The MacNeil/Lehrer Report; President Jimmy Carter's Inflation Dilemma

ROBERT MacNEIL: Good evening. Last week in South America President Carter promised some tough action on inflation when he got home. He`s started by jawboning parts of the steel industry into modifying recent price increases. But inflation is a subtle monster at the gates that doesn`t go away just because Jimmy tells it to. Now the monster is back in earnest, and many economists feel that Mr. Carter`s own policies are feeding it, not driving it away. That`s just what they didn`t want to do. Five months ago Charles Schultze, Chairman of the Council of Economic Advisers, spelled that out when we asked him how they planned to get the inflation rate down.

(Originally recorded November 2, 1977.)

CHARLES SCHULTZE: Chairman, Council of Economic Advisers: In the first place, you have to start with the fact that you want to run an` economic policy that doesn`t accelerate it again. The first thing you`ve got to make sure of is you don`t get it going again. And that means a responsible, steady economic growth, not one which is stop-and-go, but steady, in which you can reasonably and responsibly pull down the rate of unemployment, without doing it in such a rush that you threaten to set off inflation.

MacNEIL: Tonight Mr. Schultze is back with us, together with two national reporters, to examine the economics and the politics of Mr. Carter`s inflation dilemma. Jim?

JIM LEHRER: Robin, if the President is concerned about inflation, he`s got a lot of company. Until two months ago most of the opinion polls showed unemployment as the number one economic worry, but no more. It`s now clearly inflation. Back in January, for instance, an Associated Press-NBC poll had inflation -- the continual rise of prices -- as the biggest economic problem to only thirty-eight percent of the people. But after a tough winter that same poll last month had inflation jumping eleven points, to forty-nine percent, as the economic problem which bothered people the most. A recent Harris poll lays it out in even starker terms: eighty-two percent of the people Harris polled rated inflation as their premier economic anxiety.

The polls pretty well reflect what has actually been happening, too. Unemployment had been number one on the dread scale for most of the previous fifteen months. That`s because inflation had maintained a fairly moderate pace, prices in 1976 rising only five percent. 1977, the inflation figure went to 6.6 percent; then came this past January and February, with the consumer-price index climbing at an average annual rate of 8.4 percent. It was particularly visible at the grocery store, with food prices going up at a 14.4 percent yearly rate. The President obviously doesn`t buy his own groceries, but he definitely and regularly hears from people who do. Robin?

MacNEIL: Before talking with Mr. Schultze, the man with the unenviable job of trying to steer the economy away from inflation, let`s look at the problem from the point of view of two reporters who have the luxury of being outsiders, first the economic side. Leonard Silk is a financial columnist with the New York Times. Leonard, critics of the administration say that Mr. Carter s own policies are making inflation worse. Is that a fair criticism?

LEONARD SILK: Well, there`s a certain amount of fairness in it, I think. In one sense it is this problem of dilemma that you have in your title for the program tonight. Unemployment, as you mentioned a moment ago, was considered the primary problem during most of the past year that the President has been in office, and he has pursued stimulative policies to try to get unemployment down. They have essentially worked. But the price for that has been some acceleration of the rate of inflation; there is nothing unique to Democrats or Republicans about that. By and large, expansions bring with them some intensification of price pressures. But the reason I would go a little bit beyond that, anyway, is that I think that one cannot give the administration high marks for the performance of the dollar. I think there doubtless were some public relations mistakes in helping to push the dollar down faster than otherwise might have been.

MacNEIL: And as the dollar goes down, things we buy with it abroad become more expensive here.

SILK: That`s right, including some things that we make here, that are then liberated to rise more or the demand for which increases more. I think that it depends on how you evaluate, for example, the energy bill; it`s a very complicated story. On the one side, in helping to push the dollar down by not getting a bill, inflation was worsened and the administration may get some blame for that. On the other side, the administration`s own program would have been to push up oil prices faster than they have gone.

MacNEIL: Some people, adding up various things like the Social Security tax increase, the proposed farm settlement, the coal settlement, minimum wage increase, things like that, come up with a figure of between one-half and one full percent added to the inflation rate attributed to those things. Would you make a similar calculation?

