A Pause That May Not Refresh

Traditionally, the American economy booms in an election year, in large part because incumbent politicians want it that way. But not this year. Although the economy continues to improve from the worst recession since World War II, it has begun to move so sluggishly that Jimmy Carter is scoring with his criticisms of the Ford Administration's economic policies. Is he right, or is he merely being opportunistic?

Last week, at a meeting of TIME'S Board of Economists in Manhattan, the experts divided sharply along political lines. The Democrats, led by Walter Heller and Arthur Okun, feel that the economy is behaving like an engine that could use more steam. The Republicans --Beryl Sprinkel and Murray Weiden-baum--believe that considering how much progress has already been made, the engine is working just fine.

Despite that basic difference, board members agree that the U.S. economy is still healthy and the recovery is not in danger. They worry, however, because statistics show a sharp dip in economic performance between April and September. After being discounted for inflation, the gross national product, which spurted by 9.2% in the first quarter of 1976, dropped to 4.5% in the second quarter. Most of the economists also agree that growth will not improve much in the third quarter. Alan Greenspan, Ford's top economic adviser (currently on leave from TIME'S board), has shrugged off the decline as a temporary "pause." Says David Grove, chief economist at IBM: "I wouldn't use the Coca-Cola slogan, 'The pause that refreshes,' but rather Geritol's 'tired blood' slogan."

In fact, most of the latest figures on the economy can be read to buttress either Grove's pessimism or Greenspan's optimism. Take unemployment, which has risen to 7.9% of the labor force. To Democrats, that means that 7.5 million Americans are out of work.

To Republicans, it means more people working today--88 million of them --than ever before. Weidenbaum, a professor at Washington University in St. Louis, also points out that the number of new jobs has not kept up with the number of women and teen-agers entering the labor force, and this helps to explain the rise in joblessness. Most of TIME'S economists believe that unemployment will stay above 7% until the end of 1977.

Inflation Continues. The latest figures on inflation are equally ambiguous. Last week the Labor Department reported that inflation advanced at an annual rate of 6.2% in August, and members of TIME'S board project that it will stay near that level through 1977. That is far below the 16.8% rate prevailing when Ford took office--justification for those who believe that the policies of his Administration should be continued. But the rate is still high by historical standards. Says Robert Nathan, a private consultant in Washington: "Four or five years ago, no economist would have said that a 6% rate of inflation might be regarded as tolerable. It's still wholly intolerable."

TIME'S experts also disagreed on monetary policy. Some thought that by holding the annual rate of expansion in the money supply to a range of 41/2% to 7%, the Federal Reserve Board may have helped to reduce the inflation rate.

Others say that the same policy could have slowed the recovery. Once again, their differences largely go back to political judgments of the entire economy's performance. Heller, former chief economic adviser to J.F.K., asserts flatly that "the recovery is totally inadequate."

Counters Sprinkel, executive vice pres ident of Chicago's Harris Trust & Savings Bank: "The basic Administration strategy has been to avoid massive stim ulus in the early part of the recovery so that it could be a sustained recovery."

How sustained the rate of growth really is remains in question. Last week there was evidence on both sides:

>Several large banks announced that they would drop their prime inter est rate to businessmen from 7% to 6%% in order to boost demand for loans. De clining interest rates are always good news for Wall Street, and after seven months of indifference, investors are showing new confidence in the stock market.

>Retailers had hoped for a massive pickup in sales during the back-to-school period. They were disappointed when sales rose by 9% over the same period last year; most of the rise was attributable to inflation. Economist Grove, however, predicts "some pickup" in this area during the fourth quarter of 1976, adding, "I don't think it's going to be a boom by any means."

-- The Commerce Department reported that new orders for nondefense capital goods--machine tools, generators and other heavy equipment--fell by 11.7% in August. Meaning: industry does not yet have confidence enough in the recovery to invest heavily in such goods. On the other hand, housing starts, which economists regard as a key barometer of economic activity, rose 11% in August, to an annual rate of 1.5 million. That is the highest level since last February.

The economists also considered what policies the two major candidates would pursue on being elected President.

If Ford wins, predicted Sprinkel, he will continue to 1) reduce inflation, 2) create more jobs in the private sector, 3) "follow a stiff line" on increases in federal spending, 4) maintain a moderate rate of growth in the money supply, 5) avoid wage or price controls, and, perhaps, 6) propose a further tax cut. This program might take a while to produce more economic growth, but, Sprinkel says, would avoid the danger of spurring runaway inflation.

The Democrats on the board question whether slow is beautiful. They are worried by what they see as a waste of the nation's resources--the jobless people and the factories working at an average of about 73% of capacity. To correct the situation, they expect Jimmy Carter to follow the conventional Democratic policies spelled out in his position papers and in last week's televised debate: more stimulation of the economy, easier money, tax cuts through tax reform (TIME, June 28).

But Carter may have some surprises too. Okun, a senior fellow at Washington's Brookings Institution, spent some time with the candidate and believes that he is going beyond inflated campaign rhetoric when he puts "a lot of weight on getting a balanced budget.

Not because he believes that deficits are automatically inflationary, but because he really sees such a budget as a kind of management test. He wants to prove that Government can do what it says.

This guy knows that he wants to live within the means he has to spend. I sus-78 pect that with a Carter election, a year from now the Democrats around this table are going to be complaining that he is really too conservative a spender and not doing enough." The debate ahead, in other words, is whether the Government will have to stimulate the economy, and if so, how much and when.

This file is automatically generated by a robot program, so viewer discretion is required.