A Season of Scare Talk

By GEORGE J. CHURCH

The early promise of Reaganomics gives way to mounting gloom

The term is both so vague and so loaded with terrifying memories that it has been informally banned from serious discussion of the U.S. economy for most of the past 30 years. But it cannot be suppressed altogether: it popped up toward the end of the 1973-75 business slump, and has surfaced again in the past few weeks. This time though, it is not just the inveterate calamity howlers of economics but some highly respected business analysts who are saying out loud the dread word, depression.

It is a scare word--psychologically laden with history and anguish--rather than a sensible description of what could happen in a modern U.S. economy. No one talks of a 50% drop in national production, or a 25% jobless rate--the experiences of the 1930s that gave the word depression its menacing ring. Indeed, if the current downturn ever approached such severity, the great majority of economists are confident that the Government could forestall a repeat. Says Martin Feldstein, president of the National Bureau of Economic Research: "If we really found ourselves falling off a cliff, there is very little disagreement about how to get ourselves back. We have the right tools to overcome a depression."

At a moment's notice, the Government could stoke the economy by cutting taxes, increasing spending and expanding the money supply. "There is a zero chance of depression," says Richard Rahn, chief economist for the U.S. Chamber of Commerce. He scorns the loose depression talk. "The wimps of the world," he says, "buckle when the going gets a little rough."

Even so, a number of economists do not dismiss out of hand the possibility of a depression. Those who use the term define it, quite imprecisely, as a prolonged period, perhaps two or three years, during which output and incomes shrink and business bankruptcies and unemployment rise to heights not seen since before World War II. Says Alan Greenspan, who was chief economic adviser to President Gerald Ford: "This scenario still has a low probability, but it should no longer be put into the bizarre or kooky category."

Already, the depression talk has become loud enough to force itself on the attention of the Reagan Administration, which has burst out in a chorus of denials. President Ronald Reagan last week told reporters flatly, "There is no danger of a depression." Murray Weidenbaum, chairman of the Council of Economic Advisers, said the economy already "may be hitting bottom." And William Niskanen, a member of the council, said: "I hear this sort of depression rhetoric every time there is a recession."

The longer an upturn is delayed, economists fret, the greater becomes the still small chance that it will turn into something that could be called a depression. One reason is psychological: as bad economic news persists, the word depression moves out of the twilight zone into public discussion, just possibly to the point of becoming a self-fulfilling prophecy. The Administration's putdown of depression was prompted in part by a spate of articles in newspapers like the Washington Post, New York Times, Chicago Tribune and Wall Street Journal that have discussed just such a possibility.

Although no one calls the current slide anything more than a recession, it already threatens to become the most serious downturn since World War II. Lasl week the Labor Department announced that the unemployment rate rose in February to 8.8%, close to the postwar high of 9% that occurred in May 1975. The effects are still highly uneven: while unemployment in the construction and auto industries is at full-blown depression levels, the rates in such other fields as finance, publishing and Government are much lower. But the overall unemployment figure, says Deputy Treasury Secretary R.T. McNamar, "may yet go to 10% before we get things turned around." That would be the highest in 40 years.

Other statistics embroidered the picture of deepening decline. The index of leading indicators, those measurements of the economy that are thought to give the best clues to the future, dropped .6% in January, its ninth straight downward move. The index would have fallen a shocking 2.8% if Government statisticians had not decided to exclude from the calculations a sharp decline in the length of the average work week, on the questionable ground that severe weather in January had distorted that figure. New orders received by American factories fell 1.2% in January, despite a sharp rise in orders received by defense contractors.

The few signs that had given hope for an early recovery from recession have disappeared. The Government initially reported small rises in retail sales and in the index of leading indicators for December. Rechecking the figures, it now finds that it was wrong. Both went down in December, not up.

The conventional wisdom still is that the economy will turn around and production, jobs and incomes will start rising again this year. Some reasons: businessmen will get their inventories in line with sales and stop cutting back; the 10% cut in income tax rates scheduled for July 1 will put more buying power in consumers' pockets. "The probabilities are very strongly on the side of a recovery later this year," Federal Reserve Board Chairman Paul Volcker told the Senate Banking Committee last week. But he replied to Senators' questions about the possibility of a depression by conceding, "There are risks."

