The MacNeil/Lehrer Report; Economy '82: Optimism-Pessimism

[Tease]

ROBERT MacNEIL [voice-over]: There are two ways of looking at what the year ahead may do to all of us economically: a rosy view and a bleak one. It's either going to be great or it's going to be terrible, the experts say. Tonight, we let them fight it out.

[Titles]

MacNEIL: Good evening. Today, January 1st, 1982, an important phase of President Reagan's economic recovery program goes into effect: major tax cuts affecting savings and investment. At mid-year, personal income taxes will be cut by 10%. Already in place are substantial cuts in government spending.There are major battles ahead, of course, over next year's budget, the deficits, military spending and taxes, but a major part of the Reagan program is now in place. And the question is, will it begin to produce the economic recovery promised or will the current recession strengthen its grip? Will more people be forced out of work? Will interest rates and inflation continue to go down? In short, is it going to be good news in 1982 or bad? The American people in general lean towards pessimism today. The Harris Poll says a majority expect more unemployment, more inflation, bigger deficits.But what do the experts think, the people who make their livings as economic seers? Tonight, the optimists versus the pessimists. Jim?

JIM LEHRER: Robin, sorry, but there's no way to do an economic story without laying out a few numbers here at the beginning. There are only two sets, one used by the optimists to support their optimism, the other by the pessimists to illustrate why they see it the way they do. The upbeaters' figures are on interest rates, as they point to how the prime lending rate has dropped from a very high 20 1/2% a year ago to 15 3/4% now. And on inflation, where a year ago consumer prices were rising at an annual 13.5 average percent rate and now it has slowed to an estimated 10.4% rate and going even lower. The downsiders also have two in their set, both related to recession. The unemployment rate, which has risen from 7.4% a year ago to 8.4% today, which translates into one million more jobless Americans. And the federal deficit; it was $58 billion in the last fiscal year, a near record, and it's projected to go above $100 billion in fiscal '82. So, interest and inflation rates are down; unemployment and deficits are up. Which is good and which is bad and why? Stand by. Robin?

MacNEIL: To read these economic tea leaves in New York, we have contrasting views.Our optimist is William Grant, president of an investment advisory firm, MacKay Shields Financial Corporation. Our pessimist is David Jones, vice president and economist for the Wall Street securities firm of Aubrey G. Lanston. First, Mr. Grant, what is your optimistic prediction? What is going to happen and when, in your view?

WILLIAM GRANT: I think the administration has us on the proper road as far as attacking the fundamental issue, which is inflation as far as I am concerned. The bottom line to me would be pleasant news on the inflation front all through 1982 and into 1983. That is the key element as far as the administration is concerned; all of her problems fall out of that.

MacNEIL: What about interest rates?

Mr. GRANT: I think interest rates, by the spring, will be down -- at least on the long rates -- 150 basis points from here, 1 1/2%, maybe as much as 2%, perhaps a little bit more.

MacNEIL: What about unemployment?

Mr. GRANT: I think unemployment for the next couple of months will probably continue to rise, but I would also indicate that we're at a peak employment rate, too, with some 107 million people at work today.

MacNEIL: Now, what is the reasoning behind this view that is certainly not shared by everybody?

Mr. GRANT: Well, I think that the road -- we're just started down the road, and there are five specific points that I would like to make, worth addressing, and unless we address these points we could not solve the secular problem of inflation in the United States. The first one, of course, was the change in government spending patterns. We can argue whether or not there's been enough done or too much done or what have you, but I think we'll never see again the policies accepted of tax and spend and spend and tax that we've had for 40 years. So that's an issue that has been addressed. The second issue that had to be addressed was for the Federal Reserve to improve its credibility compared with the action it has taken in similar periods in the past. And I think again you can argue with whether or not they're doing enough, but at least they have a better record now. What they have to do is to say what they are going to do and then do it; that will improve their credibility. The third --

MacNEIL: In controlling the money supply.

