Curbing inflation: more tight money, budget cuts loom

Ronald Reagan now knows, from the reaction of the stock and money markets, that Americans and the world expect a lot from him in the battle against inflation.

Stocks boomed, the dollar firmed the day after the election, reflecting a perception that Mr. Reagan will do a better job at harnessing inflation than President Carter has done.

"If we don't control inflation," says Alan Greenspan, a key Reagan adviser, "we can't do very much else."

Mr. Greenspan, who was former President Ford's chief economic adviser, keeps a very concerned eye on the nation's underlying inflation rate, which -- during the Carter years -- has climbed from 7 to nearly 10 percent.

President Carter's program -- relative fiscal stringency, support of the Federal Reserve's effort to limited the money supply, and wage and price guidelines -- failed to halt the rise.

What will Reagan, as President, do that the present White House occupant could not, or did not, do?

Part of the answer comes from Greenspan, who cites controls on government spending and curbs on the growth of the money supply as key ingredients of future economic policy.

There are, however, limits to be obtained from such measures alone, unless government spending is cut enough to throw the US economy back into recession.

Charles L. Schultze, President Carter's chief economic adviser, believes it would take sustained unemployment in the 10 to 12 percent range to wring some inflation out of the economy by this route.

What, then, remains? Unit labor costs -- the steady upward creep of wages and fringe benefits, especially in big union contracts -- is a major bit of yeast in ballooning inflation.

Indeed, according to White House inflation fighter Alfred E. Kahn, labor costs are perhaps the primary reason why the underlying inflation rate continues to swell.

His voluntary wage and price guidelines having proved ineffective, Carter was prepared, in a second term, to introduce some form of what is called a "tax-based incomes policy" (TIP).

Simply put, this means tax relief for workers who agree to moderate their wage demands and corporate tax benefits for firms that hold down price hikes.

So controversial and cumbersome is this approach, and so outspoken is union opposition, that Carter had shelved any application of TIP until after the election.

Based on his record to date, Reagan would not appear to favor government interference, through TIP or other ways, in the setting of wages and prices.

Yet, in the view of many experts, wage escalation cannot continue to outstrip productivity gains, if inflation is to be curbed.

Inflation can be controlled, says the President-elect, if -- in addition to fiscal and monetary tautness -- income taxes are cut by 10 percent in 1981, thereby unleashing a fresh volume of consumer purchasing power.

This would so stimulate business, according to Reagan's analysis, that government revenues would rise despite the tax cut, budget deficits would begin to shrink, productivity (output per man-hour of work) would climb, and inflationary pressures would ease.

Meanwhile, interest rates -- already sharply higher than they were a short time ago -- continue to climb, for reasons unconnected with Reagan's election.

Despite efforts by the Federal Reserve Board to limit credit expansion, the nation's basic money supply has been growing so swiftly that the Fed's maximum growth targets for the year may be breached.

This may cause the central bank to tighten credit screws further, on the grounds that excessive expansion of the money supply breeds inflation.

When they reach a certain point, high interest rates discourage consumer and corporate borrowing, put a crimp in housing and auto sales, and threaten economic recovery.