The Political Economy of '76

Not since the mid-1930s have economic issues seemed likely to play as large a role in a presidential election as this year. Although the nation is recovering from its deepest postwar recession, unemployment, inflation and the role of the Federal Government in the economy are among the most important concerns of candidates, voters--and the nine members of TIME'S Board of Economists, who gathered in Manhattan last week for their first session of the new year/Their discussion previewed the debate that will resound throughout the primaries and the fall campaign.

The general mood was one of cautious optimism for the rest of 1976--but deep worry, at least among the liberals, about 1977. So far, the economists agree, the recovery is proceeding right in line with their forecasts (TIME, Dec. 22), which call for a rise of about 6% in real gross national product this year and a decline in unemployment to somewhere between 7% and 7.5% by year's end. Last week the Department of Labor reported that the jobless rate dropped from 8.3% in December to 7.8% in January. That was the steepest monthly decline in more than 16 years, and especially welcome because the fact that the unemployment rate had stuck at 8.3% for two months had stirred worry that recovery was not progressing fast enough.

Democrats among the economists, however, fear that the recovery could be aborted next year if Congress goes along with many of President Ford's budget proposals. The budget projects Government spending in the fiscal year beginning in October at $394 billion, or $28 billion less than would be expected if all present programs were allowed to grow at their normal rate. In the liberals' view, that imposes far too much fiscal restraint on a still modest economic upswing.

"The budget jeopardizes the vitality and duration of the recovery," says Arthur Okun, a senior fellow of the Brookings Institution. University of Minnesota Professor Walter Heller adds: "To hit the brakes when unemployment and economic slack are still legion and inflation is ebbing would be fiscally irresponsible."

Otto Eckstein, head of Data Resources Inc., a private forecasting firm, observes that the budget assumes the recovery will be kept going in 1977 by a bigger and faster surge in private demand, and particularly in business spending for new plant and equipment, than he believes will occur. David Grove, a nonpartisan vice president of IBM, agrees: "For the past two or three years, the economic and political situation has been so unstable that it is very hard for business firms to determine what degree of risk is prudent in any investment project." If the Ford budget is adopted, he predicts, real G.N.P. will rise only 4% next year, v. the 5.7% growth forecast by the Administration, and the jobless rate will average 7.5% rather than the 6.9% that Ford's economists expect. By the end of 1977, Grove fears, the real growth rate would be down to a sluggish 3% to 3.5%.

Restraint v. Inflation. Actually, the liberals are confident that Congress will raise expenditures well above the Ford proposals. "This budget is unreal," says Eckstein. "I don't know of a single forecaster who is taking it seriously."

Republicans Beryl Sprinkel, an executive vice president of Chicago's Harris Trust & Savings Bank, and Murray Weidenbaum, professor at Washington University in St. Louis, defend the budget. They think that if there is sufficient monetary growth, the private demand will rise enough to keep recovery going. They view some fiscal restraint as necessary to hold inflation in check. More important, they insist that spending must be held down to shrink the role of the Federal Government in the nation's economic life. Sounding what seems sure to be a major Republican campaign theme, Sprinkel asserts: "There seems to be in the country a desire to let the American public spend more of their money and not have it funneled toward Washington. If we are going to grow in the future the way we want to grow, both in terms of creating jobs for people and at the same time solving pollution problems and investing more in energy, we must make savings available to the private sector."

Aside from the budget, the economists' main concern is the money policy of the Federal Reserve Board and its crusty chairman, Arthur Burns. The Board has not been increasing the nation's money supply as rapidly as called for by its own target of 5% to 7.5% annual growth, and last week Burns lowered the target: he announced that the Federal Reserve would now aim for a 4.5% to 7.5% increase. On the issue of monetary expansion, the Board of Economists divided along highly uncharacteristic lines. Sprinkel, usually a vigorous defender of Burns, is so worried by the Federal Reserve Board's parsimony that he has reduced his forecast of real G.N.P. growth in 1976 from 6% to 5%.

Okun and Heller, frequently vehement critics of Burns, defend him this time--as long as he keeps interest rates down. In their view, the Federal Reserve should concentrate on interest rates, rather than giving primary attention to money supply.

On an apolitical topic, most board members are confident that the stock market will continue to rise. After January's record gain, they do expect some pause in momentum--and indeed the Dow Jones industrial average dropped 20 points last week, its first substantial decline of the new year. But none of the economists seem to question the market's ability to break its old high of 1052 some time this year. Main reason: corporate profits are zooming back from the recession: they are expected to jump 25% this year to an alltime high.

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