SILK: Oh, I think it`s awfully hard to get so fine with all these things, and there`s also that thing called inflationary expectations, which is kind of a catch-all for people who have motives for pushing up their prices or their wages faster. Here too, I think, the administration deserves some blame because of the way they have put forward programs that seem to have bigger price tags on them. And that does go for energy; I think it goes for farm; I think it has involved the coal settlement; it probably involves the rail settlement -- both of these were treated as though they were last year, instead of this year when they`re actually coming to a climax. Looking ahead to next year, with a little help from the president of Teamsters Union, people are expecting wages to go up faster. So at any rate, I think that the administration has contributed some, but partly it was that they were tackling a different problem.

MacNEIL: Okay. We`ll come back. The problem, of course, is not just economic. Every economic move the White House might make has heavy political baggage attached to it. Harry Ellis is an economic correspondent who covers the Washington scene for the Christian Science Monitor. Harry, do you agree with Leonard Silk on the contributing actors?

HARRY ELLIS: On the contributing factors, yes. I would broaden it slightly to say not only Carter administration responsibility but government responsibility, because I think Congress bears an equal share of blame for having accelerated inflation. In other words, through the minimum wage law, Social Security, the farm bill that now is still in discussion in Congress...

MacNEIL: In Congress today, as the committees began to tackle the budget, already there was talk by the Budget Committee chairman of putting a higher price tag on some of the programs than the President had asked for.

ELLIS: And also, even though Mr. Carter`s energy program would in itself add to inflation, still it is Congress that has passed no program, which has contributed to the weakening of the dollar, which in itself is inflationary.

MacNEIL: Okay. Now, what are the political considerations facing the administration in any action that it might take to deal with the rising inflation rate?

ELLIS: Very difficult. In the first place, all Americans are affected by inflation. Every American family has its purchasing power eroded by inflation, and therefore there is the overriding political concern as inflation goes up. But each of the steps that Leonard and I are talking about here that the government has initiated through legislation addresses itself to the often legitimate concerns of a segment of the population, and so the President faces this difficult responsibility of, how do you halt inflation for the good of all without treading on the toes of too many individual segments?

MacNEIL: I see. What is your understanding -- there`s been some published speculation about this -- of how much agreement there actually is within the administration on how to go on this?

ELLIS: I think there is widespread agreement among the President`s advisers that inflation is probably the top economic problem now and that it is becoming worse in a political sense. But a number of his political advisers look out there at the arena of labor, of urban dwellers, of farmers, and they say, "You have to be extremely careful not to alienate these people, these blocs, or you may frustrate your whole political purpose in trying to bring down inflation for everyone."

MacNEIL: I see. Is inflation likely to be an important issue in the Congressional elections that are coming up?

ELLIS: I would think that it`s going to be a top issue, because inflation almost certainly, no matter what President Carter announces in his anti- inflation program, is going to keep on accelerating because the root causes still are there and cannot be turned around quickly. So I would think that by the time the Congressmen go home to woo their voters, they`re going to find a very troubled lot of people back home over inflation.

MacNEIL: Leonard, as you study this, what do you see as the range of options open to the White House to deal with the inflation problem, and which is the likeliest option that you think?

SILK: Well, the first option would be to have a much tougher fiscal policy to try to reduce the deficit that`s projected for the next fiscal year, from$60 billion to some markedly lower figure. That would involve either forgetting about tax cuts or decreasing government expenditures, and I don`t think that either of those at the moment is likely to happen. The second would be to get a much more restrictive monetary policy, but I don`t think that will happen either because to do that would be probably, given the existing thrust of the economy...

MacNEIL: Raising interest rates and tightening the money supply.

SILK: Raise interest rates, tighten up the money supply. I think that there`s already worry about a recession; this would intensify that. And although the administration, as well as the Federal Reserve itself, call for moderate and cautious monetary policies, I would say that they have already been relatively moderate and cautious -- the money supply has not been growing rapidly -- and there isn`t very much they can do in that area, either. So thirdly, you come to look at the whole different range of things that are more specifically pointed at particularly objectives -- on wages and prices, or on the whole panoply of things from lumber prices, health care prices, shipping costs, right through the list of all the things that government can influence, either for good or bad. And I would think that it is in this third area that we are likely to see the President working, including, for example, on pay of civil servants and things that are directly under his control.

MacNEIL: Harry Ellis, taking those options that Leonard has outlined -- and I guess you wouldn`t quarrel with those -- the ultimate option, the kind of ultimate deterrent, is often regarded as compulsory wage-price controls, the club in the closet, so to speak. Is that club going to remain in the closet on this occasion?

