The MacNeil/Lehrer Report; Unemployment Statistics

ROBERT MacNEIL: Good evening. The unemployment news was bad again today, showing that the nation is now back to the highest jobless rate since the beginning of World War II. It reached 9% in March, a figure it touched in May 1975 in another bad recession. On this program last night, Treasury Secretary Donald Regan said he didn't think that unemployment would go much higher, and that the recession is bottoming out. Yet in Washington the political stalemate continues over how government should help the ailing economy. Private negotiations between the White House and Congress to break the deadlock over the 1983 budget have produced no public breakthrough. Essentially, that argument boils down to Congress telling President Reagan he must give on defense spending or raise taxes, or rising deficits and continued high interest rates will make recovery impossible. So far, at least in public, Mr. Reagan says no, he is staying on course. Tonight, with rising unemployment and prolonged recession, we ask two men with very different views, how can we put Americans back to work? Jim Lehrer is off tonight; Charlayne Hunter-Gault is in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, a closer look at the Labor Department's unemployment report reveals an even gloomier picture than the overall rate of 9%. It takes into account the number of people who have given up all hope of getting a job and have stopped looking. The number of those discouraged workers rose by 130,000 in March to 1.3 million, the highest level recorded since the government began compiling such figures in 1967. Further, the number of people forced to take part-time positions because they couldn't find full-time jobs increased by 150,000 in March to a record 5.7 million. By far, the brunt of unemployment felt heaviest once again on black Americans. Their unemployment rate hit 18%, twice the national average. Moreover, in the first quarter of this year, 40% of the discouraged workers were black. Finally, since the recession officially started last July, most of the increases in unemployment came from workers who were temporarily laid off. But the Labor Department says the increase last month was due to workers being permanently terminated from their jobs. Robin?

MacNEIL: We devote tonight's program to two views in depth of how bad things are and what should be done to get the country out of this situation. First, Lester Thurow, professor of management and economics at MIT. He is with tonight at public television station WGBH in Boston. Mr. Thurow, how bad is the situation right now in your view?

LESTER THUROW: Well, I would make a comparison, it's a little bit like walking along the edge of a cliff. And we haven't fallen over yet, but there are really some very severe dangers if you look at the American economy. If you think about it, we now have 9% unemployment, we have 30% of our manufacturing capacity idle; between Buffalo, New York, and Gary, Indiana, it's no exaggeration to say we have the Great Depression. Farm incomes are down 44%. Many big American companies, like Braniff, International Harvester, Chrysler, are broke. Whole industries, like savings and loan and housing are awash in a sea of red ink. I think you have to say it's a very serious situation.

MacNEIL: Can it get worse?

Mr. THUROW: I think it can get worse. The unemployment rate is apt to go up higher, and one of the problems I think you have to face is that in a modern capitalist economy we can't take year after year of either no economic growth or negative economic growth. And when the data come out for the first quarter of 1982 they are likely to show that the American GNP in early 1982 was no higher than it was in 1979. Now, I don't think our economy can take a lot of that. At some point it cracks. Now, nobody knows precisely what happens when it cracks, but no one wants to try.

MacNEIL: What do you mean "it can't take it"?

Mr. THUROW: Well, basically the whole industrial structure gets weaker and weaker and weaker. Think about the automobile industry. At the moment we've got Chrysler that's technically bankrupt. American Motors has been bought by the French government. But the longer that industry goes with very low automobile sales and more and more losses, the other firms in the industry will eventually get weaker and collapse too, and we could very well have a situation where we don't just destroy Chrysler, we end up destroying Ford and General Motors along with it.

MacNEIL: Secretary of the Treasury Regan said on this program last night the recession is now bottoming out. It's in the trough, and the next move will be up. And he also said he didn't think unemployment would go much higher and would not reach 10%. What do you say to those views?

Mr. THUROW: I think that it is optimism that's basically unwarranted. Everybody thinks the recession is basically going to occur for another three months until July. Unemployment tends to lag behind the GNP, so even if the GNP starts growing in July, unemployment will still be rising. I think we will be very lucky to get out of this recession with less than a 10% unemployment rate.

MacNEIL: What is the way out of the recession in your view?

Mr. THUROW: I think if you look at Reaganomics there are three big pieces to it. There are large tax cuts, big increases in defense spending and very tight money policies. President Reagan could clearly do any one of those three; probably he could do two of the three if he was a little bit lucky. But nobody could do all three. And therefore I think he has to give up on one of the three, and I think the place to change is the monetary policies. I think we need very different monetary policies than we're getting at the moment.

