TIME's Board of Economists

ANSWERING THE HARD QUESTIONS

JOHN MAYNARD KEYNES was probably exaggerating when he insisted that "the world is ruled by little else" than the ideas of economists and political philosophers. But there is no denying the rising vitality of the science in which he specialized. Almost every individual feels the impact of economic decisions--on his job, his income, his standard of living. The increasing impact of economics has been matched by a growth in its complexities. To help penetrate and interpret those complexities, TIME has formed a Board of Economists with eight members (see below), representing the major economic schools of thought. The board will meet four times a year with TIME's editorial staff, and the discussions will provide material for some stories in the magazine. Board members will also serve as regular consultants to TIME's BUSINESS section. Its members speak as individuals, of course, and not as representatives of the institutions with which they are associated. The first meeting addressed itself to the hard questions now troubling an economy ridden by inflation and money scarcity and facing a possible slowdown ahead. Excerpts from the discussion:

Is inflation being beaten?

SPRINKEL: It is entirely possible that in a few months we will look back on this year's third quarter, somewhere in July or August, as being the peak in this particular business cycle. This means, if I am right, that the Administration's policies are indeed working, that we have already broken the back of inflation.

ECKSTEIN: That, I think, is a bit too sanguine. It is too simple to say that once you break inflationary expectations, the problem is solved. We just will not get a quick improvement.

HELLER: I agree that we have passed the peak of inflationary pressures. But there is some evidence that, compared with previous years, inflation is more stubborn now. I'm not sure that prices are responding to anti-inflationary policies as quickly as we had hoped.

NATHAN: I think that a meaningful turndown in the consumer price index is not going to be visible for another six months or eight months. We have built in a set of developments that we are not going to get rid of very easily. Almost every Government regulatory commission is literally inundated. They are almost impossibly burdened with handling the consequences of the very substantial rise in interest rates and other costs. This is just one manifestation of the pervasive nature of inflation.

HELLER: By the middle of next year, I would expect to see our G.N.P. deflator* down from its present level of 5.2% to below 4%--maybe somewhere between 3.5% and 4%.

What more should the Nixon Administration do to fight inflation?

NATHAN: Being a political realist, if I were in the Nixon Administration. I would be doing much more in terms of leverage--like selling off materials from the strategic stockpiles. Tariffs also present another possibility. Instead of moving toward the protective direction, which we seem to be doing, one might move a little bit in the opposite direction.

PECHMAN: The Administration has a role to play in price policy in the vast number of enterprises that are subject to Government regulation. We have hardly begun to make a national policy for these regulated industries.

OKUN: Federal pay is a real scary area now, given the attitude in Congress and the pressures of the unions. Let us take another simple thing like fair trade. If we could repeal the fair-trade laws that allow some manufacturers to fix retail prices, that action alone could reduce the consumer price index by an estimated three-tenths of 1%. Then there are oil imports and the whole range of policies regarding agriculture, which have important price implications.

Should there be wage-price guidelines?

HELLER: If you are inveighing against sin and asking the top business and labor leaders not to sin, you have to define sin. That means some kind of White House specification of what is and what is not in the national interest in terms of price and wage decisions. Exhortation or purely moral suasion will not work. That is an open-mouth policy without any teeth in it.

SPRINKEL: There has not been, nor do I think there should be any attempt to interfere directly in individual price or wage decisions. Such efforts do not work. They have not worked in this country, and they have not worked abroad.

TRIFFIN: They did work in Holland--spectacularly.

SPRINKEL: They did for a while. I think everyone agrees that in the face of overly expansive economic policies, no set of guideposts will work very long.

OKUN: An Administration that will not ask business to toe the line certainly cannot make strong statements on wages. A chief executive of one of the electrical-equipment manufacturing firms told me last October: "If I have a number from the Government on what a reasonable wage increase is for 1969, I will do better in my settlement in October 1969. That number will give me something to stand on, something to bargain from at the table."

SPRINKEL: Arm twisting can prevent certain prices from going up, or even force them down. The Government has lots of ways of forcing businessmen to act as it prefers. But does that mean that it really contributes to controlling inflation? Is there any reason to believe that less total spending will occur as a result of reducing any particular price in the economy? My answer is no. If we spend less in one area, we are likely to spend more in another area.

What will be the consequences of rising unemployment?

HELLER: There is no earthly way--maybe there is a heavenly way--to achieve price stability or to disinflate without knocking people out of jobs. When you talk about moving from, say, 3.5% to 4.5% unemployment, that means an other 830,000 people will be knocked out of work. They are not likely to be the skilled and the semiskilled and the strong. They will probably be those workers who are the weakest links in the employment chain, potentially the most disruptive links in the social and political chain.

ECKSTEIN: The Administration is in for some unhappy months. But you have to keep it in perspective. First of all, the unemployment will not be recession unemployment. Small changes in the unemployment rate do not have any visible effect on social unrest. Unrest has been at its peak when unemployment was low. As long as the Administration can show progress toward price stability, and as long as it can keep us out of a recession, I don't think that the voters will have anything to complain about.

GROVE: The Nixon Administration's chances for re-election are not going to depend on whether we get through the next year with a 4% unemployment rate or a 4.5% unemployment rate. It seems to me that the Administration's principal thrust should be to press ahead very vigorously on those measures that soften the impact of unemployment, rather than be willing to accept more rapid rises in prices.

HELLER: In this day and age, economics alone is not enough; you are dealing with socioeconomics. When, for example, President Nixon forwards an income-maintenance plan, that isn't just a sociological measure. It is an economic measure in the sense that if you have a floor under income, you can press the fight against inflation a good deal harder. For you will have provided landing nets for the people you knock out of jobs. Those landing nets could be of four different kinds. The first is income maintenance; the second is broader and deeper unemployment compensation; the third is a greatly expanded job-training program. The fourth, which is the missing link in the Nixon program, is Government employment of last resort.

