After a Slowdown, the Boom of 1981

By Marshall Loeb

Executive View

Very often now, a broad smile creases the lean face of Alan Greenspan, celebrated conservative and inveterate pessimist. He sits at his cluttered horseshoe desk, savoring the glorious view of New York harbor 35 stories below, listening to Baroque music on the stereo as he scribbles intricate calculus formulas that will become models for his computer. "I haven't been so optimistic about the economy's long-term prospects in 20 years," exults Greenspan. To the many clients of his economic consulting firm of Townsend-Greenspan, to the companies on whose boards he sits (Alcoa, Mobil, General Foods, Morgan Guaranty), to the congressional committees that often seek his judgment, Economist Greenspan recites the same startling message: after a couple of slow years ahead, a record boom is coming.

This unusual forecast is worth pondering, for Greenspan has been both gloomy and prescient for almost two decades, ever since he sensed in 1960 that Jack Kennedy and Dick Nixon both were much to the left of Dwight Eisenhower. While other experts saw only endless blue horizons, Green span put on a hangdog expression and correctly predicted deficits, inflation, tight money, stock slumps and dollar blahs. Even when he marched off to Washington, taking a pay cut of more than $300,000, to $42,500, to serve as chief economist for Nixon and then Gerald Ford, he despaired over the "seemingly unstoppable momentum of federal outlays" that were feeding inflation and starving investment. But now Greenspan perceives an amazing shift in Government, to ward reducing spending and raising incentives to invest. The combination, he figures, will lead to a surge in spending for all kinds of capital goods--trucks, test tubes, typewriters and many, many new plants.

"Two or three years ago," Greenspan recalls,"politicians debated whether our capital investment was adequate. Today there is nonpartisan agreement that it is not and that we need increased incentives to create it." Consider the totally unexpected changes in only the past seven months in Congress, which is responding to the will of the people. President Carter sent up a sock-the-affluent tax bill; Ways and Means did not even bother to discuss it, but substituted a bill that would significantly reduce income taxes for people who do most of the investing. On top of that, capital gains taxes would go down. What most surprises Greenspan is that a cut of two percentage points in the corporate tax rate is sal ling through Congress--unopposed. Everybody has caught the budget-cutting bug. Jimmy Carter, the born-again conservative, has called for yet another $5 billion reduction. In addition, California's Proposition 13, which will stimulate investment by cutting business costs, is being copied in many states. "Fiscal responsibility," says Greenspan, "has become a political plus."

He expects the new stringency to squeeze inflation down below 5% by late 1981. Consequently, interest rates will tumble. With inflation, taxes and interest rates all lower, business people will be able to invest in capital goods without demanding abnormally high rates of return to justify their outlays. Because those "hurdle rates" have been so steep, capital spending has been retarded for years. Just to stay competitive in the world, the U.S. needs to put 12% of its G.N.P. into such investment, but the figure has been 10% since the early 1970s. Result: America's plant is aging and outdated, and a huge backlog of unmet demand for capital goods has built up. In the early 1980s, says Greenspan, capital investment will soar.

"We will see a major expansion in spending for energy conservation and development. For nuclear, solar, shale, sands--all of them. We will get an extraordinary amount of basic research. There will be an awful lot of replacement and modernization across the board--in steel, paper, textiles, chemicals, aluminum. I don't know of a single industry that will not draw enhanced investment."

Getting from here to there will be a rocky trip. For the next couple of years, some inflationary pressures will continue, with demands for outsize wage increases and Government payouts. "But all these," says Greenspan, "will be only the last-gasp aftereffects of the previous decade."

There will be relatively modest economic growth--3.4% --next year, and probably a brief and shallow recession in 1980, hitting bottom that autumn. Though that is not a joyous prospect for Jimmy Carter, Greenspan is not prematurely celebrating any victories for his fellow Republicans. He figures that Democrats, moving with the tide of the people, have shifted fast to the right and co-opted the G.O.P.'s position. But the fellow who is sworn in as President on Jan. 20, 1981--Jimmy or Jerry or Teddy or somebody--will inherit an economy that, Greenspan feels, will rise with a bang.

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