The MacNeil/Lehrer Report; State of the Economy

ROBERT MacNEIL: Good evening. The New York Stock Market registered another decline today, sending the Dow-Jones industrial average to its lowest level in eighteen months. The Dow average of thirty leading industrial stocks dropped 4.42 points, to 8879. It has not been that low since January 1976, when the economic recovery really began to gather momentum. Analysts attributed today`s immediate fall to fears that the Federal Reserve Board will further tighten credit by encouraging short-term interest rates to rise. But the midsummer collywobbles on Wall Street are just one manifestation of uncertainty about what`s happening to the U.S. economy. Tonight we consult the oracles to find out. Jim?

JIM LEHRER: Robin, the old saw comparing economic forecasting to weather forecasting has seldom rung truer than it does right now. Depending on what current economic barometer you read, the prediction can be for darkness or light, sunshine or rain, tornadoes or calm. The gross national product, which marks the economy`s expansion, had been going up at a spectacular seven percent rate; now it`s slowing down slightly. Something called the "index of leading economic indicators" -- twelve items: the prices of crude materials, building permits and so on -- is also down, for the second month in a row. But corporate profits were up for the first six months of the year, much higher than expected. But the stock market dropped twenty points last week, the biggest weekly drop since 1975.

Meanwhile, the consumer price index went up; the wholesale price index went down. The international trade deficit is up, meaning we are continuing to import more than we export. The value of the dollar has been going down, but did strengthen a bit yesterday. But the monetary supply, meaning money available for credit borrowing, is up -- so much so the Federal Reserve is already taking steps to tighten it back up. Housing starts boomed during the first six months of the year, are now starting to go down. And finally, there`s the unemployment rate, the one most non-professionals use to measure the economy: it went up last month after a small but steady decline earlier in the year. The new figures for July are due out Friday.

Now, what do all of these ups and downs on the various barometers mean? Well, as they say in the weather business, opinions are variable. Robin?

MacNEIL: With us to try and make some sense out of all these apparently conflicting signs and portents and hopefully offer the confused citizen a little guidance are four economists and analysts: John Kenneth Galbraith of Harvard; Dr. Henry Kaufman, a general partner with Salomon Brothers, the investment bankers; William Wolman, senior editor of Business Week magazine; and in Washington, Hobart Rowen, economic editor of he Washington Post.

Before we get into the details let`s have one quick headline opinion from each of you. Do all the signs portend continued recovery and growth, or a new slump and recession -- Dr. Kaufman?

HENRY KAUFMAN: I believe the economy will continue to do quite well in the next year and a half and that there should be no recession or slump of a classical type.

MacNEIL: Mr. Wolman.

WILLIAM WOLMAN: I believe that we are heading into a slowdown that will come perilously close to a recession by the last quarter of this year.

MacNEIL: Professor Galbraith.

JOHN KENNETH GALBRAITH: Well, depends on what the government does, what the administration does. If there`s continued inaction, I would expect that we`d have continued unemployment and continued inflation; that`s what we`ve been having for some years.

MacNEIL: Hobart Rowen.

HOBART ROWEN: I think we`re going to have a slower rate of growth in the second half of this year that will probably continue that way into 1978. I think the really big problem is inflation -that`s what the administration really hasn`t come to grips with.

MacNEIL: Dr. Kaufman, you sounded the most optimistic there. What are your grounds for optimism?

KAUFMAN: Well, if you look back over the path of the American economy since April of 1975 when the economic expansion began, we`ve done reasonably well. We`ve come through a very difficult period in the United States: a 1974 credit crisis, 1970 financial crises, a crunch in `66, problems of mismanagement in government, some excesses in the financial and business community. We have hurdled these problems, to some extent; we`ve improved the liquidity of the business community; financial institutions are much better prepared today; we have shown substantial growth in housing; we see now a pickup in plant and equipment expenditures, which has been crucial, particularly to the coming economic expansion; and from an international perspective, despite the problems of the dollar recently, the United States is in a far better position than most industrial nations around. the world.

MacNEIL: What do you predict for the next twelve months, using the indicators some of us are more familiar with, like inflation, unemployment and the growth rate?

KAUFMAN: I believe over the next twelve months the growth rate of the economy in real terms will come close to five percent and that the inflation rate will probably be somewhere between six and six and a half percent. It would seem to me at the same time that we should have continued good expansion in housing, with housing starts averaging around 1.9 million, perhaps 1.8 million units during the next twelve months, and that there will be some lift in federal spending to encourage the economy somewhat more.