Mr. GRANT: In controlling the money supply. The third force which had to be dealt with was to break the back inflation in the real estate market, because the public had come to assume that each and every year the price of their house, the biggest single asset, was going to go up 15%. Well, that price is no longer not only not going up, but it's actually coming down. The fourth factor that had to be addressed was the speculation that took place in the commodity markets through the late 1970s. And commodity markets, I include everything from cotton to coffee to medals, and even taking it down to collectibles and antique prices and what have you. So those tangible assets have now had a major correction, and that was one of the fundamental corrections that had to take place. The last one, and perhaps the one least recognized, but to me maybe as important, perhaps the most important one, is the change in attitudes of American management and American labor. I think they're starting to become much more rational about their relative vested interest. In the case of management, they are starting to realize that, in a highly competitive economy, you just can't increase prices without suffering loss in market share. From labor's viewpoint, they're starting to understand that excess wage increases, wage demands, that were involved in increases, cause unemployment. So those five basic forces are now being adjusted and addressed by this administration, and I think that's the beginning of an extremely healthy road. You solve inflation, lots of other problems fall out and can be solved.

MacNEIL: Well, that's the optimistic view. Mr. Jones, what is your pessimistic prediction? What do you think is going to happen, and when?

DAVID JONES: It's difficult to be pessimistic at this season of the year, but, if you look at the economic facts of life, pessimism comes out in big, broad letters for 1982. First of all, indeed the Federal Reserve has established credibility. They will intend to starve the economy for new money and credit next year --

MacNEIL: Just to match what Mr. Grant said, why don't you tell us what you think is going to happen, first -- to interest rates, for example.

Mr. JONES: We will have next year a weakening economy, and we'll have some decline in interest rates. But we may not have any more than Mr. Grant talked about, and I would submit to a potential homebuyer that, dropping from somewhat over 17%, where we've just risen back to, in the latest week, to 15%, may well not whet the appetite of potential honebuyers -- in fact, it may still be beyond reach of many people attempting to buy a house, particularly with the housing market turning down.

MacNEIL: What about unemployment?

Mr. JONES: Unemployment could rise above 9% by the time we get to late spring, early summer of next year; maybe 10.

MacNEIL: What is your projection on inflation?

Mr. JONES: Inflation will come down; that will be the one piece of good news. But the price we pay in terms of economic pain is going to be extremely great, number one; and number two, the policymakers in Washington are not going to be able to control that downward move in the economy.

MacNEIL: Now, what is your -- is the sort of reasoning behind this much more pessimistic projection?

Mr. JONES: In essence, we have a unique recession. We used to be able to plug into the economic models neat little inventory recessions. Inventories became too high, we ran them down. Inventories became too low, and off the economy went again. There are some very key and fundamental factors at work right now which we've never seen before to the degree we see now in this recession. Number one: corporate balance sheets. They're in the worse shape they've been since World War Two, and corporations are having extreme difficulty improving those balance sheets because they can't move into the bond market, due to instability there, to pay off their excessive reliance on short-term debt. Second fact of life: the thrift institutions that are supposed to lend money to the housing market simply will not be there. We're losing a New York savings bank a week through merger, roughly, right now. The balance sheets of the thrifts are in bad shape, and therefore the availability of money to the mortgage market is very questionable next year. Third, we do have, indeed, a significant problem in terms of the world. The world is in recession as we look ahead to the year. And, finally, and perhaps most importantly, and much differently than other recession periods, state and local government spending and hiring, instead of rising during a recession period to cushion the recession, is actually falling and reinforcing the recession. These factors are going to work together to produce probably the worst recession since World War Two, and probably the highest unemployment rate we've seen since the Depression.

MacNEIL: Okay. Two very different views. Jim?

LEHRER: Robin, there's also much less than agreement among those who watch and wonder about the economy from Washington. Richard Rahn is one of the most optimistic of the forecasters here; he does it for the U.S. Chamber of Commerce, where he is a vice president and chief economist. Countering him is Charles Schultze, who does his viewing of the economy now as a senior fellow at the Brookings Institution. During the Carter administration he was the government's number-one man on the economy, the chairman of the president's Council of Economic Advisers. Mr. Rahn, you're a forecaster who sees silver linings ahead, is that right?

RICHARD RAHN: That's certainly right. I think --

LEHRER: Tell me what the linings are.

Mr. RAHN: Well, I think Mr. Grant was absolutely right on the inflation front, but Mr. Jones failed to see the advantages of the big tax-rate reduction which is coming to play during this year. As of January 1st, the maximum tax on income drops from 70 to 50%. That will be used for productive purposes. In addition, we have the individual rate cut, which officially goes in effect on July 1st. But, for those people who pay their individual income taxes on an annual basis, or make estimated payments, they can start reducing their tax payments right away, 'cause the tax liability is for the year.