The disquieting thing is that the prospective date for the upturn keeps getting pushed back. The Reagan Administration first predicted that recovery would begin shortly after the start of 1982, then in the spring. Now the prevailing opinion among forecasters, both in the Government and private business, is midyear, and there are loud dissents. Robert Farrell, the leading stock watcher for Merrill Lynch, biggest of all brokerage firms, asserts bluntly: "The consensus that has the economy up in midyear and up in 1983 is wrong." Many investors appear to share his apprehension. The Dow Jones industrial average dropped 17 points last week to 807, its lowest close in 22 months, on some of the heaviest trading in the history of the New York Stock Exchange. And the Business Roundtable, a group composed of chief executives of some 200 of the biggest U.S. corporations, predicted that an upturn would not begin until the fourth quarter of 1982.

Economists are concerned that many businesses simply cannot hold out much longer against the combination of slumping sales and high interest rates. Says Michael Evans, president of Evans Economics, a Washington-based forecasting firm: "If by the fourth quarter there is no significant relief from these high rates, then people will start dumping goods on the market for whatever they will bring and we will really be headed downhill."

A special worry is that, after years of inflation, recurrent recessions and punishingly high interest rates, some of the nation's biggest corporations are desperately short of cash. A prolonged recession could push several over the line into bankruptcy, possibly endangering the solvency of the financial institutions that lend to them and sending shock waves through the economy. Says Arthur Soter, a bank analyst at Morgan Stanley & Co.: "We are reaching a point where you could have serious cash-flow problems for some airlines, trucking and real estate firms, and heavy equipment manufacturers."

The nation's thrift institutions--savings and loans and savings banks--are in perhaps the shakiest shape of all. Andrew Carron, a Brookings Institution economist, estimates that the 4,000 U.S. thrifts will lose $9 billion between 1981 and 1983, cutting their collective net worth in half, because they are paying high interest rates to attract deposits but collecting low interest on many old mortgage loans. Says New York State Bank Superintendent Muriel Siebert: "I can see 600 to 700 thrifts going down the drain this year, and maybe another 1,100 in 1983." The prospect appears to be causing some people to worry about the safety of their savings for the first time since the 1930s, even though deposits in thrift institutions are federally insured. Carron reports that depositors are withdrawing $1 million a month from thrifts and putting it in commercial banks, which pay slightly less interest.

Even a recovery from recession would not necessarily end these worries. There are widespread fears that recovery, whenever it comes, will be weak and choked off quickly by high interest rates, which would be bumped up by rising demands for credit from business and consumers, and more borrowing by the Federal Government to cover swelling budget deficits. In that case, the cash squeeze on corporations would be relieved only temporarily, and would shortly become even worse.

The devilish dilemma is whether to switch policy, and by how much. Most economists believe that the Government should immediately attack the towering deficits that threaten to keep interest rates high. Two possible strategies: scaling back the enormous increase in defense spending now planned or delaying, reducing or even canceling the further 10% cut in income tax rates scheduled for July 1983. On Capitol Hill, Congressmen are advancing various plans to reduce spending--even including the previously unthinkable step of freezing cost of living increases due next year in Social Security benefits--and to raise more tax revenues.

One person who is emphatically not convinced is Ronald Reagan. In the West last week, Reagan asserted that "Washington, as usual, seems to be paralyzed by hand wringers." In Cheyenne, Wyo., he told a whooping crowd of 5,000 in a high school gym that his opponents "want to steal your tax cut before you even get it." In Albuquerque, he added that "there is an alternative to a larger defense budget. It is a larger and increased possibility of war."

Reagan's lieutenants insist that the President has not closed the door on a compromise with Congress that might lower deficits. But time is growing short: the crunch may come in late April or early May, when Congress votes on raising the ceiling on the national debt, which is now $1.1 trillion, vs. $935 billion when Reagan took office.

Meanwhile, the Administration is facing a threat in the fall congressional elections. Reagan scored heavily off Jimmy Carter in 1980 by telling voters to ask if they were better off economically than they had been four years earlier. What if they now ask whether they are better off than when Reagan took office? In one way, the economy has improved: the rate of inflation was only 5.3% in the last quarter of 1981, compared with 9.6% in the first quarter. But then, nobody on Inauguration Day last year was talking about depression.

--By George J. Church. Reported by David Beckwith/Washington and Frederick Ungeheuer/New York

With reporting by David Beckwith/Washington, Frederick Ungeheuer/New York

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