Facing a Global Dilemma

When Jimmy Carter assumes the presidency next January, he will have the world as well as the U.S. economy to worry about. According to increasingly concerned economists on both sides of the Atlantic, the outlook for the faltering economic recovery in Europe could be determined by how fast Carter moves to quicken the pace of American business. These experts fear that unless the U.S. helps to speed up sluggish global growth by adopting a more stimulative course soon, the entire industrialized world could fall into another recession. Such a downturn could well be hastened if, as expected, the Organization of Petroleum Exporting Countries boosts the world price of oil by 10% or more next month.

Last week 16 American, European and Japanese economists, meeting at Washington's Brookings Institution, called on the world's three economic heavyweights--the U.S., Germany and Japan--to adopt more expansive policies, such as tax cuts and increased government spending. A failure to get the major economies moving again, the experts indicated, could dangerously increase social and political tensions, especially in other economically bedeviled nations, such as Britain, Italy and, to a lesser degree, France. Moreover, almost all economists agree that a slump in Europe would be bad news for the U.S. Says Lawrence Klein, President-elect Carter's chief economic adviser: "What really scares me is signs of a worldwide slowdown at a time when the economies of the West have become increasingly synchronized."

All this marks a sharp reversal in economic thinking. Only last June, Western politicians, led by the Ford Administration, were enthusiastically endorsing moderate growth policies aimed at beating inflation. But only the U.S., Switzerland and West Germany have managed to wrestle down inflation rates. In most other countries, wages have continued rising so rapidly that even the moderate improvement in business that occurred sent prices up sharply too. Many European governments responded with austerity measures aimed at holding down demand. Business quickly slowed, while joblessness remained high--all without making much of a dent in the rate of price increases so far.

As a result, the Paris-based Organization for Economic Cooperation and Development has been forced to scale down growth forecasts for its 24 member nations, which make up most of the non-Communist industrialized world. Assuming no change in policy, and without allowing for the deadening impact of an oil-price rise, the OECD is predicting growth of 4.3% for the first six months of next year, v. its earlier forecast of 5.3%. For all of 1977, the OECD sees the U.S. economy growing by only 4%, well below its earlier projection of 6%, while expansion in other industrial nations will be even slower. Moreover, the figures indicate that trade among the OECD members will rise only half as much next year as in 1976, when it is expected to have increased by 10%. That would create explosive economic and political problems for nations, particularly Britain, that have been banking on an "export-led" recovery.

For the U.S., the world business slowdown poses an exquisite dilemma. Though Carter is expected to pursue a far more stimulative policy than President Ford, he will have to move gingerly lest he fire up inflation, which is now running at an annual rate of 5.5%. That pace is low compared with Holland's 8% or Britain's 14%, but it is much too high by historical standards in the U.S. Yet if the Carter Administration fails to take the lead in reviving the industrial world's laggard economy, the U.S. cannot hope to achieve the robust recovery the President-elect has promised.

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