LEHRER: Well, in a general way, before we get some of these details, in a general way, what do you see happening to the economy in 1982? Will the inflation rate continue to go down?

Mr. RAHN: Inflation rate is going to drop, and by the end of the year we're going to see much lower inflation than we now have.

LEHRER: Then you agree with Mr. Grant that that is the single most important thing, right?

Mr. RAHN: Well, that and coupled with that tax reduction, which is going to give real incomes, and particularly savings and investment, a tremendous kick. We are going to see a real rise in incomes, which we haven't seen for quite some time.

LEHRER: Okay. Now, on the down side, what about unemployment? What do you think is going to happen on the unemployment front?

Mr. RAHN: Well, the next couple of months unemployment will probably continue to creep upward. It lags behind the rest of the economy.

LEHRER: Nine or 10%?

Mr. RAHN: Oh, I don't think it's going to go that high; probably the high eights. But by the end of the year we'll see significant improvement on unemployment, and by '83, unemployment will be in pretty good shape.

LEHRER: What about interest rates? You heard what Mr. Jones said on the down side; he said it's down to 15%, that's still not going to help much. Do you think it's going to -- I mean, interest rates, do you think it's even going to go below that?

Mr. RAHN: Interest rates will continue to drift down through the year. They'll have some little ripples upwards, but overall we expect the rate of interest to be -- average for about 13% during the year; the prime rate will probably be about 11% at the end of the year.

LEHRER: Where do you come down on the projections on the federal deficit? It's now, as I said, it's now projected that it is going to be over $100 billion next year. Do you think that's about right?

Mr. RAHN: No, we are a little more optimistic there. We said it'll be about $96 billion.Now, that's still high.

LEHRER: That is a little -- just a little. Okay.

Mr. RAHN: But if you put it down in proper terms -- a percentage of GNP, and particularly as a percentage of net saving -- it's not out of line at all with what we've had in recent years.

LEHRER: So it's no problem?

Mr. RAHN: Well, big deficits are always a problem, but it is not the extreme problem that some people have painted it.

LEHRER: Mr. Schultze, you can begin anywhere you want to. Let's begin -- let's start at those deficits and work back. Do you see -- do you agree that it's going to be $100 million or $96 billion, and is that in fact going to be a problem?

CHARLES SCHULTZE: A $100 billion budget deficit in the fiscal year is quite likely. I don't think that's the problem. The problem is that, even as the economy begins to recover in 1983 and '84, you are going to be facing budget deficits even larger than that. A budget deficit in a recession is one thing -- you don't worry about it quite so much. A budget deficit in a recovery is another problem, and we're going to go through a major struggle in Washington next year, and --

LEHRER: What's the result of that struggle going to be? I mean, what do you think? What's --

Mr. SCHULTZE: Well, let me start first with the way the economy is going to look. I agree with a little bit of what everybody said, but, net, come out pessimistic. First point: the Federal Reserve has gotten credibility. That is, it is going to, and people believe it is going to, restrict the growth of the money supply. In my judgment, there is no way, I mean, no way, in which the economy can recover quickly, finance that recovery and an inflation that will still remain even though it's down, with the growth in money that the Fed is going to let us have.

LEHRER: Now, why not?

Mr. SCHULTZE: Well, what the Fed is going to let us have -- maybe 4% a year money growth.You can't, with 4% a year money growth, finance an economic recovery of 4 to 5%, 6%, and an inflation rate, even though it's down, of 7%. I mean --

LEHRER: There's just not enough money there.

Mr. SCHULTZE: -- you can't crowd the two in; you just can't do it. That's going to mean -- not immediately; I think we'll have a recovery in 1982. I don't know when it's going to come, but maybe sometime in the spring you might very well begin to see recovery. But, as you get towards the end of the year and that money begins to bite, you're going to find interest rates going back up, and the recovery, if not completely stalling, at least substantially slowing down. I fully agree with Mr. Grant that inflation is critical. I fully agree that the Federal Reserve has become credible; it is going to slow the money supply growth. The problem is that you can't get even that lower inflation and economic recovery financed out of what the Fed is going to let out. That is the price we pay for bringing down inflation. There is no way of bringing inflation down and have, in my judgment, a booming, vigorous recovery for any length of time.

