The Politics of Recession

The difficulty with using the budget to attack inflation was that a recession might well result, bringing unemployment, lower profits, and bankruptcies. Recessions are not popular; neither, under normal circumstances, are presidents who go out of their way to start them.

Carter faced unique difficulties because he was a Democrat. Recessionary policies would attack his party's basic constituencies: labor and beneficiaries of social programs. In October, James Fallows reflected on Carter's plight:

Ford and Nixon were Republicans, and therefore had some theoretical excuse for tolerating unemployment while fighting inflation. For a Democrat to do that is like an American fighter plane joining a kamikaze squad: no one can figure out what's in it for him.^[8]

Because Democratic politicians were particularly opposed to unemployment, and because Republican politicians were particularly opposed to Democratic administrations, Carter could count on no one to support a recessionary budget. Beyond such short-term tactical difficulties, to pursue unemployment explicitly flew in the face of the mission and history of the Democratic party. Democrats had become the majority party because, in the Great Depression, they had worked to reduce unemployment and its miseries. Democrats built the modern welfare state so that fluctuations in the economy, the boom-and-bust business cycle, would not leave millions destitute. As the party of full employment, Democrats liked to portray Republicans as the party of unemployment. Even in January 1980, when the Carter administration's inability to control inflation caused Americans to feel that Republicans would be better at running the economy, the Republican party's own polls reported that Americans (by nearly two to one) still believed that Democrats were better at reducing unemployment, helping young people buy homes, and

providing financial security for the elderly.^[9] If they began to create unemployment, what were Democrats good for? If the public wanted to cut social programs, why not just hire some Republicans to do the job?

Caught in a double bind, the administration, like Goldilocks, wanted a recession that was "just right": one that would both reduce demand (one source of price pressure) and be seen to reduce demand (thereby reducing expectations of inflation, a major source, some thought, of the spiral), yet not hurt anyone very much. Ideally the recession would be long enough to convince the public but short enough to seemingly end by election day. By January 1980 it may well have been too late to accomplish any of those goals.

Carter's Goldilocks budget predicted an unemployment rate of 7.5 percent for 1980, inflation of 10.4 percent, and a FY81 deficit of $15.8 billion. Defense spending was up by choice; entitlements were up by inertia; and the remaining domestic budget was held constant or slightly decreased. The deficit would go down, in spite of higher unemployment, because taxes would go up. Inflationary effects on wages and legislation passed or in progress (e.g., the projected adoption of the windfall profits tax on oil companies and a January 1981 scheduled increase in the social security payroll tax) would increase revenues by 14.5 percent over the FY80 level, compared to a 9 percent spending increase.

Essentially, Carter was pushing the economy toward recession with higher taxes. His budget message promised to limit the pain of the unemployed. The deficit, he said, was only one cause of inflation. But the basic message remained that "by continuing a clear and consistent policy of restraint, the 1981 budget ensures that the federal budget will not be an inflationary force in the economy."^[10] Another term for restraint was unemployment.

The president and his advisers had decided that to limit inflation—and to be seen as steadfast in this—was more important politically than to avoid tax increases. They believed that the public was willing to pay a high price to stop the inflationary spiral.^[11] Yet accepting unemployment levels of more than 7 percent without countermeasures was extraordinary, especially for a Democratic administration. The administration could not have accepted such a grim prospect if its economic theory had offered any alternative.