78 Outlook: One More Good Year
The TIME Board of Economists sees additional growth--and inflation
The thing that hath been, it is that which shall be.
--Ecclesiastes 1:9
The members of the TIME Board of Economists put it in more modern language, but that essentially is the forecast they are making for 1978. Despite all the doubts and uncertainties gripping consumers, businessmen and investors, the economists predict a year almost uncannily similar to 1977--a solid though unspectacular growth in production, incomes and profits, another strong rise in the number of people working, but no great reduction in unemployment. Inflation will speed up from its current pace, and that and other factors could set the stage for a downturn in 1979 or 1980. But for the next twelve months, TIME'S board members unanimously agree with Arthur Okun, a senior fellow of the Brookings Institution: after 2% years of recovery from the 1973-75 recession, "there is one more year of good news in this expansion."
The board's predictions differ from those being made by economists in the Carter Administration and by such private bodies as the Manhattan-based Conference Board only in being slightly more optimistic. But the members of the TIME Board of Economists have a special claim to attention: the predictions they made a year ago have been proved right, in one case to the last decimal point. Last December board members forecast that the real gross national product--that is, total production of goods and service discounted for inflation--would rise during 1977 by 4.8%; when all the numbers are added up, that forecast probably will be close to the bull's-eye. They also predicted that the unemployment rate at the end of 1977 would be 6.9%; the November figure was exactly that.
Now board members' forecasts for 1978, averaged out, go this way for the three key measures of the economy:
Real G.N.P. will rise 4.6%--an increase that is above the rate the economy can sustain year after year, but no more than adequate in the present situation to repair the ravages of the last recession. The rate of rise may decline to 4.2% or so by year's end, but a big cut in individual and corporate income taxes will keep anything like a recession from developing--next year anyway.
Unemployment will decline to an average of 6.6% for the year, and perhaps to 6.4% next December. That would still be high by any but recession standards. As in 1977, new jobs will be created rapidly; this year the number of people working has risen by 3.7 million--950,000 in November alone. In all, 92.2 million Americans now have jobs. But the increase has been offset by a flood of would-be workers, especially women and youths, into the job market. That pattern will continue in 1978.
Inflation, as measured by the consumer price index, will proceed at an annual rate of a bit more than 6%; if anything, the pace will be quickening twelve months from now. That will about match what board members and other economists consider to have been the basic, or underlying, rate throughout 1977--or 1976 for that matter. The officially reported rate in recent months has been lower--3.7% in October--but that was an illusory result of a temporary lull in food prices. The respite is now ending; in November wholesale prices, which often foreshadow what will happen to living costs, rose at an annual rate of 8.7%.
The overall forecast is cheering, considering the fog of worry about the economy that has enveloped the nation in recent months. For all its progress in production, jobs, personal income (up around 11 %) and corporate profits (about 12% ahead of last year, after taxes), 1977 brought the economy a set of nagging headaches. Stock prices tumbled through the year; the Dow Jones industrial average is now about 19% below what it was at the close of 1976 (see box).
Auto sales, a mainstay of the economic expansion, weakened in the final 20 days of November. The Carter Administration, in its first year in office, displayed what often seemed to be a fumbling and unsure touch in dealing with the economy. For example, the President has vowed to shun wage-price controls or even guidelines but has yet to proclaim any strong anti-inflation policy. Indeed, he has taken several actions, including signing into law a huge increase in the minimum wage, that will raise prices.
Because of massive oil imports and deep inroads into the American market for steel, color TV, microwave ovens and other products made by aggressive foreign competitors, the U.S. trade deficit is ballooning toward $30 billion, about five times the 1976 figure. That has sent the dollar to new lows against such currencies as the Japanese yen, German mark and Swiss franc, and set off a protectionist clamor for restrictions on imports to save American jobs.
The surest way to redress the nation's lopsided trade balance and stabilize the dollar is to slow the flow of foreign oil into the U.S., which is the chief goal of the President's energy program. The complex energy bill is now before a House-Senate conference, and last week the conferees approved one of the key Administration-supported measures. The legislators tentatively accepted the "gas guzzler tax" in just about the form the President first presented it. Under this law, which would take effect next fall, cars delivering less than 15 m.p.g. will cost an extra $200; those getting less than 14 m.p.g. will be taxed $300. If the mileage is below 13, the bite will be $550. Tax levels will steadily rise, and by 1985 cars doing less than 12.5 will be taxed a whopping $3,850. In that year, the levy is ex pected to save 175,000 bbl. of oil a day.
Many of the same problems that plagued 1977 will continue into 1978. One big one: lagging business investment. Corporate spending for new plant and equipment, discounted for inflation, rose about 8% this year. A Department of Commerce survey released last week indicates that business outlays will slow to an even more cautious rate of 5.4% in the first half of 1978. That is a far cry from the 10% annual rise the Carter Administration believes is needed to meet its goal of reducing unemployment to 4.5% by 1981. David Grove, a vice president of IBM and a member of the TIME Board of Economists, traces the hesitancy to a worldwide worry over business conditions--above all, the price and supply of energy.
