THE CARTER administration has now revised its inflation forecast upward twice since the budget came out in January. One large reason for Mr. Carter's nomination in 1976 was his explicit and forceful response to the issue of inflation. He recognized that it was a menace. He understood that it was steadily raising people's taxes, and he pledged himself to reverse that pattern. But now inflation is three times the rate it was when he took office. If Congress succeeds in balancing the budget for next year, it will happen only because inflation has pushed taxes higher than ever. What has gone wrong?
Oil prices are part of the explanation, certainly, but far from all of it. To reconstruct this country's own mistakes in the hope of avoiding them in the future, it's important to recall the circumstances in which they were made. Inflation had reached an annual rate of about 14 percent at the end of the Nixon tenure. Then it dropped and, in the spring of the following year, the economy collapsed into the deepest recession since the 1930s. That recession scared the daylights out of just about everybody responsible for economic policy in both parties. For a time it seemed possible that the intricate system of economic stabilizers had broken down. All of the old fears of uncontrollable decline were suddenly alive again.
In the aftermath, both parties were desperately anxious to encourage growth and recovery.Inflation seemed to be winding down. But unemployment was stuck at levels far higher than traditionally acceptable. By gradual degrees, concern to promote a strong recovery from the last recession became a concern to avoid, or at least to mitigate, the next one.
To reach Mr. Carter's pledged goals without severe budget cuts, the new administration in 1977 adopted a policy requiring unrealistically high growth of the economy. The administration's first move was to propose a tax rebate to kick it into faster expansion (and, for the record, this newspaper supported it). But it was blocked in Congress by people of both parties who argued that business was already expanding strongly. They proved right.
Over the next year, the administration repeatedly misjudged the American economy's capacity for production and growth. The ceiling was lower than it thought. Around the end of Mr. Carter's first year in office, prices started accelerating again. When oil prices began to shoot upward last year, they came on top of a rapidly rising inflationary trend. But last spring the administration thought that the long-predicted recession had actually started. It seemed like a bad time to cut spending and social protection.
The past four years have been, on the whole, a time of indecisive and conflicting economic policy. It reflects the indecision and conflict within a government that has consistently overestimated the danger of unemployment and underestimated the danger of inflation. At the moment, Americans tend to regard the Thatcher government in Britain as the world's great example of hardhearted doctrinaire rigidity. But it might be noted that current interest rates are not so high in Britain as they are here, and the budget cuts in prospect there are hardly any larger. The moral is that indecision and pragmatic muddle are not always the same things as caution and concern.