LEHRER: Mr. Rahn?

Mr. RAHN: Well, I disagree with that. I think as we get into the year, as the supply of goods and services increases -- largely as a result of these tax-rate reductions -- the Fed will loosen up some, and that we will have adequate monetary growth; we're also going to have a big surge in savings. And this is going to enable us to expand our productive plant and equipment without feeling inflation.

LEHRER: Now, you haven't mentioned the tax-rate reductions on the inflation. You don't think that's going to matter much?

Mr. SCHULTZE: Oh, no, no. No, no. I mean, that's going to help us have a recovery. Tax-rate reductions will put money in people's pockets. They will spend most of it and save some of it. That will, in the middle of the year, start us into a recovery. As that recovery starts to roll along, it's going to run right into the Federal Reserve's monetary targets, and that's going to slow it down. It isn't that I don't think the tax cut is going to push us up; the problem is that two things are fighting each other. "We've got a Catch-22 situation with respect to interest rates. It's the problem that comes about when you try to bring inflation down. If the economy is really soggy next year, then indeed interest rates will go down, and may stay down for a while. But, if we get into a really vigorous recovery, then after, oh, three months, or five months or so, interest rates are going to start moving back up rapidly and bring that recovery, if not to a halt, at least to a slowdown.

Mr. RAHN: See, our major point of disagreement here is the amount that's going to be saved. If I'm correct that we have a much higher savings rate -- these IRAs -- now, anybody under the new tax bill will be able to set aside $2,000 a year without paying any tax on it.

LEHRER: So it's the pension, the pension there --

Mr. RAHN: Yes, and this will be -- anybody, if you are under a qualified pension program, will be able to engage in these. And that's a tremendous incentive for additional saving.

LEHRER: And that money, by having been set aside, can then be loaned out, you mean, and that'll help put more money in the system.

Mr. RAHN: That's right.

Mr. SCHULTZE: I'll give you my Catch-22 again. If people save and do not -- and that money does not get into productive investment -- interest rates will be low and you'll get no recovery. If, on the other hand, people save the money, and instead of it being idle it goes out to finance big building of equipment and plant and all that, and which might ultimately be good, in the meantime that's going to drive the economy back up and you're going to go right back into that Federal Reserve ceiling again. So, save it or spend it, you got the same basic set of problems.

LEHRER: And Mr. Rahn continues to shake his head. Robin?

MacNEIL: Mr. Grant, Charlie Schultze says that it's going to recover but you're going to run bang into the Fed and that their money growth limits are so much that it will turn down the recovery again, it'll stifle it.

Mr. GRANT: Well, but I think the problem is we are again focusing on a quick fix for something, and what I'm saying is the administration has put us on the right long-term road, and we can't just focus on from here to the spring or the summer or the fall of 1982; we've got to look ahead on a three- or four- or five-year basis.And I think that they are doing the absolute proper things, and they've got to take that long-run viewpoint. If they try to do a quick fix, or try to manipulate or respond to the unemployment rate as it's reported, we'll be back in the same problem.

MacNEIL: But you have predicted recovery starting in the spring.

Mr. GRANT: I'm looking for recovery starting in the spring; not a roaring recovery but --

MacNEIL: And Mr. Schultze says the Fed will stifle that recovery.

Mr. GRANT: I think interest rates are going to continue to come down all year. Refer to the 200 basis points by the spring.I don't think -- I think there can be enough money supply increase by the Fed to continue a steady but consistent rate of growth. Not a boom, and I wouldn't want to see a boom. I think that would bring in definitely more problems.

MacNEIL: What do you think about the Catch-22 of Mr. Schultze.

Mr. JONES: The policy mix is wrong -- that's what Mr. Schultze is essentially saying, and that's correct. Money is too tight on one side. We need it on a long-term basis to reduce inflation, but the budget is too far out of balance on the other side -- not just because of recession and because incomes are down and therefore revenues are down, but by deliberate design -- through tax cuts, through increases in defense spending. As long as we have tight money and those ceilings on potential growth on one side, and extremely heavy federal borrowing on the other, we're going to have a clash. And left in the middle are these poor borrowers on Main Street that are trying to get mortgage money, are trying to borrow -- or, businesses that are trying to borrow in the bond market, or state and local governments. Everyone cannot get into that market together, and the big bully always is the federal government. So we'll have crowding out and higher interest rates.

