The MacNeil/Lehrer Report; The Economy

ROBERT MacNEIL: Good evening. If you understand what`s happening to the economy right now, consider yourself lucky, because a lot of people are very confused. While many other economic indicators have gone sour recent ly -- the dollar plunging overseas, inflation up, talk of a new recession - - at least unemployment was going down. But today`s monthly figures showed unemployment sharply up again in June, after a drop the month before. The number of jobless rose in June from 5.7 percent of the work force to 6.2 percent. But what is happening to the economy? If the other news is so bad, why are they so Happy on Wall Street? Is there in fact a new recession on the way? Tonight: government, industry and labor tackle those questions. Jim?

JIM LEHRER: Robin, the specific news items that are confusing matters right now are these: inflation-- last month`s consumer price index showed prices going up at a double digit, 10.8 percent annual rate. The stock market -- well, it`s booming. Yesterday it reached an all-time high volume record of 66.4 million shares exchanging hands. The Dow-Jones industrial average closed today up a point and a half. The dollar --well, it`s lost thirty- four percent of its value compared to Japanese yen, for instance, in the last twelve months. Today it was down again on the Tokyo exchange. Gold -- its prices jumped. Today it was selling for $201.70 an ounce. While that`s a $1.05 drop from yesterday, it maintained its over$200-an-ounce price, something many experts predicted wouldn`t happen for many more months, if ever. Consumer buying -- a University of Michigan survey reported that consumers nationally believe bad times economically lie ahead for the next twelve months; but in spite of that, or maybe because of it, consumers are at the same time buying big items at record rates: cars, appliances, houses and other things that require credit. Consumer installment debt is rising at a twenty percent rate, jumping by $3.7 billion alone in the month of June.

While all of us with a dollar in our pockets have a vested personal interest in trying to interpret what all of this means, the economists have a professional interest in doing so, and nowhere is that interest more vital than among the economists within the government, the administration - economists such as Daniel Brill, Assistant Treasury Secretary for Economic Policy. Secretary Brill, first of all let`s take the unemployment figures today. Are you as bewildered as others seem to be on what happened, 6.2 percent?

DANIEL BRILL: Disappointed a bit, but not entirely surprised. It is quite difficult to catch the seasonal movements at peak times when there are big influxes into the labor force which normally happens at the end of the school year and again in the fall when a lot of the youth go back to school. So I don`t think many of us were all that bewildered by the big drop that was reported in June or the big increase that was reported this morning for the month of July.

LEHRER: The White House said today that they thought that maybe that drop to 5.7 last month was a statistical aberration of some kind. Does that jibe with your reading?

BRILL: The term "statistical aberration" was what I was trying to describe as the problem of handling the big movements in and out of the labor force at school leaving and school entering times. I think perhaps in looking at month-to-month figures we`ve tended to become a nation of economic hypochondriacs, taking our temperature and blood pressure almost every minute and getting excited about movements that really tend to obscure the longer-term trends. If you look back over a longer period in the approximately year and a half that we`ve been trying to tackle economic problems with this administration it`s pretty clear that we have added some six million additional jobs and reduced the unemployment rate by a full two percentage points, and that is something that`s more significant than month-to-month oscillations.

LEHRER: In short, then, you see today`s figures as unfortunate but nothing to be too concerned about?

BRILL: We`re always concerned about movements in the unemployment rate. It`s just that I think one should look at it in terms of averaging out, perhaps, a statistically misleading drop and not regard any increase today as being all that economically significant.

LEHRER: All right. My reading of economic theory is that when unemployment goes up, inflation is supposed to go down. That`s not happening right now. Why?

BRILL: That`s a sixty-four-billion-dollar question. I don`t think economists have been able to come to full grips with the problem that has been given the name of stagflation. There are as many hypotheses as there are economists. We know that the problems relate to a perpetuation of a wage-price-wage rat race, they relate to the changing composition and growth in the labor force; but putting all of these developments together into a coherent theory that explains it adequately still seems to me to have escaped economists.

