Recession: Deeper and Longer

TIME'S economists see scant price relief, more unemployed

It will be longer and deeper than even the pessimists were predicting only a short time ago.

That is how TIME's Board of Economists views the Recession of '79, which it forecast as early as last November and which began in April. The bipartisan board agrees that the worst is yet to come: the recession will last 12 to 15 months rather than six to nine months, as previously forecast. The economy will shrink 3% during the decline rather than just 1% to 2%. Meanwhile, inflation will remain near 10%. Not until next summer will expansion resume, and even then it will be rather weak. Scarce and expensive energy will mean that growth throughout the 1980s will be sluggish. Says Democrat Walter Heller, who was President John Kennedy's chief economic adviser and now counsels brother Teddy: "The bad news bear is up the path. The recession has only just begun to bite."

Just now, that beast seems rather distant. In fact, the economy was somewhat stronger in August and September than it was in the early summer. With gasoline readily available again, buyers have returned to shopping centers and auto showrooms. Reflecting this consumer boomlet, the Commerce Department guesstimates that the economy may have actually grown at an annual rate of 1% in the third quarter. But in the fourth quarter, which begins this week, the brief spending splurge is expected to fade, and the pace of business will slow sharply.

Republican Alan Greenspan, perhaps the most optimistic member of TIME's board, sees a roller-coaster recession: the economy, after its slight rise, will plunge steeply during the coming winter and spring. Unemployment, which has hovered at about 5.7% for the past year, inched up to 6.0% in August, and a majority of TIME'S board predict that it will reach 8% by next summer, meaning some 8 million Americans will be out of work. That is severe, of course, but not as bad as during the 1974-75 recession, when the jobless rate hit 9%.

As an antidote, several board members favor a tax cut. Heller argues that an early $28 billion reduction for consumers and corporations is "the only way to fly." Joseph Pechman, head of economic studies at the Brookings Institution, agrees on the need for a prompt cut.

The length and depth of this slump will be largely determined by monetary policy. In the eight weeks since Paul Volcker took over as Federal Reserve chairman, businessmen's basic cost of borrowing money has jumped from 11.75% to 13.5%, the highest in history. Most board members hold that the increases will soon stop but interest rates will remain steep over the next year. Some fear that the Fed may worsen the recession by inducing a classic credit crunch, in which little money is available for borrowing to finance new plants and create jobs.

So far even the populist Carter Administration has backed Volcker's high-interest policy. Yet banks have had plenty of money to lend anyway--perhaps too much. In the past month, the money supply has grown at an annual rate of 11.5%. Beryl Sprinkel, executive vice president of Chicago's Harris Bank, argues that this "hemorrhaging" must be stanched if inflation is ever to be curbed.

Democrat Arthur Okun complains that the Fed has lost much of its control over credit policy as a result of innovations, such as money market certificates and mortgage-backed securities, that are designed to keep banks and thrift institutions flush with funds for home loans. Says Okun: "Money is easy but expensive, and nobody is saying no to any borrower. They're saying, 'The price is high. Won't you take two?' "

Despite the increasing unemployment, the wage-price spiral continues. One example: the autoworkers' settlement with General Motors, which will set the pattern for the industry. If inflation averages 8%, the cost-of-living escalator in the new contract will boost the average cost of wages and benefits paid to GM workers from $15 per hour to $20 over three years, for a cumulative raise of 33%.

The Carter Administration last week attempted to revive its moribund voluntary guidelines by creating a 15-member committee, including representatives of labor and management, that will recommend new wage standards to replace the current 7% guide. Since unions had strongly opposed the guidelines, forming the committee was a step toward reconciliation between the President and labor. Unions still have scant incentive for moderate settlements at a time when inflation is roaring at 13%. The Labor Department announced that consumer prices rose by 1.1% in August, the seventh straight month of an increase of 1% or more. Because prices rise faster than wages and salaries for most workers, the real take-home pay of Americans has declined 4.3% in the past year.

TIME's board predicts only moderate relief. The peak of inflation has been reached, but the road down will be slow. David Grove, a private consultant and former chief economist for IBM, foresees a 1980 inflation rate of 9.5%, or double the level of only three years ago. Says he: "Inflation will continue as long ahead as we can see." Okun maintains that the latest surge of inflation has placed the economy on a higher price plateau, where it will stay for years to come. Even after the recession is over, he predicts, prices will be increasing by 8% annually.

For the first time, several of TIME's economists worried that the intransigent inflation might endanger the free economic system. Lower- and middle-income citizens have accepted the inequities of capitalism because they figure that they have an opportunity to get ahead. If inflation and slow growth rob people of the chance to save and advance, they may be tempted to veer sharply left or right.

To avoid such extremes, the U.S. may be forced to take strong measures to bring down inflation. Grove and Washington Economic Consultant Robert Nathan reluctantly vote for a "quick and dirty" solution that would include draconian measures. Says Grove: "The ideal program would be very sharp fiscal and monetary policies buttressed at the outset by wage and price controls. The controls would be cosmetic, to convince people that the program is really going to work." Okun scorns this as the "trillion-dollar cure," meaning that it would cost the nation that much in lost production. He believes that such a solution would be "disastrous" because "it would have broad ramifications on the confidence in our whole institutional structure that would resurrect the darkest days of the 1930s."

Republican Murray Weidenbaum, a visiting scholar at the American Enterprise Institute, argues that nothing less than a series of structural changes in the economy can break inflation. He proposes measures, including reduction of Government subsidies to farmers, shippers and other interest groups and elimination of some of the federal regulation burden that discourages innovation and new business spending.

Greenspan, who as chief economist in the Ford Administration devised the measures that helped pull inflation down from 12.2% in 1974 to 4.8% when Jimmy Carter took office, is the most confident of the board members that stringent fiscal and monetary policies alone can work again. He predicts that if a firm hand is kept on the economy and the political leaders avoid the temptation to stimulate growth just to get elected, inflation will decline to perhaps 6% in 1981. No matter how high the cost of curbing the price plague, concludes Greenspan, some unpleasant medicine taken now will be less painful than other, tougher remedies forced upon the nation in the future. Says he: "The costs will be even more intolerable the longer we wait to come to grips with this problem."

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