Did Carter pull wrong economic - signal switch?
President Carter may be regretting the day he approved credit controls. Administration officials, says Jerry L. Jordon, top economist at Pittsburgh National Bank, may now be asking themselves, "What have we done?"
Tight money imposed by the Federal Reserve System this year already assured a recession. The controls guarantee the slowdown will be greater.
"It could be as sharp as 1974-75," reckons Mr. Jordan, referring to the worst recession the nation has experienced since the Great Depression of the 1930s.
Evidence of a dip in business activity is piling up rapidly:
* Housing starts plunged in March to the lowest rate in nearly five years. The seasonally adjusted annual rate for the entire month of March was 1,041,000. But most of those starts were before the March 14 date of the credit controls.
"There's nothing happening in the housing industry; no activity, no sales," Michael Sumichrast, Chief economist for the National Association of Home Builders told the Wall Street Journal. "They're shutting down. I've never seen it so bad."
* Industrial production declined in March. So did retail sales.
* Sears, Roebuck & Co. officials are complaining that consumer confusion about credit controls has slowed sales in its retail stores.
And so on.
What worries Mr. Jordan is that the sudden curtailment of credit to consumers could worsen the slide in the final sales dramatically.
Through 1976 to 1979, consumer spending stayed much stronger than expected. With many individuals finding their balance sheets looking very handsome as the price of their homes soared, they felt freer to go into debt to purchase goods or services. Nor, with regulations limiting the interest on regular time deposits at commercial banks, were savings attractive when inflation was at a double-digit level. In addition, an attitude of buy-now-before-the-price-goes-up had developed.
Now, the access to credit markets is restricted. Moreover, inflation has begun to squeeze consumers disposable income -- the income left after taxes.
"The potential on the down side in consumer spending is very, very large," warns Mr. Jordan.
Commercial banks and other financial institutions were already moving to restrain consumer credit because of the high cost to the banks of attracting funds. Consumers themselves were taking it easier in the use of credit.
Then the credit controls came along and added tremendously to the cost of making consumer loans.
Mr. Jordan calculates that to make a profit, his bank would have to charge 40 to 45 percent on new credit card loan extensions. That's because the bank must now set aside some 16 percent of deposit growth as reserves; another 15 percent on new credit card loans; and finally the certificate of deposit money acquired to use for new credit could cost 17 or 18 percent in interest charges.
As a result of such high costs, commercial banks have been imposing all sorts of fees and service charges on their credit card business.
To a considerable extent that would have happened without credit controls. With controls, the banks are free to impose these new costs on consumers without worrying that customers will be able to run down the street to a competitive bank.
What bothers Mr. Jordan perhaps most is that a bad recession -- one deepened by controls -- might prompt Washington to suddenly reverse its anti-inflation policy. It has done so in previous recessions, resulting in inflation getting worse after each cycle.
"That is the argument for gradualism," he notes. In other words, the use of classic monetary restraint to produce only a moderate recession would help the government stick patiently to its anti-inflation position for years and not just months.
Dr. Allen H. Meltzer, an economics professor at Carnegie-Mellon University, complains that the credit controls are "a typical program to make sure the federal government gets its share of credit on somewhat cheaper terms." By linking consumer credit, more money is steered to the market for Treasury billls and bonds. Interest rates in the government market have been tumbling since imposition of the controls. One, further reason may be the security of government debt as lenders' fear for the safety of private debt increases as the recession becomes more evident.
Mr. Jordan agrees, adding that the controls will help the government obtain a bigger share of total national output of goods and services. Using different and "more realistic" assumptions that those used in the administration's 1981 fiscal budget, he figures that the government's share of gross national product will grow from 21.5 to 22 percent in calendar year 1979 to 23.5 to 24 percent by 1985.
"That means the private sector has to shrink," he said. Because government financing needs will make access of private firms to new capital through the depressed stock market or nearly destroyed bond market even more difficult, any such shrinkage will occur in capital formation. The private economy will not have the money needed for modernization and improved productivity.
What's to be done?
Stop the growth of government. Mr. Jordan recommends. Abandon the credit controls, even though this will be highly embarrassing to the administration. It could also weaken the dollar in foreign exchange markets which might mistakenly believe the Fed is abandoning its anti-inflationary monetary policy.