LEHRER: What about inflation? All signs seem to point to inflation getting worse before it gets better. Do you agree with that?

BRILL: No, I don`t. I think most of the signs suggest that the worst of the inflation rise is behind us. We realize that very much of the rise in inflation in the first half of this year was due to food prices, which went up at an eighteen percent annual rate, while the overall price measure went up just a little over ten. As we look ahead at the developments in the food area, I think one has grounds for some encouragement that this factor contributing to the price front will be moderating. I`m not saying that inflation is over, I`m not that optimistic; but I think that the principal driving force over the past six months is losing some of its steam.

LEHRER: Finally, Mr. Secretary, in the simplest possible language, what do you see lying ahead in the immediate future economically? What does all this add up to, the things I`ve asked you about and the other things that I mentioned a moment ago?

BRILL: Well, to me it does not add up, if I can start with a negative, it does not add up to recession. We`ve been through six months of rather violent swings in our economy, a period in the winter months when we were suffering from severe weather and from the coal strike we had zero real growth in the economy. And then we went through a period of sort of catching up for that short fall. But if you average the thing out you get a growth rate of, oh, between three and a half and three and three-quarter percent. I think most of the signs point to a continuation of growth at that rate, which is, as we can best measure it, somewhat above our long term potential and therefore suggesting that it will provide us with an opportunity to make further improvement on the unemployment front, but not a pace so fast as to add fuel to the inflationary outlook. I think that we`re in for a period of steadier growth, slower perhaps than last year, but adequate to cope with the two problems -- on the one hand the unemployment problem, on the other the inflation.

LEHRER: All right, thank you. Robin?

MacNEIL: How does the labor movement read these trends? Economist Rudy Oswald has been with the AFL-CIO for twenty years and he`s now their Director of Research and their chief economist. Mr. Oswald, do you view today`s unemployment figures with as sanguine a view as Secretary Brill does?

RUDY OSWALD: Mr. Brill, I think, is correct in saying that the July figures are a continuation of the unemployment level which has remained fairly constant since January, where unemployment was 6.3 percent, and it remains at approximately the same level today.

MacNEIL: You didn`t believe that big drop back in June, in other words.

OSWALD: I didn`t believe that big drop, and I think that we have a continuing high level of unemployment; at 6.2 percent it`s a higher level of unemployment than we`ve had at any other time except in recessions, and of course the last couple of years, which we`ve been trying to creep out of the 1975 mini-depression.

MacNEIL: Well, taking the other indicators that Jim`s been talking about with Secretary Brill, how do you in the AFL-CIO look at the inflation prospect? Certainly the rate has been going up fairly rapidly in the last few months. Do you see that rise continuing, or do you see it moderating, or how alarmed are you about it?

OSWALD: We`re very alarmed, because as Secretary Brill indicated the major force in that inflation has been food inflation, and the other specific factors that have been pushing the rate of increase during the first half of the year have been medical care costs; interest rates, particularly as they affect housing; and also gas and electricity rates. These have been the major factors that have led to the acceleration of inflation. Certainly everybody is hopeful, as Mr. Brill indicated, that food price inflation will come to an end, but nobody anticipated the increases in the first half of this year and we certainly hope that they do moderate.

MacNEIL: Do you expect that they will?

OSWALD: That depends upon the crops, which haven`t been harvested yet; it depends upon the demand and supply aspects of agricultural products, and that remains an iffy question at this point.

MacNEIL: Do you in the labor movement, or you yourself as a labor economist, share the fears of some that we are headed for another recession, a slowdown in growth that will amount to a recession?

OSWALD: Mr. Brill clearly indicates that even the administration expects a slowdown in growth from what we`ve had in the last few years. Most economists indicate that any growth rate of less than four percent will not have any reduction in the unemployment level, and that is a continual concern of ours because at the current level of unemployment it is still recession level of unemployment in terms of earlier times. The figures released today show that the black unemployment level is twelve and a half percent, double that of the overall figures, and for black teenagers the unemployment level is thirty-seven percent. That means one out of every three black teenagers are unable to find jobs in our society today. And that is a matter that needs to be addressed in terms of policies that address the unemployment issue.

