The MacNeil/Lehrer Report; Economic Recovery

ROBERT MacNEIL: Good evening. Nothing is probably as important in any Presidential election as the voters` sense of their own prosperity -- their gut feeling that the going is good for them economically or bad. That also happens to be one of the few clear-cut issues of this campaign. Gerald Ford says his leadership has brought the country out of recession into solid recovery, Jimmy Carter says Ford`s lack of leadership has left us with too many people out of work and prices going up too fast. Well, today government calculators coughed out some of the last heavy facts we`ll have before the election to help our decision.

They showed that the gross national product, the broadest measurement of economic performance, rose four percent in the months of July August and September. That is slightly less than the growth rate of 4.5 percent for the second quarter, and much less than the nine percent in the first three months of this year. The government also announced that starts made on new homes continued to rise sharply in September, as they had in August. What does all this mean? Is the nation still on the path to economic recovery but pausing on that path, or is it slipping back into recession? Or is it, like so many other things in this election, six of one and half a dozen of the other? Tonight we make a stab at finding out. Jim? .

JIM LEHRER: Robin, the gross national product and housing starts of course are not the only measurements economists and politicians use to measure the health of the economy. There is some thing, for instance, called the composite index of leading indicators, also put out by the Commerce Department. It measures 12 different economic items; and the-last figures available are for August, when the composite index went down 1.5 percent, eight of the 11 indicators available all showing decline. The best-known and understood of the other economic measurements are the consumer price index, and the latest figures here, also for August, were when the index rose 0.5 percent. Then the wholesale price index; September figures are in, a rise of 0.9 percent, seasonally adjusted. And the unemployment rate -- the rate was 7.8 percent in September, a decline from the 7.9 percent of August. Now, as Robin said, everyone is permitted to read today`s, and all of the other economic statistics, any way they wish. For instance, White House Press Secretary Ron Nessen said today the President was pleased by the new GNP figures because inflation was less severe than last quarter. But Carter issued a statement saying the GNP totals proved the economy was in a slide downwards, and asked how much worse things must be before the administration admits the economy is in trouble. Robin?

MacNEIL: Irwin Kellner is vice president and assistant to the chief economist at Manufacturers Hanover Trust Company. He is also the author of the company`s quarterly publication, called "Business Report," are analysis of business conditions. Mr. Kellner, Jimmy Carter said today the GNP figures show the economy is in a downward slide; is he right?

IRWIN KELLNER: No, I wouldn`t say that. As a matter of fact, I would go so far as to say that the economy is performing quite naturally for this stage of an economic recovery. We are now half way through the second year of an economic recovery. In the first year of an economic recovery growth is always the fastest. The average rate of real growth in an economic recovery in the post-war period has run eight percent; in the second year the average rate of real growth has run four percent. So far, in this first half of the second year, we`re doing better than average.

MacNEIL: When did this second year begin?

KELLNER: It began with the second quarter of 1976, so for the second quarter and the third quarter we`re averaging a growth rate of better than four percent.

MacNEIL: But it is slowing down, from 4.5 to four -- or does that difference not matter?

KELLNER: Well, that has to do with business inventory policies. If you take business inventory policies out of the calculation you find that there`s been a progressive speeding up in the rate of economic growth, from a 3.7 percent rate in the first quarter, 4.2 percent in the second quarter and 4.4 percent in the third.

MacNEIL: Is this slowing down a pause, and are things going to spurt ahead again at a foreseeable point, or is it going to continue to slow down, and slow down, and slow down?

KELLNER: I think the use of the word "pause" has been overworked.

MacNEIL: That`s what Mr. Greenspan, the President`s economist, says it is.

KELLNER: I don`t see an immediate re-acceleration of economic growth until perhaps the spring quarter of next year; but I do see economic growth -- I don`t think we`re on the verge of a new recession.

MacNEIL: I see. How can you be sure that it`s this way? What do you look at, yourself, to give you that feeling? So many of these indicators that Jim just went through look, to a layman like ourselves, going downward.

KELLNER: The leading indicators tend to be very nervous; they`ve called nine out of the last three "recessions," and they`re not a very good example of what to look for in forecasting the economy.