MacNEIL: It sounds as though you believe that the Carter administration scenario is roughly on target, is that the case?

KAUFMAN: I think the administration has done reasonably well. There have been some problems here; but there is no perfection in the business of economics or in the business of business. The problem is that we deal with- human endeavors here, which are highly complex, particularly in a very large society as the United States. To expect that we can always have in each quarter and in each month steady state of growth I think is unrealistic. I think we have to recognize the frailties and the problems of dealing with a diverse society, we have to recognize the fact that the art of economics is not as well advanced as some of us would hope, and therefore we should recognize also that the real driving force has to be in the private sector. I would disagree with Mr. Galbraith here that it can`t be from the governmental side.

MacNEIL: Given all these favorable signs that you see in the economic weather charts, how do you explain the performance of the stock market?

KAUFMAN: The stock market, of course, has had a variety of very difficult problems. Number one, it believes, rightly or wrongly, that the economic advance will terminate soon. Some believe, some institutional investors, that perhaps there may be another financial crisis. The long-term interest rates are very competitive with the equity market today. At the same time you have to recognize that there-is a performance syndrome in equity portfolio management. Even if you would forecast reasonably good economic activity four years hence, five years hence, which is not believed right now, performance in institutional portfolio management continues to be measured day by day, week to week and, more likely, every quarter to every quarter. This was not the approach that prevailed a decade or so ago. There were longer looks.

MacNEIL: Thank you. Jim?.

LEHRER: Mr. Wolman, you`re much more pessimistic about the economic future. Why?

WOLMAN: Well, fundamentally I believe that the industrial economies of the West got into trouble with the outbreak of the Vietnam War, trouble that was clearly intensified by the OPEC oil embargo and the subsequent quadrupling of the price of oil. This created inflation; western governments don`t really know how to deal with inflation. And I believe that this spurt in the American economy over the last six months was a rather temporary thing because I really don`t believe that the basic problems posed by oil and inflation have been solved. One thing that`s particularly relevant is that the European economies are doing extremely badly at this point. Unemployment reached record levels in Britain and in Germany and I believe in France as well; and instead of pulling them up like we were supposed to do, they are going to pull us down like they`re not supposed to do. So I think the world economy is in trouble and we can`t resist those trends very easily.

LEHRER: You heard what Dr. Kaufman just said, that he feels that most of these problems, I guess, and others that you just went through have been hurdled, though, the worst is behind us. You don`t feel that way at all?

WOLMAN: You know, there`s a huge gap between-potential and actual output. The world economy is underperforming at this point; and given the inflation problem, world central bankers and so on and finance ministers can`t adopt very much stimulus. Under those conditions I think we continue to get that drag of huge excess capacity. You take things on a world basis, that excess capacity shows no signs of going away but probably is increasing. We`ve managed to spurt over the last few months because we`ve had terribly expansionary policies; but as I say, I don`t think we can go it alone for very much longer, and this press of excess capacity will rise -- will become more intense -- and unemployment`s going to go up in this country rather substantially, I would judge, between now and the end of the, year.

LEHRER: How much?

WOLMAN: Maybe as much as a percentage point and a half, to around, say eight and a half, maybe. A high forecast, and it`s minority view, but that`s not impossible...

LEHRER: What`s your view of what inflation`s going to do between now and then?

WOLMAN: I`m like Henry-- I think five to six; I would go something like seven to eight. The fact of the matter is that although economists keep saying our fundamental rate of inflation is five to six, in fact it`s turning out to be seven for the past couple of months and I think could easily see it continuing at that level for the rest of the year. That depresses, of course, the growth of real output.

LEHRER: Are the fluctuations and the problems of the stock market a serious concern of yours, too?

WOLMAN: Well, it`s not a concern of mine, but despite all the jokes about the stock market forecasting twelve of the last six recessions, the stock market forecasts the economy far better than any human forecaster or any econometric model can do. So, sure, I take it as a portent that the American economy is going to slow down. I think those businessmen out there know a lot more than us economists up here, and they cast their votes in the stock market.

LEHRER: All right, thank you. Robin?

MacNEIL: Professor Galbraith, what`s your reading of the indicators?

GALBRAITH: I must say I`m enchanted by this discussion. I find Mr. Wolman saying that everybody in Wall Street is wrong except Mr. Kaufman.