MacNEIL: Does that all add up, in your view, to a new recession?

OSWALD: A new recession, if it occurs, would be starting from an unemployment level of 6.2 percent. The 1975 recession started from a 4.6 percent unemployment level. So that if we do go into another recession, the likelihood and the fear is that it will be starting from a much worse base than we had before.

MacNEIL: Thank you. Jim?

LEHRER: Now for the business view of what`s going on, from Dr. Jack Carlson, chief economist with the U.S. Chamber of Commerce. First, Dr. Carlson, how do you interpret today`s unemployment figures?

JACK CARLSON: Well, I think they indicate softness in the economy that we haven`t appreciated up until now. I think the economy has been cooling down since May and June, and July we`re starting to see it occurring in the unemployment rates. I don`t put so much on the statistical aberration; I thought the job growth earlier in the year was too high, given the economic activity that was occurring, and consequently productivity was very low. I do think we have a risk of recession, and it`s going to be important what kinds of economic policies we follow to make sure that that unemployment rate does not continue to grow.

LEHRER: Risk of recession: how serious a risk, in your opinion?

CARLSON: I would put about a one-third chance of recession within the next twelve months. I think the tax relief that the Congress is considering becomes vitally important, and also policies that add to the inflation rate become very important. I think a major cause of the inflation rate has been government policies of a cost-push variety, such as increase in the federal minimum wage, the increase in Social Security taxes, increase in farm price supports, increase in regulations, mandating costs and thereby prices to go up, increase in property taxes at the state and local government level and elsewhere. So we have a government component adding to the acceleration of inflation, as well as the momentum inflation that was already in the economy.

LEHRER: Do you agree with Dr. Oswald that if we do go into a recession it`ll be much worse than the previous one because we`re starting at a higher unemployment rate?

CARLSON: No, I think that we need not have as deep a recession as we had in 1975, because that was essentially caused by the huge increases in prices imposed upon the American consumer from those who supplied oil from abroad, and that shock effect in the American economy I would not see in the next year or two.

LEHRER: Well, look, there are a lot of things happening here that laymen don`t understand. If what you say is right, that there is recession in the air, let`s say, one way or another, then why in the world is the stock market doing what it`s doing?

CARLSON: Well, the stock market tries to anticipate where profits are going to go and where interest rates are going to go. There`s some feeling now that interest rates may well be peaking; in fact, most forecasts have long- term interest rates peaking and in fact short-term interest rates peaking in the next month or two. And the stock market, I think, thinks the peak has already been reached and we`re going to see some slowdown in interest rates within the near future. That would cause the stock market to go up. Also, profits have grown less than the rate of inflation during the last twelve months, and there may be some hope for improvement in the profit.

LEHRER: In the simplest of terms, then, you think it would be a mistake to interpret what the stock market is doing as a sign that the market is showing great confidence in the future of the economy, right?

CARLSON: Well, the stock market has been a pretty good indicator, on a number of occasions, of slowdowns in the economy. But often it has had false indications, too, where it has tended to go up or go down and not indicate a turn in the economy. And I would dare say the fact that the stock market has been very hesitant so long is an indication that people have an unsettled view as to what the future is.

LEHRER: Okay. Let`s factor in one of the other things I mentioned, which is this incredible growth in consumer credit; people are out there buying things right and left and going on the line to do it. How does that fit into your equation?

CARLSON: I think some of the surveys indicate that people are buying in anticipation that the inflation is going to be higher, so buy your car today instead of paying a higher price when it actually wears out or when you`d like to keep it even longer. And so I do think you have car buying at higher levels, which would ordinarily be the case if you didn`t have such high levels of inflation, and concern that the inflation was going to continue in the months ahead.

LEHRER: All right, thank you. Robin?

