Carter's Turn to Pep Up Growth
Every economic forecast is in part a political forecast -but when a new Administration is about to take power in Washington, politics becomes absolutely dominant. For the past eight years, Republican policymakers under Presidents Nixon and Ford have tried everything they could think of -from laissez-faire to wage-price controls -to grapple with the problems of production, prices and jobs. The results, as the Republican era ends, are decidedly mixed. After starting 1976 on a strong recovery from the worst recession since the 1930s, the U.S. economy is now faltering. True enough, a record 88.1 million Americans are working, and the nightmarish inflation rates of 11% and 12% that the U.S. suffered two years ago have been cut in half. But unemployment in November still stood at 8.1% of the work force, a reduction of a mere two-tenths of a point since the end of 1975, and the nation's production of goods and services in the current quarter may well expand only a third as rapidly as it did in the first quarter.
Key Question. Now it is the Democrats' turn to direct the economy, and the key question is what President-elect Jimmy Carter will do -and whether any policy he adopts will have much effect before 1978. As Inauguration Day approaches, the talk in the Carter camp is becoming steadily more modest. His advisers at one time spoke ebulliently of slashing unemployment in 1977 by three or four percentage points. Since the election, Carter has set goals of 6% growth for his first year in office and only a 1 1/2 point cut in the unemployment rate. On his own staff, there are growing doubts as to whether these goals can be met.
Among those who doubt the Carter projections are the members of TIME'S Board of Economists, who met in Manhattan last week for a daylong look at what is ahead. None of the economists foresees the economy slipping back into recession during the next twelve months. But none predicts anything other than a lackluster 1977, though the economy should speed up toward the end of next year as Carter's measures take hold. The board's averaged-out forecasts:
P: Production of goods and services, discounted for inflation, should go up 4.8% for the year; the rate will pick up to 5.6% in the fourth quarter. That would extend the expansion through eleven straight quarters, but the growth rate would not be as rapid as it has been at the same stage of recovery from past recessions. The anticipated slowdown in spending by business during the year's first half will be a big drag. The latest Government survey indicates that corporate expenditures for new plant and equipment, discounted for inflation, will show hardly any increase over the second half of 1976.
P: Unemployment will average 7.3% during 1977 but dip to 6.9% by the fourth quarter. That would mark a reduction of only about a point in the current jobless rate. The actual number of unemployed Americans, currently 7.8 million, might not go down at all, particularly if women and young blacks continue to enter the labor market at this year's high rate.
P: Inflation, as measured by the consumer price index, will abate a tiny bit from the 5.8% expected for this year to 5.7%, and hold there until the end of 1977. This is dramatically better than past doubledigit levels. But Board Member Robert Nathan, who manages his own consulting firm in Washington, feels that the inflation figures have benefited disproportionately from "windfalls" of relatively steady prices of food and fuel.
P: Corporate profits should rise 10% to 15%, a reasonably healthy pace but far below the 27% to 30% increases registered this year.
The economists agree almost unanimously that even this tepid performance will not be achieved unless the new Administration pumps more money into the sagging economy. Walter Heller, one of three members of the Board of Economists who have attended long meetings with Carter since the election -the others are Arthur Okun and Joseph Pechman - predicts a 4.5% rise in real gross national product next year, but only with sizable stimulation of the economy by Washington. Without it, he says, the increase might be as little as 3.5%. Republican Murray Weidenbaum of Washington University in St. Louis has come around to favor a $10 billion tax cut and says the question now is "not if, but how much."
On that point, a consensus of sorts is emerging. The board's liberal majority favors a package of tax cuts and increases in Government spending totaling $15 billion to $20 billion. That range is acceptable to some Wall Street economists as well. Two weeks ago, a group of businessmen consulting with Carter showed no dissent to a $23 billion plan proposed by General Electric Chairman Reginald Jones.
Size is only the first question. Some others: How much of the stimulus should be higher Government spending, how much a tax cut? What portion of the tax cut should go to individuals, how much to business? How to ensure that tax money saved by business will actually be spent on new plant and equipment? Should the tax cuts be permanent or temporary, the latter putting pressure on the new Administration to keep extending them? Or should they be quickie rebates on taxes already paid? Most liberal economists on the board strongly favor $12 billion in rebates, with perhaps $3 billion in help to business in the form of an increase in the investment tax credit.
To the liberals, the greatest allure of rebates is that they would put money immediately into the pockets of consumers but would not shrink federal revenues over the long run and cut into plans for social programs, as they believe a permanent tax cut would do. Okun, a senior fellow at Washington's Brookings Institution and once chief economic adviser to Lyndon Johnson, feels that a permanent cut would "paint Carter into a corner" before he has a chance to move on such other fronts as welfare reform and health insurance.