MacNEIL: Nine out of the last three, that`s a bit of heavy economist irony, is it?

KELLNER: Exactly.

MacNEIL: I see.

KELLNER: Let me put it to you another way. For there to be a recession around the corner we would have to have excesses in the economy, such as was the case two years ago. We would have to have double-digit inflation -- we don`t; we`d have to have 12, 13 percent interest rates -- we don`t; we`d have to have speculation in the financial markets -- we don`t. What we have is the economy doing its normal thing for this stage of an economic recovery. And I would add one more point: it is not at all unusual for the economy to even drop for a three-month period during the second year of an economic recovery and yet the recovery not abort into a recession.

MscNEIL: You, as your job, interpret the mood of business to business and to the general public. What part does Jimmy Carter`s possible election play in the mood of business and its outlook at the moment?

KELLNER: I think business is a little concerned about Jimmy Carter, but not to the point where his election would be the end of the world. There was more uncertainty, perhaps, in the spring and early summer months than there is today. I think business can live with the election of Jimmy Carter, although my feel for the situation suggests that business would prefer President Ford.

MacNEIL: Thank you. Jim?

LEHRER: George Perry is an economist who specializes in labor market and inflation theory. He served on the Council of Economic Advisors under President John Kennedy and currently is at the Brookings Institution, where he is co-editor of the papers on economic activity, among other things. Mr. Perry, do you agree with Mr. Kellner`s assessment that the economy is doing its normal thing right now?

GEORGE PERRY: Yes, that`s a pretty good judgment to make right now. The trouble is that the normal thing isn`t anywhere near good enough. We`ve just come out of a double-sized recession; the unemployment rate rose to record levels for the postwar period. Now, to say that during the first year of expansion we expect an exceptional rate of advance, as business changes its inventory policy, and then you expect something like four percent growth I think is a correct reading of history. I think, as a footnote to that, what we should understand is that the unemployment rate typically drops for the first year of a recovery and then levels off and doesn`t decline any further unless there is a special policy on the part of the administration to push the economy further. So to say that where doing our normal thing now I think is approximately a correct forecast -- that`s about where I would come out in terms of a forecast. But that`s really not anywhere near good enough. If this economy is going to level off at approximately today`s unemployment rate, we`re in very serious trouble.

LEHRER: All right. What about Mr. Kellner`s theory, or projection, that there is no new recession around the corner -- do you agree with that?

PERRY: That`s a good best guess right now. I don`t think you can rule it out entirely; there are some warning flags that are up that I think policy makers ought to be paying attention to, but if you ask for best guess it wouldn`t be that we`re heading into a recession. Again, recession is just one manifestation of the problem we`ve got -- that would be an even bigger slump

LEHRER: What about to the general question that the public is interested in and that Jimmy Carter talked to today in his statement that Robin just read to Mr. Kellner and I read at the opening, that the economy is generally on a downward slide and it`s still on a downward slide -- do you agree with that?

PERRY: I wouldn`t call it a downward slide.

LEHRER: What would you call it?

PERRY: It`s a leveling off -- leveling off at a very unsatisfactory level. After the economy had had a good advance,-in the first year of this recovery, a colleague of mine said that we were drowning in ten feet of water -- now we`re only drowning in seven7eet of water. Now, six months have passed since. that was a pretty good way to characterize the situation, and we`ve leveled off, still drowning under seven feet of water. The economy really has to grow a good deal faster than it has been, and a good deal faster than it probably will without some kind of shift in policy, in order to produce the kind of job situation that we need. And it`s not just a domestic problem, by the way. We`re flirting with a very serious world-wide problem of a lot of economies being in trouble and needing the boost that a strong U.S. expansion would provide for their own economies.

LEHRER: I see. So your -- if I, may summarize what you have said -- your position is that what has happened is not unexpected in view of government policies but you think that`s unacceptable; but you don`t argue with the basic arguments from Mr. Kellner and others as to what these GNP figures, and housing starts and all these other things add up to right now.

PERRY: That`s right. Right now, you shouldn`t make a forecast that we`re on the verge of a new recession.