MacNEIL: Such as?

Mr. THUROW: Basically we need much easier monetary policies. If you look at short-term interest rates, those are the interest rates that aren't affected by expectations since they're only very short-run rates. We have a prime interest rate of 16 1/2%. Last month the inflation rate was a little less than 3%. That means we have what economists call a real interest rate of about 13%. Now, with a 13% interest rate, we're not going to have a healthy economy. I think the Fed ought to be aiming for a three or four percent real rate of interest and for a while give up on monetarism in the sense of just looking at the money supply. The time has come to look at interest rates and get interest rates down -- quickly.

MacNEIL: Well, would you have them just open the floodgates on the money supply and ease up?

Mr. THUROW: I would have them ease up on the money supply, basically because there are two ways to look at monetary policies to decide whether they're tight or hard. One is to look at the rate of growth of the money supply and the other is to look at interest rates. At the moment interest rates indicate incredibly tight, hard monetary policies; we're in the midst of our worst recession and we just can't afford 13% real rates of interest for another six months or another year, or we won't have much of an economy to come back to.

MacNEIL: Wouldn't that be abandoning what both President Reagan and Paul Volcker, the chairman of the Federal Reserve Board, have said is essential to wring inflation out of the economy, and that is, to keep money tight?

Mr. THUROW: Well, I think if you had a 4% real rate of interest, that still qualifies as tight money. Thirteen percent real rates of interest qualify as something other than tight money -- that is almost suicide. And one of the things you have to think about on inflation, that's -- the philosophy that they are enumerating is basically their philosophy of "We've got to destroy the village to save the village." Now, I don't think that's smart economics, I don't think that's smart military policy; and you're just not going to have much of the economy left if you continue on this route.

MacNEIL: Well, thank you. We'll come back. Charlayne?

HUNTER-GAULT: Now to that different view. For that we have Paul Craig Roberts, who recently left his position as assistant secretary of the treasury for economic policy to become professor of political economy at Georgetown University Center for Strategic and International Studies. He is one of the original supply-side theoreticians. Mr. Roberts, do you agree with your former boss, Secretary Regan, that the unemployment rate won't go much higher and that the recession is bottoming out?

PAUL CRAIG ROBERTS: Charlayne, that depends entirely on what the government does. If the government continues to focus on the deficit instead of the fact that the economy is in a recession, and David Stockman and the Congress actually do something such as raising taxes in a recession, why then --

HUNTER-GAULT: Which is what the current clamor is for at the moment.

Mr. ROBERTS: Which is what the clamor is for, why then, you could see a much worse economy.

HUNTER-GAULT: How much worse?

Mr. ROBERTS: Well, if you already have a recession and incomes are falling and cash flow is restricted, and you take measures which further reduce people's income after tax and further restrict their cash flow, why then, you would have a worsening recession. And recessions can get so bad until you change the name. As to whether it would go all the way into a depression would basically depend on the folly of the government.

HUNTER-GAULT: What do you think of congressional arguments that unless the President gives on defense and increases taxes now, high interest rates and deficits will make recovery just impossible?

Mr. ROBERTS: I don't think the defense argument is an economic argument. That has to do with some assessment of what is our strategic position in the world. If we look at the tax argument, Charlayne, it is the Congress which has been pushing that argument on the President ever since he came into office. And in fact, the reason, one of the reasons we had this recession is that the President was pushed off of his tax program. He originally intended to have in effect, by last January, 20% tax cuts across the board; he got five. So it was the effort to delay the tax cuts in order to balance the budget which pushed the tax cuts off into the latter part of the Reagan administration -- we don't really have them yet. And if they try to continue a policy which denies the kind of relief the economy needs in order to get moving again, why, they will continue the worsening state of the economy.

HUNTER-GAULT: So in other words you're placing the blame for the way things are right now on the Congress.

Mr. ROBERTS: If you remember last spring and last summer, when we were trying to get these tax cuts passed, the argument was that these tax cuts would cause a massive inflation, and we were about to send the country up in the smoke of inflation. So they delayed the tax cuts and what you got was a recession. And that was the danger the whole time.

HUNTER-GAULT: And that's what President Reagan has been saying. If he had gotten the original 30% he'd asked for, we wouldn't be in the shape we're in now.

Mr. ROBERTS: Yes, and on schedule. Not just the 30%, but if we had had it on schedule.

HUNTER-GAULT: Starting in January. Well, if he had gotten what he wanted, what would the economy look like today in your view?