ELLIS: It will remain in the closet, I think, unless things got a lot worse than anyone expects them to, simply because wage and price controls are not considered effective. One, they bottle up inflationary pressures, which tend to burst forth after those controls are lifted; and second, they breed cynicism, as I think you yourself have said, Leonard, among the populace; they`re extremely difficult to enforce; labor claims that they are selective, that they punish labor more than they do business. So I think that that weapon will not be used, and the administration has been explicit about that.

MacNEIL: Would you agree with Leonard that the likely option lies in the area that he described as the third, of trying to target action in individual areas?

ELLIS: Yes. And you must couple that with the President`s aim to get business and labor to decelerate wage and price increases below the average increases of the last two years. Now, if he is going to do that effectively -- and of course, he is aided in that by U.S. Steel`s willingness to roll back its increases -- if he is to do that, he then has to take the other horn of the dilemma and show that he is willing to do some difficult things of his own. And that will require perhaps cutting back on federal pay increases for government workers and also vetoing any farm bill such as the Senate has passed. In other words, he`s going to have to alienate some of these constituencies we`ve been talking about if he is going, on the other hand, to persuade business and labor to moderate their claims.

MacNEIL: Okay. Well, Jim, those are the views of the gentlemen who have the luxury of looking from the outside.

LEHRER: Yes, and now let`s go to the man whose job it is to actually advise the President on what to do, not only about economics generally but of course inflation specifically, and that`s Charles Schultze, Chairman of the President`s Council of Economic Advisers. First, welcome back, Mr. Schultze. You heard what the team of Silk and Ellis had to say about the dilemma that you and the President are facing on this question of inflation, and let`s begin at the beginning where they began. Mr. Silk says that you`ve been tackling a different problem, unemployment, and now we`re paying the price for that. Is that true?

CHARLES SCHULTZE: No. Let me put it slightly more gently: that we are indeed, and have been for some time, faced with a difficult inflation problem. The rate of inflation, apart from fluctuations in food prices-- which turned out to be low in 1976, higher in 1977, and even a little higher now -- but apart from that have been running six and a half percent, maybe six percent; there is a little bit of a tendency to tick up now. On top of that we`re now getting some big increases in meat prices, in particular is what`s hitting the consumer. The rate of inflation has speeded up, but it`s not principally because we brought the rate of unemployment down. I don`t want to suggest it isn`t a problem, that as you bring that rate of unemployment down further you don`t have a problem; but that isn`t the fundamental thing. The fundamental problem is, how do we stop any acceleration, and secondly, how do we begin to wring out some of the inflation which didn`t just happen this month or last month but has been going on for some time now?

LEHRER: Well, I`ll let you now answer your questions. How do you do that?

SCHULTZE: Well, in the first place, if we knew there were any magic answers they would have been put in on January 21, 1977, at least. It`s a matter of...

LEHRER: Well, I was just going to say, let`s go to the specifics that Len and Harry just went through. Len said it`s more likely, and Harry agreed, that you would go the targeting route. We`re ten days from when the President is probably going to announce a policy and what he`s going to do. You don`t want to go into the specifics of it, but are they on the right track? Is that part of the way it`ll go?

SCHULTZE: Yeah; without going into the specifics or necessarily endorsing any of the specifics they mentioned, that`s the general route. Really there are two parts to it. One, as I said the last time I was here, is to try to make sure that the economic expansion we are pursuing is moderate, steady, doesn`t go in a rush, doesn`t overheat the economy. That is our game plan, and that we`re following, and there`s nothing that seems to be going awry with that. The second thing we want to do is to take precisely_ the kind of actions Mr. Ellis and Mr. Silk were talking about, in the sense that first the federal government itself can and should do a number of things to deal with those aspects of inflation where it itself is responsible, or where it itself has some direct control. Now, the impact that that can have alone on the rate of inflation isn`t terribly great, but it`s terribly important symbolically, because...

LEHRER: To set the example?

SCHULTZE: To set the example for the rest of the economy. We do not want to lick inflation by running us into another recession, having weak markets and a slack economy and trying to wring it out by agony. We do not want wage and price controls. Therefore...

LEHRER: That is truly on the shelf, as Harry says.

SCHULTZE: I wouldn`t even say it`s on the shelf; we do not want and will not impose wage and price controls. That leaves us, therefore, with a combination of government showing its own bona fides, that both really and symbolically it can do some things, and asking business and labor, not to do the impossible, not to turn inflation off overnight, but gradually to decelerate, to reduce the rate of wage and price increase from what we`ve been having; and both legs of that are necessary, for the federal government to do those things, and in turn to constantly remind, bring before the public eye, make comments, whatever is needed to try to get that private business and labor cooperation in the second half of it.