LEHRER: Thank you, Mr. Perry. David Meiselman heads the Department of Economics at Virginia Polytechnic Institute in Weston. He was formerly at the University of Chicago and Johns Hopkins University, among many other universities, and he worked in the Treasury Department during the 1960`x. Mr. Meiselman, do you agree with everything that you`ve heard up till now?

DAVID MEISELMAN: Let me summarize by saying I agree with most of the sense of what Mr. Kellner and Mr. Perry have said, which is that I do not see that the current situation is one where a recession is imminent; at the same time I don`t think that the present situation is a very good one, or an acceptable one. We have come out of a serious recession, and the fact that we went so low suggests that there`s &..lot of room for expansion.

LEHRER: What does that mean -- expansion in what way, totally in the economy, or what?

MEISELMAN: That`s right. Over the short run, we have a great deal of room for expansion, because if, in fact, we have a lot of unemployed resources - - labor resources and a great deal of unused capacity -- then as those resources get put back to work, then, at least for a short period of time, the economy has the potential for rapid growth. And that explains why, in the first year of a recovery, the economy does grow rapidly. The more serious the downward slide, then the more capacity there is for an upward climb; and I think Mr. Kellner has pointed to some of those numbers and Mr. Perry has indicated that we`ve come up a great deal, but there`s a great deal of unused capacity in the labor force and he has -- I think correctly - pointed to faulty public policy as one of the reasons that the unemployment rate is so high.

LEHRER: All right. But generally, then, when Jimmy Carter says that the economy is on a downward slide and when Gerald Ford says that the economy is recovering at a good, vigorous rate, you say that neither one of them is right -- is that correct?

MEISELMAN: Well, economists are very sensitive about seasonal adjustments for all kinds of numbers, and I think perhaps there ought to be some seasonal adjustments for statements from political candidates.

LEHRER: I see; in-other words, you wouldn`t expect them to say anything other than that, right? In other words, neither one of them is really right -- I mean, its somewhere in between.

MEISELMAN: I don`t think that the economy is on the edge of a collapse, I don`t think that we`re in the midst of a serious decline; we`re in the midst of a recovery, a recovery that`s gone on for almost two years, now. And the recovery has put large numbers of people back to work -- there`s a huge increase in the number of people working; but at the same time the unemployment rate stays very high, in part because the labor force has been growing rapidly and in part because current market conditions do not justify employing large numbers of people because the cost of hiring them is just too high.

LEHRER: Of course, you`ve just put your finger on what is so confusing to the average voter out there. Because when President Ford talks about unemployment, he uses the figure about "there are more people employed; when Governor Carter talks about unemployment he talks about the increased number of people that are unemployed, and everybody says, "Okay, what`s going on?"

MEISELMAN: The fact is that the number of people in the labor force -- or that are counted in the labor force; I ought to emphasize that are counted in the labor force -- has risen very rapidly. Many of those people may be temporarily out of work, but they`re still called "unemployed."

LEHRER: Thank you, sir. Robin?

MacNEIL: Robert Lekachman is professor of economics at Lehman College of the City University of New York, and he`s the author of a recently published book, Economist at Bay, Mr. Lekachman, how do you read today`s figures -- would you disagree with the other three and say we are heading into another recession?

ROBERT LEKACHMAN: Well, you know, forecasting is a mug`s game. Economic forecasting is about as accurate as weather forecasting, but let me put it this way: I think the situation is substantially worse than any of my three colleagues has put it.