Conservatives Weidenbaum and Beryl Sprinkel, chief economist of Harris Trust & Savings Bank in Chicago, argue that any tax cut should be permanent. Such cuts, says Weidenbaum, would "serve as a useful restraint" on proponents of "vast new expenditure programs." At the same time, he says, permanent cuts would encourage consumers to spend more money over the long run because they would have more money to keep. Monetarist Sprinkel concurs, but questions what real good any tax cut will do. "We have a $1.8 trillion economy," he says. "If anybody thinks a $10 billion or $12 billion change in taxes will be effective, he believes something that I don't believe."
Bulging Coffers. Sprinkel nonetheless would go along with a hefty tax cut for business -if there is one -to spur investment. But Heller and David Grove, vice president of International Business Machines Corp., argue that business's coffers already are bulging and that executives will not spend more on factories and machinery unless consumer demand rises. Says Grove, who wants a stimulus of as much as $30 billion: "What business needs most is the prospect of higher sales volumes to encourage investment."
Carter's own views are still unclear, and perhaps undecided. The President-elect said last week at a news conference that "my own preference is to concentrate on job opportunities" -meaning he would put more emphasis on Government spending for job-creating programs, less on a tax cut. On the Board of Economists, Nathan favors that approach as a method not only to put people to work but to begin tackling some of the nation's unmet social needs -for example, mass transit and aid to education. Other Democrats on the board doubt that new spending programs beyond $5 billion or so could be cranked up quickly enough to give the economy the immediate lift it needs. In any case. Carter will be wary of going too far for fear of upsetting his plan to balance the federal budget by the end of his first term. Even the most modest plan before him might swell the deficit in fiscal 1977 from the $61 billion now estimated.
Carter has also said he will take a look at economic statistics over the next few weeks before deciding the size and type of stimulus -and the numbers are no longer all gloomy. There were enough tidbits of good news last week to soothe the fears of some Ford Administration economists, who now concede that earlier in the fall they worried about the possibility of a new recession.
Last week, for example, the Government reported that both personal income and industrial production rose more than a percentage point in November. In Seattle, Boeing announced that it would hire up to 4,500 workers because of an upturn in aircraft orders. In Detroit, Ford Motor Co., recovering from a month-long strike, said that it would raise capital spending to $2 billion next year, an increase of 66%.
Record Year. General Motors officials said that 1977 could be a record year, with car sales hitting 11.25 million, slightly ahead of this year. Bank loans have shown an upturn, indicating renewed business demand. Though reports on Christmas sales are conflicting, merchants at least hope they will wind up with a gain. Says James Lutz, executive vice president of Chicago-based Montgomery Ward: "The weather is with us, and we're going to have the best Christmas ever."
The current flurry of optimism will hardly take the edge off disappointment over the economy's performance in 1976. The year began in high gear with an unprecedented surge of investor confidence that drove the Dow Jones industrial average of 30 stocks up 122 points in January alone, the most successful month in Wall Street history (see box). By April, growth figures were in for the first quarter, and they seemed almost too good to believe. Discounted for inflation, G.N.P. rose at a 9.2% clip, one of the biggest quarterly spurts on record. Corporate profits soared; American Telephone & Telegraph eventually became the first U.S. corporation ever to earn more than $1 billion in a three-month period. Some economists began worrying about an inflationary overheating of business.
They need not have concerned themselves; from the second quarter on, growth rates turned down like a burned-out rocket. The rise in real G.N.P. fell to 4.5% in the second quarter, to 3.8% in the third, and is expected to be only about 3% this quarter. Unemployment bottomed out at 7.3% in May and then began rising once more. One measure of the setback: at midyear, economists believed that the jobless rate would fall below 7% by year's end. It now seems unlikely to get that low until a full year later -if then.
What happened? Two things:
1) Consumer demand waned because there was no money left from the 1975 rebates, and the rises in workers' pay -despite the big increases won by some unions -generally only matched or actually trailed price increases. Though consumers in the third quarter saved a mere 6% of their incomes, the lowest figure in four years, their spending was still insufficient to keep pushing up the economy.
2) Businessmen who had bought goods furiously during the first quarter began cutting orders. Their purpose was to keep their inventories from swelling; their actions forced suppliers to reduce production and lay off workers.
In October another culprit surfaced: budget watchers discovered that the Government had not spent $9 billion to $16 billion that it had been authorized to shell out during 1976. The economy was robbed of that much spending power and slowed all the more. Harvard Professor and Board of Economists member Otto Eckstein estimates that total federal purchases will rise less than 1% during 1976, hardly enough to promote robust growth.
What caused the spending shortfall is still largely a mystery. Nathan 'theorizes that Ford Administration bureaucrats responded altogether too strongly to White House pressure to hold down the budget. Okun believes that departments and agencies estimated their spending at the highest levels foreseeable -which in fact were not met -to avoid any chance of having to apologize to the boss for overrunning their targets. There were also some mechanical delays in handing out federal contracts. For a while, some economists believed that the money not spent in 1976 would flow out in 1977, lessening the need for stimulus, but the prevailing belief now is that no such thing will happen.