LEHRER: That`s called jawboning, right? Isn`t that what you columnists call that?

SCHULTZE: Well, whatever the name is, I don`t know, but what it is is really voluntary actions according to a standard of behavior.

LEHRER: Okay. As Silk and Ellis say, though, there`s no way that the administration`s going to be able to do this without alienating some constituencies -- in other words, biting some political bullets. Is the administration prepared to do that?

SCHULTZE: Yes. I would prefer to use the term there is no way to do it without trying to get some reasonable approach on the part of some constituencies; but yes, you`ve got to bite some bullets.

LEHRER: Is the mood there at the White House now to do something in a dramatic, bold way, or to do little things here, little things there that will eventually all add up to something good? Are we going to get something in ten days? Is the President going to say, "Hey, we`re going to do something about inflation; we`ve got a `war on inflation,` we`re going to do this, this, this, this. Hey!"

SCHULTZE: Well, again, you put me in the position where the words "war on inflation," "something bold and dramatic"...

LEHRER: I withdraw that.

SCHULTZE: No. I think something positive, a number of actions where the government shows that it is going to do what it can do, yes. If you`re looking for some sort of a major, magic new answer, no. If you`re looking for a policy which will enable the private sector to follow the lead of the federal sector and begin to get this down, yes.

LEHRER: Robin asked Harry Ellis if there was agreement among the advisers at the White House on what should be done. I`ll ask you: is there?

SCHULTZE: Well, of course, when you get a group of five, four, six, eight people, they never come up initially with perfect agreement on what you are going to do, of course not. On the other hand, is there general agreement along the strategy I`ve talked about? Absolutely yes. Do we have, among all of us, shades and nuances that have to be worked out, staff work to be done, exactly how do we do it? Of course there are differences to be worked out. But fundamentally, in terms of some massive difference or basic policy difference, no. Everybody is agreed.

LEHRER: Is there a conflict between the economists like you and the politicians at the White House, Hey, look, you can`t alienate my people over here, and that sort of thing in terms of targeting particular programs?

SCHULTZE: No, there really isn`t. Now, again, I want to leave you with the right impression. In the first place, you wouldn`t want this man`s government run solely by economists; and I am not suggesting that you get a group of economists in a room and you did what they wanted to do and everything would be hunky-dory. But there is no fundamental disagreement between economists, accountants, political scientists, political advisers, other advisers; there is not. That fundamental, basic strategy I`ve talked about is agreed on.

LEHRER: When you were on this program in November, you said that you anticipated that the inflation rate for this year, 1978, would go at about six percent, and we just saw January-February was up to 8.4 percent. Do you think it`s going to be six percent, or higher by the time the year is ...

SCHULTZE: No, I think it`s going to be higher.

LEHRER: How high?

SCHULTZE: Well, I`m not prepared to give a number, but I`d say it would be not what I would call "crisis" higher, but some higher. I think if you look at what`s been going on, you`ve had two things affecting prices that are pushing them up somewhat faster than we indicated. First, meat. Meat prices have been rising very significantly. I`m not suggesting they`re going to come down; they are not. On the other hand, they`re not going to continue rising at this rate. But they`re going to go up faster this year than we thought, quite frankly. Cattle herds in the United States have been going down for a large number of years, and this is now beginning to hit us. Secondly, the impact of the declining value of the dollar; while again it hasn`t had a dramatic impact and it`s not going to have a dramatic impact, it is edging up prices somewhat faster than we figured, so I would say price increases modestly above that six percent we are likely to get this year. On the other hand, we are not seeing kind of a fundamental acceleration; what we want is the policies to make sure that doesn`t happen.

LEHRER: All right. Robin?

MacNEIL: Leonard, do you agree with the administration feeling that this growth in inflation is not of crisis proportions?

SILK: Well, it is not yet of crisis proportions. I think that it could get to be if you did the wrong things. The rate of inflation, as Charlie just said, is moving up; I think that Federal Reserve Board Chair man William Miller today wrote a letter to Henry Reuss saying he expected six and a half to seven percent this year to be the rate. Now, I think it could go higher than that. I think that the big crisis year is unlikely to be this year but next year. If you had a repetition of what happened in coal, with thirty-seven and a half to thirty-eight percent three-year increases coming in, that would set in train, I think, a whole lot of things...

MacNEIL: For instance, on the railroads.