I don`t obviously differ with Mr. ferry`s view, for example, that we`re swimming under seven feet of water. I would, however, remind all of us that the people who have been swimming longest are black, urban, female, that there`s a tremendous amount of distress; and what`s more to the point, I don`t quite see what is supposed to move the economy back onto a path of recovery -- whether this is a pause or simply a very slow rate of continuing recovery. The consumers have been hit very hard by inflation, business investors -- for one thing, they have a good deal of unused capacity, as Mr. Meiselman has pointed out; why invest right now? They can wait. The economy is subject to a great many external shocks. One of them is a quite possible steeper-than-predicted increase in oil at the December or January OPEC meetings; a 15 or 20 percent increase would set off inflationary alarms in the Federal Reserve, where Dr. Burns would probably react by tightening credit. If Mr. Ford is elected he will almost surely interpret his election as an endorsement by the voters of the anti- inflationary policy he is following; he`ll be encouraged further to follow this policy. Contrary to, perhaps, what Mr. Kellner said, I agree that Mr. Carter is an unknown quantity, but I would put it like this: If Mr. Ford is elected, the outlook is certainly dismal for the economy; if Mr. Carter is elected it`s possibly dismal, but we can`t be sure because his policies are a mixture whose result is largely uncertain. I`d put it to you this way, though, Mr. MacNeil; that the likelihood is that if Mr. Ford is elected and if present indications continue, among them this dreadfully high unemployment-rate and also the inability of many, families to keep up with inflation -- this is one of the reasons why the labor force is expanding so rapidly; women are going out looking for jobs to bolster the family income -- so I would say that it does make a difference who gets elected. The prospect of continued stabilization at a low level as, I believe, Mr. Perry suggested, or actual downward slide strike me as substantially higher it Mr. Ford is elected than if Mr. Carter is elected.

MAcNEIL: Let`s pursue that with these others. Mr. Kellner, will it make any appreciable difference to all these indicators we`ve been talking about and what they show a year from now which man is elected President?

KELLNER: I don`t think so. I think it takes more than a year for a new President to turn the economy around. If Mr. Carter were to take office come January he would have a budget which is in place and which will remain in place until September 30, 1977, and the outlines of the fiscal `78 budget beginning October 1,`77, pretty well shaped up. He-could., perhaps, through confidence factors affect the economy...

MacNEIL: Perhaps in ignorance my question was too narrowly cast. Let`s take two years from now, since I understand now that he will be following the budget already agreed...

LEKACHMAN: But if I may interrupt, even one year -- you know, a quickie tax cut has been known to be advanced by a President, bud gets in place or no budgets in place. Yeah, but you have a different situation now; you`ve got the second Congressional budget resolution, which fixes the amount of spending and the size of the deficit; and it could be altered, but it`s a cumbersome process.

MacNEIL: How much difference would there be -- let`s take it two years from now, when people will be. electing Congressmen -- who is elected President this year?

KELLNER: I don`t think there will be much difference in the wave of the business cycle that we may or may not be in two years from now, but I would be concerned that perhaps we would be on the road towards greater government intervention in the private sector.

MacNEIL: Mr. Perry, what do you think?

PERRY:I think you`d have to put your bet on a stronger economy with a Carter Presidency, not only as a general proposition -because I think he`s much more committed to improving the employment situation and he`s much less tolerant of the kind of under-utilization of our labor resources, and for that matter, our industrial capacity, than we have today -- but also he really provides recession insurance. It`s not a foregone conclusion that we`re not on the brink of a recession -- I`d say the odds are maybe one in four that 1977 could see a recession. Carter represents, I think, some insurance against that because he would act very promptly if the economy showed signs of slowing a good deal further than we`ve been talking about right here; Ford, off the past record, would move very, very slowly. Held be inclined to do nothing and let the thing work itself out. So, on the probabilities, Carter is insurance for 1977 and on his stated purpose he promises, I think, a stronger economy b 1978

MacNEIL: Mr. Meiselman, recession insurance with Jimmy Carter?

MEISELMAN: I don`t see that at all. In fact, I don`t see that Mr. Perry has any evidence to go on for buying those kinds of insurance policies. On the contrary, two years ago, shortly after Mr. Ford assumed the Presidency, the economy did fall apart very rapidly and the administration responded very quickly. Now, Mr. Carter will be new on the scene, and it`s not at all clear to me that the kinds of policies that he might follow -- whatever they are -- would necessarily add a great deal of stability to the economy. I would note, however, that Mr. Perry assumes -- seems to assume -- that Mr. Carter would follow the kind of policies that he, Mr. Perry, would recommend if he were asked. However, as part of the campaign literature, I`ve read that Mr. Carter has asserted in strong terms that what the country needs are stable policies, that we should avoid the kinds of stop- go policies, on-off policies that have been an important element both in creating inflation and unemployment and increasing the waste in the economy:

PERRY: I think it`s a stop-go economy that we want to get away from. If the economy needs a dose of medicine, you want to give it that dose of medicine -- you want to keep the economy on an even keel.