Another serious problem for Carter in deciding the size and type of stimulus to be applied is that he cannot look at U.S. business in isolation. The economies of Europe and Japan are slowing down too, and their leaders are fearful of applying stimulus because of persistent inflation. World economists are looking to the Carter Administration to pep up the U.S. economy and persuade other countries, notably Japan and Germany, to pursue more expansionary policies.
That could be a key to avoiding another world recession. Great Britain, along with many other countries, seeks an "export-led" recovery to restore growth and currency stability. But the Paris-based Organization for Economic Cooperation and Development looks for no more than a 5% rise in trade among its 24 member nations next year. Worse yet, the O.E.C.D. foresees a composite growth rate for its member countries of less than 4%, without accounting for last week's rise in the price of oil.
Yale Professor Robert Triffin believes that some joint effort at stimulus, led by the U.S., is mandatory. Triffin thinks that Carter, after taking office, should move quickly toward publicly "endorsing" stimulus by Germany and Japan and work with those countries toward a plan for reinvigorating their economies, improving trade and boosting growth. Less developed countries would also benefit: markets for their commodities would be strengthened.
But the new Administration's main concern, of course, will be the U.S. economy. Another of its problems will be containing the inflation that might result from faster growth. Most members of the Board of Economists think that the danger of inflation comes largely from momentum: labor has become used to wage increases that reflect productivity improvements and rises in the cost of living, and businessmen want to pass along all cost increases to consumers.
Carter has ruled out formal wage-price controls and his advisers seem opposed even to voluntary guidelines that would set numerical standards. What kind of wage-price policy does that leave? Okun suggests a series of "prayer meetings" at which Administration officials will urge business and labor leaders in general terms to make sacrifices for the sake of noninflationary growth. He also forecasts a highly informal "prenotification" standard -a request that businessmen and labor leaders inform the new President privately of planned wage and price hikes and discuss their justification in advance. Pechman, director of economic studies at Brookings, urges that Carter appoint a new chairman of the Council on Wage and Price Stability, who would vigorously denounce excessive wage and price hikes.
Big Contracts. No one knows how such a policy would go down with business and labor. Major contracts covering at least 4.9 million workers either expire or come up for reopening in 1977, giving Carter ample opportunity to jawbone the union leaders who turned out a heavy vote for him, if he wishes. The first big contract, for 37,000 oil, chemical and atomic workers, expires two weeks before Carter takes office. Next comes textiles. Steel follows, but that is expected to be peaceful; an experimental no-strike agreement will govern negotiations. In December comes potential trouble: coal and railroads. United Mine Workers negotiators are already talking up wage increases of 20% to 25%.
Carter may have some new faces to contend with in labor. Mine Workers President Arnold Miller is likely to be challenged by U.M.W. Secretary-Treasurer Harry Patrick in the union election in June. Patrick might stiffen union bargaining demands. AFL-CIO Chief George Meany, 82, could retire this year. His likely successor: Lane Kirkland, the federation's quiet, intellectual secretary-treasurer. There is also a strong possibility that the United Auto Workers, divorced from the AFL-CIO since 1968, may rejoin the federation.
While it is not yet clear what economic actions he will take. Carter has begun surrounding himself with people who are expected to follow moderately stimulative fiscal policies. Last week he named Michael Blumenthal, chief executive of Bendix Corp., to be Treasury Secretary, and Charles Schultze, once Lyndon Johnson's budget boss, to head the Council of Economic Advisers (see THE NATION).
Both Ends. The new team is expected to work well with Arthur Burns, who still has a year to go as chairman of the independent Federal Reserve Board. During the Nixon-Ford years, Burns was often pictured as a man intent on curbing inflation at an unnecessarily high price in lost growth. But Burns lately has engineered a drop in interest rates that should please Carter. Burns, says Walter Heller, is "going to stick to his general philosophy. But he is not about to ignore the election returns. Arthur barks and wags his tail. And the question is, which end do you believe. Well, believe both ends. He is going to cooperate as much as he can, and every once in a while take a nip out of Carter to show that he still runs an independent Federal Reserve."
Given Burns' cooperation, a will to speed up the economy, and luck, the new Administration still faces a formidable task. For example, if women and youths flood into the labor market as they did in 1976, reducing the unemployment rate by a point and a half next year would require the creation of 4.2 million new jobs--probably an impossibility. Some members of the Board of Economists worry that, in grappling with this and other economic problems, Carter and his advisers will focus too much attention on 1977, too little on what follows. A stimulus of any kind takes time to filter through the economy and become effective. The job, says Otto Eckstein, is not to pump up the 1977 figures as much as possible but "to create an underpinning for business and households for a better four years." The coming year, however, is the time when a speedup must at least begin.
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