Bad Things Come in Threes

Economy & Business

Amid price surge, output slump and energy crunch, Carter seems stymied

From all sides, the intertwined problems of inflation, recession and energy squeeze are closing in on the U.S. economy. Prices keep roaring ahead at a double-digit pace. Inflation-straitened consumers, who have long kept the economy rolling by spending above their means, are pulling back on their purse strings. So the longest, most sustained economic advance in U.S. peacetime history is rapidly coming to an end. As the nation heads toward its second energy-fueled recession in the past five years, the Carter Administration seems adrift and out of ideas for fighting back. Said a high Administration official: "The goddam economy is coming apart at the seams. And look at our program!"

What program? The Administration's wage and price guidelines, the program that business people and wage earners love to hate, has been as dead as Confederate currency since early spring. Last week a federal district court judge in Washington nailed the coffin shut. Judge Barrington D. Parker ruled in favor of the AFL-CIO and nine other union plaintiffs that President Carter had exceeded his authority in promulgating the guidelines. By threatening to withhold federal contracts from companies that violated the guidelines, the judge concluded, the program was coercive and thus "establishes a mandatory system of wage and price controls, unsupported by law."

Staffers at the Council of Wage and Price Stability insist that they can still enforce the guidelines by making companies targets of public censure, but some of the targets could not care less. Even as Judge Parker was gutting the program, White House Inflation Czar Alfred Kahn was publicly attacking Amerada Hess, an oil company, for breaching the price standards. A Hess spokesman retorted, almost sneeringly: "We regret that the guidelines, as established by the council, do not allow us to comply." Groaned one Administration official: "They're thumbing their noses at us."

Kahn gamely announced that the Administration would appeal the ruling, but meanwhile the White House lacks any credible inflation policy. Said Kahn: "We've got our hands in the dike, and the problems are overflowing anyway."

More and more, the Administration seems to be bereft of solutions to inflation, which has been steaming along at a 14% annual rate over the past three months. In economic counseling to the President, Domestic Affairs Adviser Stuart Eizenstat, 36, has now all but eclipsed not only Kahn but also Treasury Secretary W. Michael Blumenthal, Chief White House Economist Charles Schultze > and Energy Secretary James Schlesinger. The policy seems to be to wait for a recession and hope that it will contain the price explosion.

An economic downturn is clearly coming. "We're heading toward a recession, and I think it's a matter of a month or so away," says Washington University Economist Murray Weidenbaum. An outpouring of almost consistently weak statistics has persuaded more and more economists that the recession, which was commonly expected to pounce in the late summer or autumn, will arrive sooner. Michael Evans, the gloomy guru of Chase Econometrics, who has been predicting a slump for months, declares: "The recession is here." Most experts still expect the recession--loosely defined as at least two consecutive quarters of decline in the gross national product--to be shallow and last only six to nine months.

The G.N.P. grew only .4% in the first quarter, and a snapback in April had been widely anticipated. Instead, the Government's index of leading indicators, which gives some vague clues to future trends, declined 3.3% in April, the steepest plunge since 1974 and the fourth decline in five months. Industrial production fell 1%, housing starts remained sluggish, retail sales were flat, real personal earnings were down 2.6% and durable-goods orders plummeted 8.7%, their sharpest drop in eleven years. Alan Greenspan, business economic consultant, estimates that April's real G.N.P., discounted for inflation, dropped by nearly 2% at an annual rate. If that is so, achieving even a small increase in the current quarter would require a more robust rebound in May and June than is now evident.

Though one of May's earliest and most sensitive indicators, unemployment, remained steady at its April level of 5.8% of the labor force, auto sales slumped in the second ten days of the month to an annual rate of 7.9 million units, the lowest since January 1978. Says Arthur Okun, senior fellow at Washington's Brookings Institution: "If May is lousy, then this quarter is going to be a negative quarter, and we'll be in a recession."