NATHAN: We are likely to have a politically untenable rate of increase in consumer prices next spring and summer, and probably a politically untenable level of unemployment. Especially because of minority problems and unrest among youth, we will have a considerable amount of political turmoil. There will be a push toward what I call a quick-result effort by the Nixon Administration. My guess is that when the chips are down, the Administration will opt for slower price decline and lesser unemployment.

OKUN: What this country needs to be shown is that the price level does not have to keep accelerating and accelerating, but that it can be turned back in the direction of at least slowing down. While a 3.5% or 4% rate of price increase isn't good, it looks awfully good in relation to 5% or 6%. It would be a victory for the Administration.

Even if unemployment increases, will labor demand and get higher wages?

NATHAN: Many labor leaders have told me frankly that they realize a 7% or a 7.5% wage increase is not tenable in terms of reasonable price stability. But they are not going to take the onus of accepting less. So the prospect of significantly lower wage settlements is not in the cards.

ECKSTEIN: Over the next year or two, labor leaders demanding higher wages will be looking backward, not forward. They will be trying to catch up with inflation already behind us. There is really nothing the Administration can do, in my judgment, to affect the basic pattern of settlement for 1969-70 in manufacturing industries. Union members feel that they have had virtually no real wage gain in the past several years, and they feel that their leaders signed up on bad terms. Now they want to catch up.

Will there be a recession?

HELLER: I think we are at a turning point. We are unquestionably now incurring the risk of recession in 1970. My feeling is that we will be moving along at about a zero rate of expansion in the first half of next year. In our highly dynamic economy, there is an awfully thin line between a zero rate of expansion and a recession.

OKUN: In the American economy, if you do not go up, you go down. The potentiality for a stall is a real danger. I stress that this is a long shot, but still enough of a risk to cause worry.

NATHAN: The evidence seems to point toward a combination of rather slow declines in the consumer price index and perceptible increases in unemployment--but not to the level of a major depression or even a major recession.

SPRINKEL: I can't quite reject the hypothesis that we may already be in a recession. The configuration of monetary growth over the past year is quite similar to the patterns that previously developed prior to recessions. The leading indicators--for example, housing permits and average hours worked--are weak. The employment figures suggest that the rate of economic growth has tapered off significantly.

ECKSTEIN: The leading indicators do not signal a recession. They are at most signaling a slowdown. The economy still appears to be pretty strong. You can see the inherent buoyancy. It is really mainly monetary and fiscal policy that is slowing down the economy. This is not a spontaneous petering out of the private boom.

OKUN: I think that the balance of risk has shifted very definitely toward the downside. There is a basis for concern about a recession now. It is not an even-money shot in my book; it is a l-to-4 shot. The immortal, immutable boom is no longer the story. Consumption has been basically on a plateau for a long time. Housing has been sliding for a long, long time. Unless Congress goes really haywire on social security liberalization, it is hard to find much stimulus on the expenditure side of the federal budget.

Should the Administration change monetary and fiscal policy now to prevent recession?

SPRINKEL: It is extremely important that we begin to think about possible easing in monetary policy. The real danger is not in easing now, but that rising unemployment will undoubtedly lead to intensified political pressures to ease. The danger then will be that we will have another massive easing, as we have had all too frequently in the past. Then we will be right back in a serious inflationary situation permanently. I would be much happier if we began a moderate easing and tried to reduce the degree of volatility in economic policy.

HELLER: This has to be clearly understood. I do not think that we ought to take our foot off the brake now and step on the gas; rather, we should begin to ease that brake off the floor. There is some welcome easing going on already in the money markets, and the Federal Reserve should not interfere. I would like to see the Board give it just a bit of a nudge, while at the same time the Administration and Congress maintain a tight fiscal policy. In other words, we should extend the surtax and cut down the amount of relief in the tax bill.

That would enable us to begin to ease up a bit on this brutally tight money, which has such a disproportionate effect on housing, on state and local projects and on small business.

NATHAN: I can envisage some major concern in the Administration next spring or summer, when the responsiveness of the consumer price index will have been small and slow. They will be somewhat concerned about the elections in 1970. I think that they will be very, very concerned about being charged with having caused the fifth postwar recession.

ECKSTEIN: We are really sitting on a time bomb. The private economy would like to get going, and we had better look out that we don't turn it loose too fully or too quickly. If things go badly, and the Administration has to think about antirecession programs, the sensible thing would be to accelerate carefully thought-out proposals--such as the family-assistance program and revenue sharing--rather than rushing into a collection of usually unsuccessful, temporary antirecession measures, such as public works.

What is the outlook beyond 1970?

HELLER: By 1971, I see us steaming back toward full employment and good growth. For the later 1970s, I am essentially an optimist. We will get back to a tolerable trade-off between unemployment and inflation, and we will again be growing in real terms at 4% a year. If we maintain our commitment to full employment and rapid growth, if we attempt to cope with the great social stresses and strains in our nation, it will be very tough to get the G.N.P. deflator consistently below 2.5%. We have to learn to live with something around 2.5% to 3% inflation. If we get down to 2.5%, we will be doing well by international standards.

NATHAN: Over the next three to five years, the big issue will be whether we have big tax reductions or whether we use more Government income for a fuller meeting of the nation's huge, unsatisfied social and community needs.

HELLER: It is perfectly clear that we can no longer live by economics alone. Certainly the "New Economics" isn't enough, and the "Nixonomics" isn't enough. We need a new amalgam of social and economic considerations. It is not enough just to grow--it's a question of growth for what.

* The deflator measures the average prices of a given year's output and takes into account seasonal adjustments and other factors.

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