Carter's balance-the-budget plan vs. 18% inflation

Now comes the great test of President Carter's new anti-inflation program -- the tough and painful follow-through. Will Congress, in this election year, support the President by cutting enough programs to balance the fiscal 1981 budget, centerpiece of Mr. Carter's program?

Yes, says Senate majority leader Robert C. Byrd (D) of West Virginia, "Because we [in Congress] are getting a message from the people -- balance that budget.

"It is vitally important, absolutely essential," said Senator Byrd in a telephone interview, "that we send that signal [of a balanced budget] to our own people and to the world, because this will give credibility to the government's fight against inflation."

Few pretend that Mr. Carter's plan to cut more than $13 billion worth of spending from the budget will do much, by itself, to reduce today's roaring inflation, currently 18 percent at an annual rate.

"If you were a wild optimist," said economist Barry P. Bosworth in an interview, "you might think that [$20 billion worth of cuts] would take between 0.5 and 1 percent off the rate of inflation."

But, says Mr. Bosworth, former director of the White House Council on Wage and Price Stability (COWPS), there are other reasons for slashing spending:

A tighter fiscal policy (less government spending) should take some pressure off the Federal Reserve Board, which -- in its own effort to control inflation -- has pushed interest rates to record highs.

"Those interest rates today," adds Mr. Bosworth, "threaten the viability of the savings and loan institutions and of mutual saving banks.

"There is a fear that, if interest rates went even higher, those financial institutions could be on the verge of collapse. That's about $750 billion worth of mortgages and other forms of financial assets."

Also, says Mr. Bosworth, government firmness in cutting the budget could calm turbulent bond and financial markets, as well as convince ordinary Americans that they, too, should live in within their means.

To drive home this point, the President's program includes authorization to the Federal Reserve Board to cut consumer credit, particularly for nonessential spending.

Though restrictions will vary from bank to bank, credit card users will find it more expensive to put "luxury and nonessential" spending on credit cards, says Senator Byrd.

This, too, will do little to lower inflation -- even less, in Mr. Bosworth's view, than balancing the budget.

The thrust of the President's purpose -- both in balancing the budget and restricting nonessential credit -- appears to be to break the inflationary psychology now rampant in the United States, the conviction that it is better to buy now, pay later, even if famililes go deeply into debt to do so.

The whole question of follow-through is more complex than simply balancing the budget, hard as thay may be to achieve, given the clamor of special interests to protect their programs.

Senator Byrd says he is "urging the President to take this moment to launch a top-level, bipartisan review of the underlying problems and structural weaknesses of the US economy."

These include falling productivity, or output per manhour of work, and a low rate of capital investment to renew outmoded plants and equipment.

Mr. Bosworth cites energy, housing costs, and farm policy as areas to be tackled, if underlying inflation in the United States is to be curbed.

Mr. Carter touched on energy, by imposing a $4.62 fee on each barrel of imported oil. This will raise the retail price of a gallon of gasoline by at least 10 cents. This means that gas may cost $1.60 or more by the end of this year.

This fee will add to inflation, which on the surface contradicts the President's intent. He hopes, however, that "price rationing" will decrease American driving and lower US dependence on foreign oil.

This year alone, Mr. Carter told the nation, Americans will send between $80 and $90 billion overseas to buy petroleum.

Without a long-term attack on fundamental problems of the economy, most experts agree, only a long and deep recession -- with "10 to 12 million people unemployed," says Mr. Bosworth -- would make a real dent in inflation.

Mr. Carter's announced program may push the US into recession, but hardly of the kind or duration, many experts believe, that would raise the jobless rate beyond 8 percent of the labor force, compared to 6.2 percent now.