Mr. ROBERTS: Well, I don't know whether the tax cuts of themselves would have sufficiently offset the erratic monetary policy from the Federal Reserve and the period of very tight money for six months of last year such that we would have had a booming economy. But I do think that the kinds of recession that we have now would certainly not be upon us.

HUNTER-GAULT: Do you have any idea what unemployment rates might have been? Would it have affected unemployment rates more than interest rates, and what would you expect it might have been had those tax cuts gone into effect?

Mr. ROBERTS: Well, I think we could have avoided this recession. It was not in the plan to have a recession. The plan was to improve the cash-flow position of ndividuals and businesses with these tax cuts. And since that would improve their cash-flow position, you could gradually bring down the rate of growth in the money supply, because you would be providing them with the cash flow from the tax side.

HUNTER-GAULT: And presumably the interest rates would have come down as well.

Mr. ROBERTS: The interest rates would have come down with the reduction in the growth of the money supply. But instead what happened, the tax cuts were delayed, nobody got the cash-flow relief, and the Federal Reserve stepped in and sort of precipitously really deaccelerated the money growth -- brought it down very sudden, very sharp. And that gave you a recession. I think the reason the interest rates are high now is because people can see the President really has very little help. He's got Jack Kemp, he has more or less the Treasury, but the rest of the government seems to be against him.

HUNTER-GAULT: And Secretary Regan made that clear last night.

Mr. ROBERTS: He did? Well, it's a true assessment. So people can see that the Reagan effort to change policy may not succeed. So if it doesn't succeed, that means a return to business as usual, and that means inflation and high interest rates.

HUNTER-GAULT: Lester Thurow said a few moments ago that the unemployment always lagged behind any kind of recovery, so that even if you had gotten the kind of recovery that you were looking for with the tax cut, where do you think unemployment would be today?

Mr. ROBERTS: Well, I think if we'd had the tax cut on schedule, we probably wouldn't have had the recession.

HUNTER-GAULT: At all.

Mr. ROBERTS: At all.

HUNTER-GAULT: How do you respond to Lester Thurow's prescription of easier money as a way out of this recession? I know you just came down on the Fed a moment ago, but that's his prescription for bringing us out of the recession.

Mr. ROBERTS: Yes, well, I share Lester's emphasis on pointing to monetary policy as opposed to the tax policy as the source of the problem. Now, whether the solution is easier money or whether it has to go further than that and give people a money that they can have more confidence in -- in other words, if you had a gold standard, you would define the value of their currency, and they would know what it was worth. And if you defined the value of the currency, you commit the government to protect that value. And it may be that people have lost so much confidence in paper standards that simply making money easier actually may have the counterproductive effect -- it may make them fear, again, the inflation of the currency. I don't really know the answer, but I do agree that we must find the conditions for monetary stability. We do not have those now. We do not have from the Federal Reserve a monetarist policy. We have extreme volatility, extreme fluctuations in money growth. And I think that in itself is a very destabilizing effect on interest rates.

HUNTER-GAULT: All right, thank you. Robin?

MacNEIL: Mr. Thurow, do you see the Fed as erratic as Mr. Roberts does?

Mr. THUROW: I think the Fed is kind of erratic from week to week, but that's because it doesn't have any choice; it doesn't have any way of controlling the money supply from week to week. If you look at what the Fed did on the money supply between 1980 and 1981, there was a nice slow, gradual decline from a little over 6% to around 5% per year. I think the business of the Reagan administration blaming erratic monetary policies for the current problem is simply the Reagan administration trying to hide their own failings. I think the real problem is that they have a set of inconsistent policies that nobody but nobody can really put in place.

MacNEIL: Mr. Roberts, do you want to comment on that first, about the --

Mr. ROBERTS: Well, I think that he's right that the Reagan administration does not have its policies in effect. The tax cuts were pushed off to the future, and the monetarists, at least, do not acknowledge that they have a monetarist policy from the Federal Reserve. So what Lester is saying is that even if you had all these policies in effect, it would be somehow incompatible. That is sort of an academic question when in fact you have none of the policies in effect.

MacNEIL: Mr. Thurow, what do say to Mr. Roberts' point that it is a failure, by Congress chiefly, to implement the full supply-side theory -- in other words, by cutting back on the tax cuts -- that has got us where we are?

Mr. THUROW: Well, if that was the argument, I think that argument should have been made last July, because when the President got his tax package last July -- and he knew the timing of the tax cuts -- he still forecast this terribly optimistic scenario for the American economy.And if last July, when Congress passed the tax cuts, if the President really felt that that package wouldn't work, he had a duty to tell the American people that Congress had just passed something that wouldn't work. Instead of saying that, he declared a great victory, he forecast a very rosy scenario going into the future; and if that's what was wrong I think the President basically lied to the American people. Because last July he told us he had what he wanted.

