Charles L. Schultze, chairman of the Council of Economic Advisers, yesterday labeled as "nonsense" assertions by advisers to President-elect Ronald Reagan that the nation will face "an economic Dunkirk" early next year.
Schultze, in the first such public post-election shot at the Reagan economic team by a member of the Carter administration, said such talk is not only belied by the basic strength of the economy but can make current difficulties worse by further upsetting jittery financial markets.
"If [Reagan administration officials] end up having to be evacuated from a beach at Dunkirk, the Carter administration didn't pin them there," an obviously annoyed Schultze said.
Rep. David A. Stockman (R-Mich.), designated by Reagan as director of the Office of Management and Budget, and Rep. Jack Kemp (R-N.Y.) used the phrase "an economic Dunkirk" to describe the conditions that may confront the new administration when it takes office.
Stockman and Kemp, in a highly publicized memo in which they urged Reagan to plan to declare an "economic emergency" as soon as he takes office, said those conditions likely will include very high interest rates, high inflation, a federal budget that is out of control and a new downturn in the economy.
Schultze termed the proposal to declare an economic emergency "unfortunate and dangerous. They could create the conditions they are afraid of," he warned.
Meanwhile, Citibank, the nation's second largest commercial bank, increased its prime lending rate from 21 percent to 21 1/2 percent.Other major banks quickly followed Citibank's lead in lifting the interest rate they charge on loans to their most creditworthy corporate customers to its highest level in history.
Most market analysts believe interest rates are nearing their peak. The Federal Reserve Board yesterday fueled such speculation when it reported that the measure of the nation's money supply known as M1-A, which includes currency in circulation and checking account deposits at commercial banks, dropped by $1.9 billion in the week ended Dec. 10. M1-A is now lower than it was in mid-October, indicating that high interest rates are slowing growth of the money supply, which is the Fed's anti-inflation objective.
Schultze, in an interview, said the incoming administration is pursuing a "high-risk strategy" of planning to cut taxes and making large additions to military spending before other spending cuts are in hand. This would add to the budget deficit and crowd out some private borrowers, since at the same time the Federal Reserve intends to limit the overall availability of credit, he said.
The new administration "is spending a clear message to the money markets, and they are reading it," Schultze said, suggesting that part of the current surge in interest rates might be a reaction to expectations of the type of policies Reagan will follow.
Treasury Secretary-designated Donald T. Reagan and some other Reagan advisers have begun to play down the possibility that Reagan will declare an economic emergency.
Schultze acknowledged the serious problem of inflation and the difficulties of dealing with it by restricting growth of the money supply, which has produced such high interest rates.
At the same time, he ticked off some strong points: the U.S. dollar is very strong; the country had a near-record balance-of-payments surplus in the third quarter despite huge oil price increases; there has been a substantial reduction in oil imports and oil price controls are ending; and, over the last four years, "an employment performance unparalleled in the free world."
Private economic forecasters, while lowering their predictions for economic activity in 1981, have been raising their estimates for real output in the current quarter. The economy has been growing this quarter at more than a 4 percent annual rate, after adjustment for inflation, they said, which has kept unemployment from rising above the 7.5 percent range.