MacNEIL: Mr. Rahn, what's your answer to that?

Mr. RAHN: Well, I think we have to look at the Japanese case. The Japanese have a budget deficit of about 6% of their GNP; ours is only 3% of our GNP. Yet, because the Japanese have a high rate of savings, they're able to have a high rate of economic growth, a very low rate of inflation, and yet have big budget deficits. The budget deficit, you have to take a look at it in relationship to the net amount of savings in society.

MacNEIL: Mr. Jones, Mr. Rahn said earlier that you were, as well as Mr. Schultze, failing to take into consideration the great stimulative effect of these tax cuts -- starting today with the IRA provisions and other things to encourage savings, the lowering of the maximum rate of unearned income from 70 to 50%. What do you say to that?

Mr. JONES: In essence, I'm focusing on next year, number one. And, number two, I would say we can't have it both ways.If we increase savings significantly because of direct savings incentives -- the individual retirement accounts and so on -- people will tend to save more and spend less. We say, how do we get recovery going, then? Put yourself in a businessman's position. If there's no demand for his product, is he going to take advantage of that tax incentive to go out and spend on plant and equipment, or will the economy simply tend to spiral down into a deeper and deeper recession. I say this much: higher savings against the background of a weakening economy is Hoover economics, not boom, recovery economics.

MacNEIL: Mr. Grant, what do you say to that?

Mr. GRANT: I think that there's going to be a major shift on the part of the Mr. and Mrs. America in terms of preferring financial assets to the tangible assets that he's been building up and -- really until about a year ago. And I think that's going to do a tremendous amount to alleviate the problem of how do you finance the deficit that's coming along. It's something we haven't experienced in probably the lifetime of anybody here, but I review this as a very major factor in alleviating that deficit problem and its financing it.

MacNEIL: What do you say to that, Charlie Schultze?

Mr. SCHULTZE: Well, I think -- I go back to what Mr. Jones said, I think we have the wrong policy mixture between what we're doing on the budget and what we're doing with money. We, like many other countries in the world, are struggling to bring inflation down. While you're trying to bring inflation down, there is no way you can have a boom. There is no way you can have really vigorous growth. You've got to restrain the economy. Now, what we're doing is restraining it very, very severely with tight money -- but conversely, because in my judgment we had too large a tax cut combined with the defense increases. We've got a very loose budget, so while the Federal Reserve, doing its duty, is trying to sit on the economy to keep inflation down, the federal government -- not so much this year; the deficit this year isn't so much of a problem, but the next couple of years after that is going to be undoing with its left hand -- this tension means that, what will in any event be a difficult period to go through, is going to be made more difficult because it will give us an unbalanced economy. The burden of licking inflation is going to fall too heavily on those industries which are particularly affected by high interest rates -- housing, autos, and machinery and equipment.

MacNEIL: Let me ask each of you very quickly, starting with you, Mr. Rahn, what would your advice be to a family that's contemplating a major purchase in this coming year -- a house or a car or a home or a car, or something like that? What would your advice be, briefly, to them?

Mr. RAHN: Well, I think it's a good time to buy. Inflation rates will be coming down and interest rates as a result will be coming down, so homes are going to be much more easily affordable -- also automobiles. Now, of course, as the economy picks up the softness in prices -- those of homes and some of the automobiles -- will pick up, so you've got to do the trade-off of, at what point is the advantage in lower interest rates, is that offset by increases in prices.

MacNEIL: What do you think, Mr. Grant, very quickly?

Mr. GRANT: I think between now and the spring will be a good time to buy a home. If you don't need it to live in I'd rather buy long-term bonds.

MacNEIL: What's your advice to consumers?

Mr. JONES: Main Street, USA, should batten down the hatches; invest in short-term, safe assets; be ready for a deeper recession than expected; and have money available to fall back on when you need it.

MacNEIL: Mr. Schultze?

Mr. SCHULTZE: Oh, I guess what I really would say to consumers is probably don't listen to four different economists telling you how to run your personal life.