WOLMAN: Everybody is right except Mr. Kaufman.

GALBRAITH: I`m sorry -- however you get into this. Well, I must say that Mr. Kaufman seems to me to be egregiously optimistic and comfortable, and Mr. Wolman seems to accept misfortune with a calm that must be a little hard when you consider, for example, that youth unemployment in this city is twenty-five percent, among black youth up above fifty, sixty percent; that the continuing rate of inflation you know, it`s extremely hard on people to go to the supermarkets and wonder whether they`re going to have any money for anything they can buy the next time they get there. And I rather think that this is a portent and that this will continue to be the misfortune unless we accept the fact that we must have a much more affirmative policy against inflation, much more affirmative incomes policy and price policy than we had under Ford or we so far have under Mr. Carter. And that in turn then allows us to go after youth unemployment, go after unemployment in the cities and the ghettos and the minorities, and without the present risk of inflation.

MacNEIL: Can I just ask one detail: do you care about the economic indicators that we`ve been through, these ups and downs and the various things that Jim read?

GALBRAITH: Not terribly. I think always the safest thing to do is to assume that what you have will persist. We`ve had great persistence of unemployment with great persistence in its effect on particular groups, as Wolman says. And we`ve had great persistence of inflation in the absence, at least, of a strong will to take control of the price-wage spiral. And as long as we do nothing about either of those, as long as we don`t move directly on the unemployment problem of particular groups and as long we don`t take control of the wage-price spiral then we`ll continue to have the misfortunes that Wolman, I think, correctly describes and which I`m really very sorry, Henry, that you discount, and I think they must be a hell of a lot more comfortable down on Wall Street than they are out in Bedford- Stuyvesant. I hope that doesn`t sound too...

MacNEIL: We`ll give Dr. Kaufman an opportunity to respond in a moment. I just wanted to ask you, if wage-price controls, as you`re suggesting, were adopted, whether voluntary or compulsory, by this administration, wouldn`t that be the club that business already fears is in the closet and so further shatter business confidence that it would discourage capital investment and all the things that might stimulate the recovery?

GALBRAITH: I would suppose that if you look over history that the economy has generally performed best -- I`m not seeking for paradox here -- when business confidence has been worst. Business hated Roosevelt, but business was much better under Roosevelt than under Truman. They were very suspicious of Johnson and Kennedy, but it was much better than under Ford and under Nixon. So that if I had any single piece of advice on which I would want to persuade you more than anything else, it`s pay no attention to business confidence. The only thing that really stimulates business confidence is higher personal income after taxes, and that has very little to do with the economy

MacNEIL: Thank you. Jim?

LEHRER: Hobart Rowen, what indicators have special significance to you when you look at your crystal ball?

ROWEN: Well, I think the unemployment rate and inflation, primarily. The unemployment rate is a number for everybody to look at, professional or not. And as both Dr. Galbraith and Mr. Wolman have suggested, that is one of the key factors and we can`t forget it. I find I can agree a little bit with almost everything that`s been said, even a little of Henry Kaufman, but I think where Henry goes off the track so far as I`m concerned is that the good that has happened in the economy is not good enough; we`re not doing well enough. We have an unemployment rate that`s seven percent, and while I don`t think that it`s going to go to eight and a half percent, as Mr. Wolman suggested, by the end of this year, I don`t see it coming down very much and I see it hanging in there very high for the next couple of years.

LEHRER: 7.1 now, and you think it`s going to stay in that area.

ROWEN: Well, I think it`s going to stay in that area because there is no real thrust coming from the private economy that we can see ahead and I think that`s one of the main factors. The only saving grace is the probability that the government will be spending more money both at the federal, state and local level for the balance of this year and into 1978. So I think that we`re in a kind of a middle situation in which the economy isn`t going to grow very fast, but neither is unemployment going to come down very fast, and that`s a very serious thing. The unemployment rate -- we usually talk of one number, seven percent. It shields a much higher rate for women, it shields a much higher rate for youth. You may have seen some figures published, the New York City black teenage rate is an astonishing eighty or eighty-five percent; it`s almost unbelievable. So unemployment is a bigger problem than many in the administration have been willing to face and they haven`t been willing to face it because they`re over concerned about inflation, and yet they`re not doing anything to control inflation.

LEHRER: What is your forecast for what inflation`s going to do over this next twelve months?