MacNEIL: Mr. Roberts?

Mr. ROBERTS: Oh, I think Lester here is being very unfair. And just to take up his own point about the monetary policy -- also in the assumptions of the President's forecast was money growth ranging between 5 1/2 and 8 1/2 percent. And yet the Federal Reserve, between last April and last October, for six months produced zero money growth.Now, Lester himself has pointed to the problem of the monetary policy, and I think that it is a documented fact that the Federal Reserve did not deliver the monetary policy that was assumed by the President and the administration as a basis for those forecasts. No forecast can come true independently of the monetary policy.

MacNEIL: Let's move off what happened in the past to what is being discussed as remedies in Washington. The chief political argument there between the President and the Congress this morning is -- at this moment is for the President to give, which, if he does, as is widely predicted, would result in even smaller tax cuts because some of them presumably would be rescinded or taxes would be raised. What would that do, Mr. Roberts, to the implementation of supply-side economics?

Mr. ROBERTS: Well, of course, that would mean that you wouldn't even get supply-side economics in the future. Not only do you not have it now, but you wouldn't have it in the future. And as I said a bit earlier, I think here we are running the risk of a worsening recession on the down side. As Lester himself pointed to, if you -- what we have going on here is the Congress trying to revive Hoover economics, trying to treat a faltering economy with austerity. Trying to treat a situation where income is falling and cash flow is restricted by adopting measures that would further reduce income and further restrict cash flow. If they do that, then you will see a worsening recession.

MacNEIL: Well, conversely, would the -- by getting a compromise between the Congress and the President on a budget, would that not lower the prospective deficit and increase the confidence of people who are keeping interest rates high at the moment, and therefore help the recovery? Mr. Thurow, what's your view of that?

Mr. THUROW: Well, I don't think the high interest rates are due to confidence. As I tried to point out, if you look at short-term interest rates that have nothing to do with inflation, nothing to do with expectations about the future, they are enormously high. And I think we've got basically a supply-and-demand situation going on that gives you these very high short-term interest rates, and in the short run we just need some relief. See, I'm not in favor of a deal between the President and the Congress.I think it has to be a deal between the President, the Congress and the Federal Reserve Board, where if the -- and we also desperately need the tax cuts in 1982. But in 1983, that's a different point. I think that we need a deal between the President, the Congress and perhaps the Federal Reserve Board that says, if the Federal Reserve Board gives us much easier monetary policies now, as measured by interest rates, then Congress will be willing to think about what you do about the 1983 tax cut. But I agree with Paul Craig Roberts 100 percent. The only that's going to save us in the short run is the fact that we're going to have a big tax cut in July.

MacNEIL: Mr. Roberts, do you have confidence that the administration can handle all this now? Between the administration and the Congress, that they see it clearly and can handle it?

Mr. ROBERTS: Well, I think that the Congress and large parts of the administration do not see it clearly. They are treating the deficit as a cause instead of as an effect. Now, the deficit is not the cause of our economic troubles, it simply is a manifestation of a faltering economy.The widening deficit is due to the recession. Any time you have a recession the government loses tax revenues and yet its expenditures rise because of the income-support programs.So I think we are in a very risky situation with the Congress, with the Office of Management and Budget, with parts of the administration treating the deficit as cause instead [of] as an effect. And so that leaves me with not much confidence, except in the President, who seems to understand the situation and is resisting a rerun of Hoover economics.

MacNEIL: Yes, Mr. Thurow, what's your view of that? What confidence do you have?

Mr. THUROW: I think that it's a matter of good or bad luck. I don't have any confidence that the administration is going to straighten it out, because at the moment the administration doesn't seem to be willing to give on anything, and at the moment, if you believe the President's press conference last night, he isn't even willing to go to Mr. Volcker and say, "Hey, your monetary policies are wrong" or "The monetary policies I asked you to have last year are wrong; we need significantly different monetary policies for the next year." And I think until the President is willing to do that, we're not likely to kind of pull away from the abyss that we're now facing.

MacNEIL: Thank you. Charlayne?

HUNTER-GAULT: Can we just talk about jobs for a moment. In looking at the traditional industrial heartland of America, Lester Thurow, where we have the worst unemployment, what would be your prescription for bringing back jobs in that sector?