SILK: Well, that`s right. So I think there are dangers here that come out of the whole world international situation as well that are very, very serious, and I don`t think they should be minimized by playing games with decimal points.

MacNEIL: Mr. Schultze?

SCHULTZE: Well, first let me agree -- I want to make sure it`s clear, I think inflation is a serious problem, a very serious problem. I think that not only is it serious because of the fact that we don`t like inflation and what it does itself; it`s also serious because if we allow the rate of inflation to heat up -- and in fact if over time we don`t gradually try to bring it down -- we`re going to get in trouble in keeping employment up. So that one of the reasons -- only one, but one of the major reasons we want to deal with inflation forcefully -- is to make sure we can keep economic expansion going. I`m sure Mr. Silk would fully agree that if inflation were allowed to significantly heat up, we`d be in real trouble on reaching employment and unemployment objectives.

MacNEIL: Harry, Mr. Schultze mentioned the moderate growth game plan and said it was not going awry. Some commentators believe that the growth has slowed down to a point of being perhaps almost invisible. What is your comment on Mr. Schultze`s reading of the growth plan?

ELLIS: Well, the administration, of course, has set a four and a half to five percent growth rate for this year, and I believe that the first quarter growth has been slower than the administration anticipated when that projection was made. It might be interesting to hear whether Mr. Schultze thinks that the economy will grow quickly enough in the latter stages of the year to achieve that target, given the fact that we`ve had a slower first quarter.

MacNEIL: Mr. Schultze?

SCHULTZE: Well, we have had a slower first quarter, clear. As far as we`re able to tell, it`s principally on account of the very severe cold weather and to some extent the coal strike. If you look at the statistics that are now beginning to come in -- on insured unemployment, on retail sales, on new orders for durable goods, on automobile sales -- they all point to a very good snap-back from that. Whether we`ll come out precisely four and a half to five percent or not, I`m not sure, but my basic point is that even though the first two months of this year did see a slowdown in growth the basic underlying growth in the economy still appears to be going on.

MacNEIL: Go ahead.

ELLIS: I`d like to ask about a dilemma which certainly faces not only President Carter but the nation. One of the chief contributors to the weakness of the dollar is of course our mounting oil imports; and yet, in order to halt those imports, or halt the rise in those imports, the President`s program would raise the domestic price of energy, which is in itself inflationary. And so you have two goals: one, to get energy conservation in order to reduce oil imports; but on the other hand, that is inflationary, and you`re trying to bring down inflation. How do you solve that dilemma?

SCHULTZE: Well, in one sense you don`t solve it; you face up to the dilemma and admit it. There is no question about it that ultimately dealing with this energy problem is going to mean higher prices for energy. Not only is it inevitable, but we have to have it occur. Does that add to the rate of inflation? It does. What that means is, however, that you have to work harder at the rest of the economy in order to offset it. But it`s exactly one of the dilemmas of government; there is no way -- I mean no way -- to deal with the energy problem without getting higher prices.

MacNEIL: Related to that, Mr. Schultze, there are reports to the effect that the administration is considering rebating the proposed wellhead tax on oil to offset some of the Social Security tax increases. Can you confirm whether that is a decision yet?

SCHULTZE: No, I cannot.

MacNEIL: I see. Is it reasonable speculation?

SCHULTZE: Well, I can simply say, what you`ve done is heard some reports. We do not have the wellhead tax yet, and so we don`t have the revenues to spend.

MacNEIL: I see. How do you feel, Leonard, about the degree of psychological urgency that seems to be represented in what Mr. Schultze says about the approach they will be taking, in general terms? Is it sufficient to meet the degree of crisis there is in the rate of inflation, as you see it?

SILK: Well, I think that people in office and people not in office have different purposes. Somebody once said -- I think it was an American ambassador -- to me that his job was to minimize the news and my job was to maximize the news. And psychologically I think there is always that difference. I think the administration could use a somewhat heightened sense of crisis, which one feels when one sits in New York perhaps more than in Washington.

MacNEIL: We have about twenty seconds, Mr. Schultze. Do you want to respond to that?

SCHULTZE: All I can say is, Mr. Silk and I are only quarreling over the use of the word "crisis." We have a serious problem, it`s a worsening problem; we`ve got to do something about it, we intend to do something about it; so we really don`t have a disagreement.

MacNEIL: Well, thank you very much for joining us tonight. And thank you, Harry Ellis and Leonard Silk. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That`s all for tonight. We`ll be back tomorrow night. I`m Robert MacNeil. Good night.