Board members, however, see other factors that will keep growth rolling through 1978. Consumer spending, for one thing, remains strong; consumers this year have been spending more, and saving less, of their incomes than at any time since 1963. Christmas sales have started off with a surge that should give business a lift into the early months of next year.
In Boston, Leon Slayton, corporate vice president of the Jordan Marsh store chain, reports that sales during this Christmas season "are far in excess of last year's--and last year was an excellent year." Harold Krensky, president of Federated Department Stores Inc., says his company's sales are now 10% above a year ago, and he expects to maintain that pace throughout 1978. "There's no reason why it should not continue," he says.
The biggest reason for expecting continued expansion is that the Administration seems to have settled on its tax policy: it will recommend a sizable cut in individual and corporate taxes, while proposing few if any of the sweeping reforms that it once talked of and that frightened many businessmen and investors. Board members' forecasts assume that the President will propose, and Congress enact, a tax cut of $20 billion to $22 billion--$15 billion for individual taxpayers, $5 billion to $7 billion for business. That checks with word from Washington, where officials are talking of reductions that would save $300 a year for a family of four in the $15,000 to $20,000 income bracket, and of lowering the corporate tax rate from 48% to 46%.
A large cut in income taxes is needed just to offset the impact of rising Social Security payroll taxes, the wellhead tax on crude oil that the President has proposed and the so-called inflation tax. As inflation drives up wages and salaries, it pushes more people every year into higher income tax brackets, thus raising the Government's total take. Board Member Walter Heller, a University of Minnesota professor and former chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson, calculates that these factors will siphon $15 billion of potential purchasing power out of the economy in the next year and a half unless they are countered by an income tax cut. Some of the drain may be postponed. Late last week the White House agreed with House and Senate leaders to postpone any additional rise in Social Security taxes until 1979--though increases already required by existing law would still go into effect next year.
In any case, Heller doubts that a $20 billion tax cut next year will be enough to give the economy the push it needs. He would prefer a $30 billion slash, though he has little hope of its being enacted. Says Heller: "We are still afraid of the large numbers on fiscal matters that really go with the enormous size of the economy." Meaning: $30 billion seems gigantic, but it would be only about 1 1/2% of next year's G.N.P. More optimistically, Joseph Pechman, director of economic studies at Brookings, says that if Carter proposes a tax reduction of the size and type now being talked about, "I think it can be regarded as a positive step by all groups in the community."
Though it should keep production and employment growing, however, a tax cut will do nothing to ease what most members of the Board of Economists identify as the gravest problem of 1978: inflation. None of the economists can foresee any slackening of price increases, and some fear the rate may even speed up beyond 6%. Beryl Sprinkel, executive vice president of Harris Trust & Savings Bank in Chicago, predicts a 6.5% pace. Robert Nathan, a Washington business consultant, is afraid that if even a 6% inflation rate, combined with an unemployment rate exceeding 6%, persists beyond 1978, "we are going to get more frustration and more political unrest."
The economists have different reasons for fearing continued or accelerating inflation next year. Democrat Okun lists, among others, these factors: the drop in the value of the dollar will intensify inflation by making imports more expensive; wages will rise, especially (though surprisingly) for nonunion workers, who make up more than two-thirds of the U.S. labor force. So far, pay increases for nonunion workers have been moderate. But, says Okun, "nonunion wages have adjusted to a lousy labor market; as the labor market gets less lousy [meaning as unemployment comes down slightly] they will catch up."
Conservative Sprinkel offers a very different reason for fearing more price rises. In his view, the expansion in the money supply that the Federal Reserve Board has permitted this year (money growth was expanding at an annual rate of 12% in October) practically guarantees inflation next year. Alan Greenspan, a Manhattan business consultant who was President Ford's chief economic adviser, agrees. Says Greenspan: "What is the anti-inflationary policy for 1978? The answer is there is none"--meaning that no policy adopted now would have a chance of influencing prices until year after next.
Inflation--and what might be done to combat it--lies at the root of the economists' fears that, while 1978 will be "one more good year," it may be the last one for a while. Sprinkel's worry is that the persistence of inflation will prod the Federal Reserve into money-supply restrictions so severe, and the Carter Administration into tax and spending policies so draconian, that they will plunge the economy into a new recession. Says he, resignedly: "We may as well relax and enjoy it. We are going to have another good year, and some time in '79 or '80 we will crunch it one more time."