Mr. THUROW: Well, easier monetary policies and low interest rates would be a big help, because automobiles are very important in that part of the country and consumer durables that go into new housings. And if we can get interest rates down I think we would quickly start to sell more automobiles and more homes, and in the short run that's probably the best thing we could do for the industrial Midwest.

HUNTER-GAULT: Do you agree with that, Mr. Roberts?

Mr. ROBERTS: Oh, I think there's a great deal to the good effects of low interest rates. The question is, what would get them down? I'm not certain that easier money would. I believe one of the reasons interest rates are high is that people expect the President to be defeated in his effort to change policy, and therefore they expect a return to business as usual, and so they foresee future inflation due to the inability to control spending, and future high interest rates. I think that's basically the problem. And I think that's the problem with discussing the President giving. If the President gives, and my view of the markets are right, then that would confirm the markets' expectation that the President's program is going to be defeated, in which case I wouldn't expect to see interest rates come down.

HUNTER-GAULT: And therefore people would not be restored into jobs.

Mr. ROBERTS: That's right.

HUNTER-GAULT: Lester Thurow, do you think it's a good idea even to talk about putting people back to work in those old industrial jobs, given the way the job market is going and given the competitive edge that, say, the Japanese or Third World countries which have cheaper wage scales have?

Mr. THUROW: Well, I don't think automobiles are a sunset industry in the United States. I think automobiles have been hit by three things: Japanese competition, high interest rates and the shift from big to small cars. And it's not obvious to me they can't make at least a very substantial recovery. They may not get back to where they were in terms of employment, but I think in a healthy American economy you would have more people working in the automobile industry than you do at the moment. Now, we also need new growing industries in addition to automobiles, but that's a different problem. At the moment you've got a very severe recession, and I think it's important that we begin to take actions to fight that recession. The Fed can control interest rates if it decides that's what it wants to do -- short-term interest rates. And I think that is precisely what it ought to do.

HUNTER-GAULT: What is your sense, though, of how we give companies like steel and automobiles an edge in this competitive market?

Mr. THUROW: Well, of course in both of those industries they are currently now protected. We have trigger pricing that gives the American steel companies protection from foreign competition, and we have a quota with the Japanese that gives the American companies protection from the Japanese. So I think in both of those industries at the moment their problem is not foreign competition; their problem is a domestic economy that is collapsing under them, and that is going to very severely weaken them. And the thing that is going to hurt them in the short run is not the Japanese, it's the economy.

HUNTER-GAULT: Mr. Roberts, do you think that there is a role for the federal government to play in job creation, or do you think it's better left exclusively to the private sector?

Mr. ROBERTS: Well, the federal government does play a role in it, Charlayne. They've played a very destructive role in their hot-tax policies and their high-inflation policies. And it is in my view the result -- sort of mounting unemployment overtime -- is a result of the fiscal and monetary policies.

HUNTER-GAULT: But, what role do you think the federal government should be playing?

Mr. ROBERTS: I think the federal government has to have a tax system that has the proper incentives, such that you find a growing economy.

HUNTER-GAULT: Proper incentives like what?

Mr. ROBERTS: Well, you've got to have a tax system that encourages high savings rates instead of low savings rates; a tax system that encourages risk-taking, encourages people to commit themselves to activities that are risky in expectation of profits. You see, what has happened to us in my view over the last couple of decades, is we have moved from being a productive society, in which people rely on their ability to produce goods and services for their income, and to a transfer society in which they rely on organized political action to give them access and rights to the income of others. Well, that messes up the whole incentive structure, and you get a system in which the production of income declines relative to the demands on an income.

HUNTER-GAULT: What's your view of that, Professor Thurow?

Mr. THUROW: You mean on the whole issue of should the government play a role in job creation?

HUNTER-GAULT: Right.

Mr. THUROW: I think the government's prime role in this area ought to be basically in terms of education and training. Now, I think there may also, along with that education in training there may be a lot of the training that should be done in an on-the-job context. Some of those jobs might be private jobs, some of thosejobs may be public jobs. But the problem is, it takes a year or two to set up any system like that. We had a system -- we abolished it last summer, and there just isn't any way we can get it set up again by this July. And so I don't think -- even if you think there is a role for the government in this area -- and I do think there is a role -- it isn't something that's going to rescue the economy in the short run, simply because it takes too long to get in and out of business when you once cut the programs -- and we cut the programs last year.

HUNTER-GAULT: I'm sorry, we have to cut it out now.

MacNEIL: Thanks, Charlayne. Lester Thurow in Boston, and Paul Craig Roberts in Washington, thank you for joining us tonight. Good night, Charlayne.

HUNTER-GAULT: Good night, Robin.

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