ROWEN: I think inflation is going to be a little higher than either Henry or Mr. Wolman suggested. You know, the administration has talked about a six percent basic underlying rate. Well, the fact is that the rate in the first four months of this year was back in the double-digit area, it was ten percent when you count food and fuel. They say, well, take food and fuel out. Well, you can`t do that. Everybody has to pay those prices. Now, it`s true that the food outlook ought to be a little better because farm surpluses are developing, we`re not going to have as much of a push from fuel. I still think it`s possible to have a seven to eight percent inflation rate for the next year ahead.

LEHRER: I read one of the columns you wrote recently on this question of business confidence that Dr. Galbraith just mentioned. Do you agree with him that...

ROWEN: Oh, I wholly agree with what he said. Business confidence can be translated into a desire to be assured of the profitability of investment. If business thinks that Mr. Carter is going to create an atmosphere in which their investment is going to give them a satisfactory return, then they`ll have confidence in Mr. Carter. Confidence is simply the return on investment. It`s not anything psychological, it`s not anything that`s ephemeral.

LEHRER: Look, you spent a lot of time covering the White House and the administration from the economic point of view. Let me ask you this: would things be much different as we sit here tonight if there was a Republican President -- say, named Ford -- rather than Carter? Has he done anything dramatic in an economic way that`s that different?

ROWEN: I think things would be different, although there are compatibilities and similarities that make many Democrats uncomfortable. The major difference between the Carter program and the Ford program, taking their budgets as a symbol, is that Ford would have stimulated the economy by tax cuts heavily slanted toward the middle and upper income brackets and to business. Carter has put some spending programs into the economy as well as some tax relief. Of course, as you know, he dropped the fifty-dollar tax rebate. It`s a question as to whether or not he should have still, I think.

There are some spending programs coming along in the jobs sector beginning about now, and their hope of course is that this will be enough to pick the economy up in 1978. I think that sometime in 1978 Mr. Carter is going to have to face the question as to whether or not the economy needs further stimulus. At that point he`ll also have to face the question of holding down inflation, and that`s when I think he`ll have to come to some kind of inflation program that`s meaningful -- not necessarily Ken Galbraith`s formal wage and price controls, but some form of less dramatic, less severe incomes policies. I think we can`t avoid facing that issue.

LEHRER: Let me go back to you, Mr. Kaufman, first on this question of what Carter has done or not done. Do you see a discernible difference between a Democratic administration and a Republican administration thus far?

KAUFMAN: I think there is some difference. First of all, there is an acceleration in federal expenditure that will be coming later on this year. Secondly, the administration has worked very hard, as the previous administration has, to dispel the very issue that we`re talking about tonight: wage and price controls. Indeed, if you look at this issue very well and very closely, you find one thing: American labor is not for it, American business is not for it. Who is for it? I believe some writers, some economists as such; but it is not a workable solution. And in that sense I believe the President has done right and proclaimed each time that he is not, in a peacetime environment, going to institute wage and price controls.

LEHRER: What`s your response to the Galbraith-Rowen theory of business confidence?

KAUFMAN: I think business confidence is a critical factor. It may not be the most important factor in this entire setting of an economy which is highly developed, highly institutionalized, many aspects to it. Business confidence is very difficult to measure. You could measure it perhaps in stock prices, you can measure it perhaps in the extent to which business is willing to put on more plant and equipment, you can measure it perhaps by the rate of inflation. I would say to you that today business confidence is somewhat stronger than it was several years ago. That`s quite evident in the economic statistics. Plant and equipment expenditures are higher today, capacity utilization of business is at least ten points higher than it was two years ago. The unemployment rate is lower than it was during the height of the recession. And by the way, if I may take just a second, the unemployment issue is an unfair issue to introduce in this kind of a discussion for the very simple reason that it is highly concentrated on the structural side. The problem of dealing with unemployment is not through aggregate economic policy, but through specific policies of government such as a deep commitment by the government, by the political body, to go ahead and train and educate the impoverished. We haven`t made that commitment at all in this period. It isn`t through aggregate policy, where you can potentially endanger ninety-three percent of the people employed by trying to benefit seven percent of the people unemployed. It`s through specific measures, and it`s a problem we cannot resolve in four years -- the life, perhaps, of one President.

LEHRER: Dr. Galbraith, do you agree with that?