MacNEIL: Jim?

LEHRER: Yes. But you will, you will participate, and you pessimists particularly. You said things are not going to work out too well.If you were still advising a president, what would you advise him on how to fix it?

Mr. SCHULTZE: Well, it's going to sound kind of glib coming out so fast, but two things. One, undo a few of the things -- not all, not completely, but a few of the things that have been recently done.The tax cut was too big; we need to raise taxes again at the outer end -- postpone some of those taxing cuts. Two, we've got to at least pare some off defense spending. We can certainly get a few percentage points out of it. And, number three, I would think we need to do something more directly to deal with business and labor, trying to get prices down directly through what's called an incomes policy rather than doing it only through beating them over the head with tight money.

LEHRER: Mr. Grant, should anything be fixed at all, and what do you think of the Schultze solution?

Mr. GRANT: I think that a lot of the forces that are necessary are now in motion, as far as the economy itself is concerned. I would not be in favor of any kind of an incomes policy. I think for the first time in my experience I see some more rational thought on the basic fundamental problems by labor and also by management, and that to me is a key in being on the right road.

LEHRER: You wouldn't touch the tax situation?

Mr. GRANT: I wuld not touch the tax situation at all. I think one thing that we have to have is some credibility in what an administration does, and some belief on the part of corporations and the American public that they can look ahead and say this is something that they can plan on.

LEHRER: No matter how bad things might get?

Mr. GRANT: If you invite me back next spring I'll answer that question.

LEHRER: Okay. Mr. Jones, what do you think ought to be done?

Mr. JONES: I think in essence we do have to raise some revenue.I'm not saying to change the tax-cut program as it is, because the one advantage that Reagan economics does have is that tax cuts are in place in terms of cuts, but I think we have to go for some revenue enhancement -- that fancy political term from Washington -- which would be a tax on oil imports, perhaps -- could raise $20 billion. We need to close that gap in the budget; we need to be tighter in the budget, perhaps going to some spending cuts, even in defense, although that looks very much like an outside chance at the present time. We have to essentially tighten up on the fiscal dial and loosen up on the monetary dial, or this economy is going nowhere. And we won't be able to wait long enough for the long-term results that everyone hopes for. We may die in the process.

LEHRER: Mr. Rahn, do you think anything needs to be fixed?

Mr. RAHN: Not at all. We've got to stick with the program.The prescriptions that I've heard from Charlie Schultze and Mr. Jones are the same prescriptions they prescribed over the last four years. We know where that got us: higher interest rates, higher rates of inflation, low rates of economic growth. Increasing taxes is counterproductive. I think we have learned that. The administration is on the right course. We at the Chamber are recommending they stick with it.

LEHRER: No matter what?

Mr. RAHN: We're optimistic, very optimistic.

LEHRER: That's right, that's right. I forgot about it. I'm sorry, I forgot. [laughs]

Mr. RAHN: So, if we turn out to be wrong, we can redo the debate a year from now. But I don't think we will.

LEHRER: Mr. Schultze, what about that? This is not only what Mr. Rahn and Mr. Grant have said; everybody's said, the President has said it.We do not want to do what you guys, what the other people did -- that means you -- had been doing before.

Mr. SCHULTZE: In the first place, what we did, right or wrong, has little to do with whether or not taxes are cut by an additional five or 10%. That's number one. Point number two, what we are now in the process of doing is trying to unwind a very substantial inflation that a very major oil shock put this country and other countries in the world into. It wouldn't be easy for us if we were still in power; we'd have problems.It's going to be a very painful thing to do. My point is that simply cutting taxes, and cutting taxes far beyond what you can afford when you're increasing defenses, isn't the answer to it.

LEHRER: What about the consistency argument? Mr. Grant mentioned that. The important thing is predictability; the President has a policy, stick with it.

Mr. SCHULTZE: If it's a good policy, stick with it; if it's not a good policy, then at least postpone it. You don't have to cancel anything the President's done, but you don't have to have it immediately.

LEHRER: Okay, we'll see you guys in a year. Robin?

MacNEIL: Mr. Rahn, Mr. Schultze, Mr. Jones, Mr. Grant, thank you very much. We'll be very interested to see who's right. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back on Monday night. I'm Robert MacNeil. Good night.