MacNEIL: Yes. Gentlemen, let`s see what measure of consensus we can arrive at on the diagnosis of this situation. Secretary Brill, could you explain to Dr. Carlson why you don`t think we are headed for a recession, and I`d like to hear Dr. Carlson`s answer to that.

BRILL: Well, Dr. Carlson said the odds were about one out of three. And I think I`d give those odds on anything happening in economics.

(General laughter.)

BRILL: But I have some degree of confidence, based really on the very balanced nature of the economic expansion we`ve had over the past year and a half. It is quite unusual, in a recovery that has persisted as long as this one has, to find yourself in a fairly balanced economy where inventories are not excessive relative to sales, where there seems to be a fairly good balance -- not as good as perhaps what some would like -- but fairly good balance between current consumption and investment. And I think that we would have to search pretty hard to find instances of severe distortions in the economy of the kind that in the past have tended to precede economic turndowns. So my confidence is based in part on the fact that by and large I think people -- business as well as consumers -- have behaved quite rationally in this expansion. I`m not that disturbed, for example, by the rise in consumer credit because terms have been extended such that the repayment burden -- that is, the monthly amounts that have to be paid relative to availability of disposable income -- while it`s gone up, is still not as high as it`s been at times in the past.

MacNEIL: Why do you think he`s wrong, Dr. Carlson?

CARLSON: I think that generally we have a lack of confidence with the consumer, and when we get away from spurts of buying automobiles and other durables that may well be short-lived, then you`re going to have that source of strength in the economy dwindling. Also I think there`s a risk, with these high levels of mortgage payments, for housing purchases to stay out. So I think the strength of the economy coming from that source will tend to dwindle. I think it really depends upon what happens with tax relief and whether tax relief is sizeable, because that`s the only policy mechanism we have to move fairly quickly as the economy slips away in the months ahead.

MacNEIL: You mean to stimulate more growth?

CARLSON: Yes, to stimulate more growth in the sense of letting people have more of their income that they can go ahead and spend, and also to stimulate investment. I`d have to differ with Dan Brill in the sense that investment has been healthy. It`s been very unhealthy since 1973: essentially no growth in investment, which means workers are working with more inferior tools than would otherwise have been the case if we`d had investment. And we need to increase investment and have tax relief to encourage investment to do that.

MacNEIL: Dr. Oswald, what do you think of these two arguments, and are there factors you think are important that these gentlemen aren`t mentioning?

OSWALD: Yes; I would like to emphasize that neither of them has spoken about the foreign trade problem. In the first half of this year there was an eighteen-billion-dollar deficit in our trade with other countries, and for the first time we had a deficit in trade of manufactured products; where America a year ago had an excess of manufactured exports, in the first half of this year it had a five-billion-dollar deficit of manufactured imports. And all imports in the first half of this year were down two billion dollars from what they were during the first half of 1977. So that there is a serious impact on our whole domestic economy from the foreign trade relationship. It shows up also in the devaluation of the dollar, which adds to part of our inflationary forces in the United States and causes somewhat of a run on some of our raw materials and our farm products, which then become cheaper for other countries, forcing price increase: in this country for things such as lumber, which has increased by over twenty percent in the past year. So in part of that discussion they`ve really ignored the impact that has been so serious in the past year, of the foreign trade deficits and the declining value of the dollar.

MacNEIL: Do you want to comment on that, Mr. Brill?

BRILL:I think it`s important to look very carefully at the foreign trade developments over this first half of the year, which, as Rudy indicated, did wind up for the period as a whole with a large deficit. A lot of that deficit was incurred early in the year, partly an effect of the weather; to some extent it`s almost appropriate to say that the snow fell only on our exports in that there were problems in getting deliveries to ports but not the same problem in unloading imports. The coal strike had some effect. Also there were attempts to rush, accelerate exports to the United States in order to, say, get in under the wire before the imposition of steel trigger-price mechanism, some rush to get automobiles here before the change in currencies. But if you look at the export picture since about March there is a very encouraging trend in an increase in. U.S. exports, including exports of manufactured goods. And of course we`re all hoping that the trend in that will continue.

