunt of Carter's anti-inflation policies.But how does his loss and pain stack up against the pain of lowering the inflation rate that affects everyone, employed and unemployed alike? The administration has opted to fight inflation.
Anyone with a car will also feel the impact of Carter's decision to put an import fee on crude oil and load it onto gasoline prices. But that will reduce gsoline consumption by about 100,000 barrels a day, reduce oil imports and perhaps, help a little to hold down future increases in world oil prices.
Beneficiaries of some of the government spending programs that are being reduced will feel a loss, too. But balancing the budget has become an overriding symbol of Carter's willingness to deal with inflation.
Balance alone will do little to slow down rising prices, but without it inflationary expectations would have kept on soaring, and without the sort of substantive actions that were taken, inflation probably could not be brought under control.