New Cause for a Pause

The productive capability of the U.S. economy is so great that every recession in the nation's recent history has been caused by a weakness in demand for its tremendous output of goods and services. Next year, though, the nation will experience something new: a slowdown caused by the inability of fuel-short businesses to satisfy demand. Members of TIME'S Board of Economists warned at a meeting last week that the pause could easily turn into the U.S.'s first "supply-induced recession" ever.

That is not an inevitable outcome. Indeed, the board's consensus forecast is that the slide will be over by midyear, and the economy will then start to revive as the Government, industry and consumers adjust to fuel scarcities. Real growth will range between zero and 1.5% for the year; unemployment will climb to somewhere around 5.5% to 6%; corporate profits will be down around 5% to 10%. Consumer prices will rise at a scorching pace of 7% to 8%, at least in the first half of the year. Whether that combination qualifies as a recession is partly a matter of semantics; by all normal standards it adds up to a dismal year. But the forecast still is relatively cheerful compared with the dire pessimism being voiced in some other quarters, especially on Wall Street (see ECONOMY AND BUSINESS).

Some factors that will keep the economy moving, even on less oil: capital spending will continue to be strong because businessmen will have to invest in energy-saving equipment and processes. Exports will remain high. Consumers who will be buying fewer cars and taking fewer trips will, in Arthur Okun's sardonic words, "find something better to do with their money than save all of it." They may buy more TV sets, says Okun, and "I'm predicting a boom in backyard swimming pools next summer."

The faint cheer, however, depends heavily on two very shaky assumptions. One is that the Arab oil embargo ends fairly early next year. In that case, says Banker Beryl Sprinkel, the economic consequences will be discomforting but not unduly painful: "We will still get some growth." But, says Okun, if the embargo lasts all year--and the Administration's fuel allocation program continues to flounder-"one would have to bet that we would have the highest unemployment rate and the biggest retardation in real gross national product in the entire postwar period." Harvard's Otto Eckstein, whose predictions on what will happen if the embargo ends in a few months are among the most optimistic, has drawn an alternative forecast based on a yearlong Arab shutoff: it has unemployment soaring to 6.5%, and the G.N.P. showing no growth at all. Robert Nathan fears that unemployment could even top 7%. Alan Greenspan, a frequent adviser to the Nixon Administration, adds that the consequences for Europe and Japan would be so "horrendous" that they would likely cave in to Arab demands.

Free-Market Approach. The second assumption is that the Administration allocates fuel efficiently enough to prevent bottlenecks and insulates the most productive sectors of the economy from the full impact of fuel shortages. "The problem," says Eckstein, "might be not the crisis but the handling of the crisis. The real risk is that the Administration might run the program in a weak and insensitive manner."

Sprinkel, an ardent free-marketeer, and Greenspan give the Administration high marks, particularly for permitting the price of gasoline to rise high enough to discourage consumption and encourage production. The wisdom of the free-market approach is questioned by most other Board members on the ground that it would give a gigantic profit windfall to the oil industry--perhaps as much as $50 billion before taxes, or more than all manufacturing profits last year.

While agreeing that prices must rise further, a majority of the Board believes that some intervention in the free-market system is needed to curtail gasoline consumption quickly, preferably by a system that would assure each driver a basic allotment of gas, then either soak him with a higher tax on purchases above that basic amount or permit him to buy the unused portion of another driver's allotment. "I don't care how they do it, as long as they do it," says Eckstein. But several members agree with the University of Minnesota's Walter Heller that it will take several months of "flubbing around" before the Administration hits on a policy that "will put the economy in a position to advance again."

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