MacNEIL: Well, there you have it, Jim; the diagnosis is gloom, gloomier, gloomiest.

(General laughter.)

LEHRER: All right, gentlemen, we have a few minutes here; let`s solve all these problems now. Let me get your cures. Now, as I read what you`re saying, Dr. Carlson, the government can do something about this if they`ll just do the right thing.

CARLSON: Yes.

LEHRER: And the first thing you`re suggesting in a general way is tax relief. That means cutting income taxes right?

CARLSON: Really, tax relief. Taxes are still going to go up, but not go up quite so fast. And I`m really talking about twenty-five to thirty billion dollars, a little bit short of the size of the tax cut in 1975; so, small in historical comparison, but enough to keep the economy from sliding down. However, I do want the additional spending to occur in the private sector with each individual person. Therefore I would argue that we ought to have a limitation on the increase of government spending to go along with such a sizeable tax relief. And that tax relief is about four hundred to five hundred dollars for each average American family that I`m talking about.

LEHRER: Do you buy that, Mr. Secretary?

BRILL: I buy the principle that we need tax relief. The administration is indeed asking for tax relief. There may be differences, and I think they`re probably small, if you are using numbers such as that, Jack, small differences in what one estimates as the total amount of tax relief. I think we need a balanced tax relief package that will encourage investment, and I mean to imply that we`re satisfied with the rate at which investment is growing, and we do need investment incentives. At the same time, there`s no point in encouraging industry to build plants to produce products if we don`t encourage the income growth so that people can buy those products. So we need a balanced tax reduction that will affect both individuals and business.

LEHRER: Let`s see if we can get a consensus here. Would you buy that, Dr. Oswald?

OSWALD: I buy that we need the tax cut. I think much of the discussion next week in Congress will be what type of a tax cut. Will that tax cut give most of its benefits to the very wealthy, as the current bill reported by the Ways and Means Committee gives most of the individual tax cut benefit to the top richest ten percent of the taxpayers. The question is, will the Congress pass a bill that does that, or one which distributes the tax cut more equitably among all the taxpayers? Unless you make it more equitable, you won`t have the stimulus forthcoming because most of the taxpayers won`t get the benefits.

LEHRER: All right. Let`s move on to another thing that`s been suggested, and that`s to delay the increase in minimum wage.Is the administration considering that, Mr. Secretary?

BRILL: No, sir, we are not.

LEHRER: Should they, Dr. Carlson?

CARLSON: Oh, very definitely. If you were to defer the increases for the next two years, you could add, in terms of not pricing people out of the labor market, nine hundred thousand additional jobs, and also you could take one and a half percent off of consumer prices if you would defer the increases of the minimum wage for the next two years --one of the most important things we can do on the inflation side and also the job creation side.

LEHRER: I would assume you would not agree with that, Dr. Oswald.

OSWALD: I don`t agree at all, because what it means is that the poorest people in our society should work for less real wages each year, that they should be made somehow the scapegoats for the nation`s inflation and unemployment problems. They are already the poorest in our society, and such a policy would only make it worse.

LEHRER: Gentlemen, I have a funny feeling we have not resolved all of the problems tonight. Let me ask you, Mr. Secretary, in conclusion: is there serious talk within the administration at this point of some kind of phase two, get-tougher situation toward inflation?

BRILL: We are at the subcabinet level examining every option that has ever been proposed, except one.

LEHRER: Wage and price control.

BRILL: Wage and price controls are on the proscribed list; we are not looking at any aspect of that. We are not that silly to try to repeat every mistake that has been made in that respect. On the other hand, there have been a great variety of proposals by very responsible economists -- Mr. Okun has proposed one approach; Mr. Wallich, many others. We are examining the consequences of any of those to see which are feasible, which are administratively possible, what the effects would be. And that`s the status of it.

LEHRER: All right, thank you. Robin?

MacNEIL: Thank you all, gentlemen. We have to leave it there tonight. Good night, Jim.That`s all for tonight. We`ll be back on Monday night. I`m Robert MacNeil. Good night.