The Administration's bitter-end optimists contend that April's figures were badly skewed by the Teamsters strike and floods in the Midwest. Daniel Brill, the Treasury Department's chief economist, points to the brisk growth in business spending as proof of the economy's continuing strength. Still, Treasury Secretary Blumenthal last week trimmed his growth estimates for the year as a whole down from 2.3% to 2%--or less.

More than anything else, the Administration suffers from an inability to send out coherent, consistent signals on energy policy. As crude-oil inventories declined earlier this spring, the White House began urging oil companies to rebuild their crude stockpiles, even though doing so unavoidably cut into refinery output. Later, with stocks of refined heating oil and diesel fuel also dangerously low, the Administration urged oil companies to rebuild them too, even if gasoline production should suffer in the process. When gasoline output did not increase as it normally does in the spring, the Administration changed course again. Complains a top oil-industry lobbyist in Washington: "From now on, if DOE tells us to do something, I'm going to ask that they put it in writing."

The fine tuning seems momentarily to be replenishing crude-oil stocks largely because the Administration is now urging oil companies to go out and buy whatever crude they can acquire on the world market. Diesel fuel and heating oil remain critical problems. Diesel is still generally available to farmers and truckers, though at prices that brought a column of truckers to Washington last week to double-park their rigs in front of the White House in protest. But heating-oil stocks have dwindled to only about 85% of last year's levels, and they must be rebuilt by autumn if they are to prevent severe winter shortages.

The squeeze is being aggravated by competition from Western European importers, who are paying premium prices to buy up heating oil that is refined in offshore Caribbean refineries and normally goes to the U.S. market. To ease the pinch, the Administration is now providing a temporary $5-per-bbl. subsidy for U.S. importers to match the European price. This has infuriated Europeans, who rightly argue that U.S. policy is fueling a price war that will hurt everyone.

The Administration last week also started phasing out oil price controls in an effort to stimulate both increased domestic production and decreased consumption. With controls loosening, U.S. prices will rise whenever cartel members post increases. Economist Okun figures that a $1 raise by OPEC adds $4 billion to U.S. prices and drains $4 billion from U.S. consumer purchasing power. Admits Inflation Adviser Kahn: "The standard of living is going down, and there is nothing that I can do about it. The question is how to divide the burden without tearing ourselves apart."

Since April, when OPEC boosted prices 9% to an average of $14.55 per bbl., price gouging by individual members has pushed up charges for some grades of crude to $20 or more per bbl. Lately cartel members have been leapfrogging each other to grab ever higher prices. No sooner did Algeria and Nigeria post unilateral increases of up to $2.45 per bbl. on their low-sulfur crude than Libya raised the price of its own competing grade by a comparable amount. The increase, Libya's second in a month, was promptly followed by a rise by Iraq as well. Even Saudi Arabia, which is generally regarded as a pricing moderate in the cartel, tacked a $1.40-per-bbl. increase onto its top-of-the-line "berri" light crude. Late in the week, Iran started the whole destructive process all over again by jumping up its prices another $ 1.30 per bbl.

OPEC could be poised for a further jump in prices. Production from Iran hovers at about 4 million bbl. daily, or approximately two-thirds its prerevolutionary output. But violence is flaring once again among oilworkers in the fields of Khuzistan. If the trouble results in even a modest drop in exports, that could send prices shooting into orbit.

Prices will probably rise at least somewhat in any case when the cartel meets in Geneva on June 26. One possibility being urged by both Saudi Arabia and the United Arab Emirates: dumping the bewildering hodgepodge of existing prices and settling on a single figure for all members, perhaps at a new level of $17 to $18 per bbl. Doing so would be coupled with a pledge by members not to add on additional premiums and surcharges. That would seem merely to ratify the cartel's unilateral increases since April, with no assurance to importing nations that a new spiral would not start almost immediately.

The truth is that in both energy and the economy the deterioration has by now gone too far for the Administration to do much of anything. The cooling economy cannot easily be turned around--nor, in fact, should it be. Congressional enactment of mandatory wage and price controls remains a remote possibility if inflation shows another alarming burst as the economy winds down. But, short of that, recession seems about the only option still open to the Administration to curb the nation's crippling consumption of oil and to slow the price surge.

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