With the turn of the season, the whole direction of the economy suddenly seems--at first glance--to have reversed itself. All spring, the talk was of recession. The one encouraging note was the unexpectedly low inflation rate. Now summer has come, and one preliminary statistic seems to say that the recession is over. Less happily, the inflation rate in May turns out to have leaped upward again. And once again, interest rates are accompanying it.
But perhaps nothing fundamental has really changed. Since the spring of 1979, the American economy has been caught in a rapid alternation of sharp contractions and weak expansions, canceling each other out. The output of the economy is almost exactly where it was more than three years ago--a plateau that is unprecedented in the past 40 years' experience. One major contributor to this pattern has been the government's unhealthy practice of running self-contradictory policy. Large budget deficits stimulate the economy to rapid growth, while firm restraint on the money supply sharply limits it. Instead of moving through the accustomed long cycles of growth, the country is now caught in a series of short, self-terminating swings and dips that has aptly been called oscillation.
The next stage is not difficult to forecast. The income tax cut, effective a week from today, will add more stimulation. That means higher employment. But it also brings with it some other effects that are less welcome. The consumer price index for May, just published, is a warning that the threat of inflation is far from resolved. The rise in the interest rates suggests that an expansion won't reach far. Just as happened the last several times, growth will shortly be choked off by the higher interest costs that are unavoidably generated by inconsistent policy.
If you had an unusually powerful magic wand and three wishes, what would you do about it? First, you would cancel the tax cuts for 1983 and later--both for businesses and individuals--to get the deficit moving downward. Next, you would endow the financial markets with a heavy ration of patience, the commodity that is in the shortest supply of all. Interest rates lagged behind the reality of inflation when inflation was ascending, which created the very low real rates of the late 1970s. The same lag will be evident as inflation descends, creating unusually high real rates for awhile. To get through this stage takes time. Finally, you would put the president, all his economic advisers and Congress under a spell in which it would seem wise and proper to them to accept a growth rate of 2.5 percent a year as their target for the economy, instead of frantically and compulsively pushing for an unrealistic 5 percent. By trying to gun the engine too fast, they have repeatedly stalled it. In the absence of a magic wand, it's hard to see a promising way to break that bad habit.