Okun has a different fear. Since the Federal Reserve has been unable to contain the growth of money supply by the usual method of moving funds in and out of the banking system, it is trying to hold down the money stock by pushing up borrowing costs. Since the start of 1977, the prime rate on bank loans to business has risen from 6 1/4% to 7 3/4% in November. Okun's fear is that the board will lift interest rates high enough to discourage borrowing and cause a recession in 1979. Says he: "The Federal Reserve is on a collision course with the kind of expanding economy we have."
Federal Reserve policy, of course, depends heavily on who runs the independent board--specifically, whether President Carter reappoints the crusty conservative Arthur Burns when his term as chairman expires next month, or chooses someone else. That has become one of the burning questions for 1978, and it divides the TIME Board of Economists along strict liberal-conservative lines. Conservatives, though they are displeased that Burns so far has been unable to keep the money supply from growing rapidly, contend that he must remain as the nation's chief inflation fighter.
Liberals argue that so long as Burns remains Fed head, Carter cannot get any coordination between fiscal (tax and spending) programs and the Federal Reserve's policies on money supply and interest rates. Says Heller: "Burns tells the Administration what it should do and what he is going to do and hands off what he is going to do and that is it. Replacing him* might make a difference in that it would replace monologue with dialogue." Yet liberals reluctantly conclude that Carter just might reappoint Burns anyway because the President might feel that Burns has become indispensable as a symbol of monetary rectitude.
Burns' fate aside, can anything be done to hold down inflation while pushing up employment and incomes? Board members offer any number of ideas, but none that seems likely to be both effective and politically acceptable.
Liberals Heller, Okun, Pechman and Nathan all urge some kind of "incomes policy"--essentially, presidential pressure on companies and unions to hold down wage and price boosts. Conservatives argue that that policy would only cover up inflation, and Grove, a nonpartisan who tends to liberal views, this time agrees. Wage-price guidelines, he thinks, would actually speed up inflation temporarily. Companies and unions would be tempted to get all they could while the guidelines were being formulated.
Okun voices two ideas: tie federal income tax cuts to reductions in state sales taxes--which would lower the prices that consumers pay for goods and services --and grant a "tax relief incentive" to businessmen and workers who help to control inflation. Under his plan, a company that pledged to hold its average rate of wage increases to less than 6% a year, and its average rate of price boosts to no more than 4%, would have its corporate profits tax lowered by 5%. Employees of the firm would get a tax rebate equal to 1.5% of their wage, with a ceiling of $225 a year. Henry C. Wallich, a member of the Federal Reserve Board, has proposed a variant: penalizing with extra taxes companies and workers who enjoy excessive price or wage hikes. Okun admits his scheme has little chance of being adopted, and some of his colleagues consider it impossible to administer anyway.
Board Member Murray Weidenbaum, a professor at Washington University in St. Louis and Undersecretary of the Treasury in the Nixon Administration, urges a "free market alternative": dismantling many of the Government and private regulations that restrict the market. He mentions outlawing union bars to employment, scrapping the minimum wage altogether, doing away with the regulation of transportation rates by the Interstate Commerce Commission and Civil Aeronautics Board, and repealing the restrictions on shipping contained in the Depression-era Jones Act ("That is for openers").
Such an approach, he declares, would not only permit some prices to come down but increase employment. Says Weidenbaum: "The highest unemployment rates are precisely in the two sectors where Government regulation is strongest." He means the construction industry, where wages are pushed up by the Davis-Bacon Act, and jobs filled by teenagers, whose pay is raised by the minimum-wage law to the point that many potential employers find it unprofitable to hire youths. Liberal colleagues on the Board of Economists grant that Weidenbaum's ideas have some merit, but argue that they would take a very long time to have much impact on prices and cannot be enacted anyway because they would arouse furious opposition from all sorts of vested interests.
Opposed though their suggestions are, liberals and conservatives on the Board of Economists agree on one thing: whichever ideas they are fondest of to curb inflation and increase employment are the very suggestions least likely to be accepted by the Administration, Congress or the Federal Reserve. That may be a melancholy comment on the U.S. political process. It is even more a comment on the devilish complexities of contemporary economics. President Carter and his aides, like the Nixon and Ford Administrations before them, are caught in a box: wanting to stimulate the economy to full employment, yet fearful that vigorous action will spur inflation; wishing to crack down on inflation, but afraid that drastic action will touch off another recession. Meanwhile, production, employment, incomes and profits are likely to rise significantly for at least another year. Perhaps the nation might just as well relax and enjoy it.
* The leading candidates to succeed Burns are Paul Volcker, head of the New York Federal Reserve Bank; Robert Roosa, partner in the investment banking house of Brown Bros. Harriman, and Bruce MacLaury, head of the Brookings Institution. Okun has also been mentioned, but he insists he is not under consideration. One possible problem: if Burns stays on the board, there would be no New York Federal Reserve district seat for Volcker or Roosa to fill.
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