That Word Recession Again

Recession is a dirty word to politicians and one that even economists use with some trepidation, partly because it is difficult to define precisely (see box next page). Nonetheless, five of the nine members of TIME'S Board of Economists --Otto Eckstein, Walter Heller, Robert Nathan, Arthur Okun and Joseph Pechman--declare that the U.S. economy is heading into a recession, one that cannot be blamed only on the direct effects of the fuel shortage.

At a meeting last week, the Board members revised only slightly their specific forecasts for 1974. Several who had looked forward to an upturn starting at midyear now think it will be delayed until the fourth quarter. That will produce only 1% real growth or less--.3% says IBM's David Grove. But most cling to forecasts that unemployment will peak at about 6% (Nathan, an exception, guesses 7% or more) and that consumer prices this year will average close to 9% higher than in 1973. Though scarcely cheery, those latter predictions are little worse than those made a few months ago. The inflation forecast actually assumes some improvement: the Government reported last week that consumer prices shot up in January at a staggering annual rate of 12%.

Worrisome Risks.

What is new is a tone of deeper worry than the economists were expressing at the end of 1973. Several concede that the economy could go down longer and deeper than they expect. While predicting a strong upturn at the end of the year, Eckstein volunteers that it may not happen. "It is possible that the economy will just keep on fading," he says. "Then we will be sitting here with the worst recession since 1958 and one that would be more worrisome because it would have gone on longer." Alan Greenspan, a Nixon adviser who does not yet use the word recession, essentially agrees. "The downside risks are greater than at any time in the postwar period," he says.

The most important division on the Board concerns the course that the present downturn is taking and what should be done to pull the economy out of it. The Board's more liberal members grant that the slide has been aggravated by the energy crisis. By now, they say, the gasoline shortage has seriously weakened consumer demand for cars; for housing, especially in distant suburbs; and for the merchandise sold by suburban stores that are reachable only by auto. So, they argue, the slump is taking on the characteristics of an old-fashioned recession caused mainly by inadequate buying. Heller and Okun fear that oil and gasoline price jumps will divert by $15 billion to $20 billion the amount of money that consumers have to spend for nonpetroleum products.

Mondale Plan.

To pep up consumer buying, the liberals prescribe the classic antirecession medicine of higher federal social spending and tax cuts. Heller and Pechman suggest increasing the personal income tax exemption from $750 to $850, a move that they calculate would save taxpayers about $4 billion a year. Alternatively, they advocate a proposal by Democratic Senator Walter Mondale of Minnesota to give each taxpayer a choice of using the $750 exemption or simply deducting $200 from his tax bill. The Mondale plan would provide about $6.5 billion in tax relief annually. Heller contends that tax cuts would not worsen the galloping inflation because it is being led by food and fuel prices, which will follow their own paths whatever happens.

The Nixon Administration vigorously opposes such ideas. Arthur Burns, Chairman of the Federal Reserve Board, declared last week: "I would strongly advise against adoption of a generally stimulative fiscal policy." Greenspan and Banker Beryl Sprinkel agree. In their view, the current downturn is analogous to the kind of slump that is caused by a crippling strike, like the one against the steel industry in 1959. The energy crisis has disrupted business abruptly and severely, they say, but as consumers and businessmen adapt to it, output will recover without any special stimulation, just as it does when a big strike ends.

Consequently, these conservatives argue, tax cuts or a too-great expansion of the money supply by the Federal Reserve would fuel inflation by pumping too much demand into the economy--if not this year, then in 1975 or 1976. Says Sprinkel: "If I really thought we were going to have the conventional type of downturn that could become cumulative until we do something, that would shove me in the direction of expanding the money supply more rapidly. But that is not my analysis. I think it would be a tragic mistake to turn open all the spigots."

Board members generally agree on two other conditions that must be met before the economy can pull out of the present slide. First, the Government must straighten out its allocation programs to shorten the gasoline lines. In particular, says Pechman, housing starts, which fell 44% during last year, will not revive until buyers are convinced that they can get gasoline. If they are not, he says, "this particular industry, which everybody is relying on in large measure to get out of the recession, may be flat on its back for quite a while." Second, the auto industry next fall must bring out new car models that capture the fancy of buyers much more than the '74s did. Eckstein wryly observes that his forecast of an end-of-the-year economic rebound reflects "an act of faith" that both Washington and Detroit will play their proper roles.

One development that some of the economists doubt would help much to end the slump would be a lifting of the Arab embargo on oil sales to the U.S. Okun sarcastically states that an easing of the embargo would be "one of the great nonevents of modern times." He and some others think that the Arabs will continue to hold down production tightly in order to maintain the sky-high prices they are now getting for petroleum. So, they believe, when the embargo ends, the production cutbacks will not, and U.S. oil imports will rise very little.

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