GALBRAITH: I think Henry has a certain point there. Could I go back and ask him a question? I take it you are saying that you would prefer a high level of inflation and a high level of unemployment to any overt measure, either Bart Rowen`s or mine, to try and deal with it through an incomes policy or price policies.

KAUFMAN: Absolutely not. I believe...

GALBRAITH: Oh, you want to have it both ways.

KAUFMAN: I believe that the only way to have a high utilization of real resources in the United States is by trying to tackle the problem of inflation, and I think we can achieve it not in one year but, I think, through policies that are going to assure a sustainable growth, not heat up the system and get us back into trouble.

GALBRAITH: That would be what? Prayer?

KAUFMAN: No, that wouldn`t be prayer. That would be a recognition of the fact that wage and price controls cannot work when the political system, labor business and many consumers are against it.

GALBRAITH: Could I press one further question there which interests me? Would you concede that big labor and big business might be opposed to something and the public in favor of it?

KAUFMAN: I don`t think that`s the case as such. I believe...

GALBRAITH: No, I just asked you to concede that possibility.

KAUFMAPI: It is a possibility, but I don`t think it exists.

GALBRAITH: I would stand on that possibility.

MacNEIL: Can I ask all of you gentlemen one question? Is it in the capability of the administration -- any administration, but we`ve got Carter right now -- simply to take out of their flag locker the right signals and fly them and get things going better to continue the recovery, or is it not in their control to do that? Mr. Wolman?

WOLMAN: Well, it probably is not in their control to do it, but I seriously believe that the United States neither takes the present level of unemployment or the present level of inflation seriously as problems. I mean, vested interests really stand in the way of adopting either effective anti-unemployment programs -- and I support Mr. Kaufman on what he says these are -- and also, I think, there is a great unwillingness to do the kinds of things we have to do to reduce the level of inflation, and that`s got to do with dismantling certain kinds of government programs. Many government programs are very inflationary, and I hate to say the ugly word, but it also has to do with reducing the minimum wage and perhaps eliminating it. And also there is a lot of protectionism that goes on in this country, and getting rid of that would reduce inflation. I just really believe that enough people are comfortable enough so that they are uncomfortable with the alternatives which could mount a serious program against inflation and unemployment.

MacNEIL: Do you believe it`s in the administration`s control to fly the signals that would keep things going the way you see them going? In other words, are they making the right signals now, in your view, and would you like to continue those?

KAUFMAN: I think most of the signals have been right. These have been a steady monetary cost, some effort to control the budget -- which has been not in the best. There is an effort at reform of the Congressional process and of government, which I would endorse; and I think Bill Wolman is right: there are a number of aspects of freeing this economy which the government controls. Those things could strengthen confidence.

MacNEIL: And I gather from your previous answer that you think the signal as it should be flown is one of more strict control of wages and prices.

GALBRAITH: Well, I believe in a strongly affirmative government policy. I don`t think we have stable prices and I don`t think we have high employment by accident. I think we have to work on it, and work on it constantly. Now, we`re going to have great imperfections, we`re going to have great difficulties in doing it, but hell, that`s the way economic policy has always been.

MacNEIL: We just have a minute left. I`d just like to ask each of you quickly to put yourself in the role of an analyst advising investors, and particularly small investors. Is this now a good time to be expressing their confidence in the American economy and helping Wall Street up -- Mr. Rowen?

ROWEN: I don`t want to get in the position of advising investors, large or small. I think all investors have to be aware of the big problems that have been outlined here. I think that the Carter administration could give some signals it`s not giving now in terms of control of inflation and a serious consideration of unemployment. You know, break it out of the abstract -- inflation is a problem for people who have to buy fuel, food, who need to pay for their medical care and housing. Take a look at the price of homes: young people can`t afford to buy a home today. I think the administration has to do some concrete things that would show it not only cares but can contrive some perhaps new ways of meeting these problems.

On the unemployment side I don`t think that they can say, "Well, there are more women in the labor force." All that means is that the economy isn`t growing fast enough to take care of everybody who needs a job, whether women or young people.

MacNEIL: Mr. Rowen, thank you. I`m sorry, we have a little less time than I thought we had and that will have to be it for this evening. Thank you very much and good night, Jim. And thank you gentle men all here. That`s all for tonight. Jim and I will be back tomorrow night and, other news permitting our story will be Jimmy Carter`s new love affair with organized labor. I`m Robert MacNeil. Good night.