And just to set the record straight, in October of 1974, when we were 11 months into that recession President Ford suggested a tax increase, which would have worsened the recession considerably. He was very slow in responding to that situation.

MacNEIL: Talking about medicine, I`d like to know your views -- perhaps starting with you, Mr. Meiselman -- is the administration itself not likely now to make some step to stimulate things? I mean, it`s been criticized in recent weeks for under spending in the last six months or so.

NEISELMAN: On the contrary, I think one of the problems we`re in is the assumption that the economy needs repeated doses of some kind of strong medicine to prevent us from returning to the deep depression of the 1930s; as we`ve learned in other areas, very often the best of intentions with respect to medicine will make us very sick, and I think that the same analogy is true in economics. We`ve been acting as if we need strong, repeated doses of various kinds of government stimuli to prevent recurring recessions. That has been the major source of our inflation and the reason that we have had such sharp recessions, recently, and why the unemployment rate is so high.

MacNEIL: Yes; what would you expect, Mr. Lekachman?

LEKACHMAN: You know, I obviously live in a somewhat different world, which I believe to be somewhat more real -- but opinions no doubt differ on this. It seems-to me the economy is suffering from a whole array of structural problems; a substantial deterioration of the Northeast and of the Midwest; shifting regional patterns of strength; we have masses of under-utilized human beings -and it`s a horrible verb to call them "under-utilized, "an economist`s verb; we have hordes of people that we find no useful economic purpose for. Now, to rely upon free markets to solve this at a time when there are worldwide energy dislocations is, to my mind, to indulge in a typical economist`s kind of utopian dreaming. I think what we need is a great deal more public intervention. The thing with which I agreed most in Mr. Kellner`s recent remark was his speculation that there would be, more government intervention if the numbers were unfavorable a couple of years from now. I think we needed to avoid the unfavorable numbers; I think we`ll need it more -- I think are need, in fact, at mildest, a combination of effective manpower planning, of energy planning, of selective price controls on a mandatory basis. I think we ought-to recognize that out there is not a free market economy, but an economy where there are free market elements, elements of shared monopoly -- all sorts of areas in which the suppliers are in a position to exercise substantial influence, if not control, over their markets. The response to that is more government intervention of a rational kind.

MacNEIL: Okay. Rather than spend our last couple of minutes arguing, again, liberal economic theory as-opposed to conservative economic theory, just to use the crude labels, could we go once around -- to perhaps try and help any voters who might be watching -- and ask you again what your outlook is for the economy over the next couple of years, and which Presidential candidate you personally would lean towards in terms of what he might do to the economy, Mr. Kellner?

KELLNER: I`m confident that we`re not on the brink of a recession. I think we`ll have a period of slow growth for a couple of more quarters, and then by the spring of 1977 business will fin ally get the message that it`s time to increase capital spending; and in the second half of next year and the year 1978 we will have a pretty good year, with the economy going full blast on all burners. I would, therefore, under those circumstances, lean to President Ford as the candidate that could do the best job.

MacNEIL: Very briefly, Mr. Lekachman.

LEKACHMAN: Just to select one of your multiple choices, I think we`re going downhill, and that if Ford is elected we`ll continue to go downhill. Therefore, on the chance that Carter will do better, I favor his election.

MaeNEIL: Yes. Mr. Perry?

PERRY: I`d have to favor President Carter`s election on a wide range of grounds; general health of the economy is one, but a willingness to deal with a lot of these structural problems, a lot of the problems of particular groups in this economy, a lot of the inequities that still exist as well as a lot of the problems in the general working of the economy in the sense of inflation and unemployment. He`s the man who is, I think, prepared to challenge those things.

MacNEIL: Mr. Meiselman?

MEISELMAN: I lean towards supporting President Ford because he has been a major-element in restraining the growth of government and reducing the amount of tampering with the lives of people and of industry that has impaired our growth and has been a major source of our business cycle.

MacNEIL: Thank you all very much. As some commentator, I read today, said, it makes one long for the days of Quemoy and Matsu, when things were simple. Thank you all very much; Jim Lehrer and I will be back tomorrow night. I`m Robert MacNeil. Good night.