The MacNeil/Lehrer Report; Recession

[Tease]

REPORTER: Are we in a recession, and for how long? Using that dirty word.

MALCOLM BALDRIDGE: Well, I think that we are in a slight recession; I think that`s the best way to put it.

ROBERT MacNEIL [voice-over]: Malcolm Baldridge, secretary of commerce, makes it official: the United States is in a recession.

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MacNEIL: Good evening. It has been official in a sense since President Reagan admitted it last weekend, but for economists it became official today. The United States economy is in a recession. The confirming statistics were released by the government. The Gross National Product -- the value of goods and services produced by the economy -- fell during the third quarter, ending September 30th by 0.6%. It had fallen in the second quarter by 1.6%. To economists, a handy definition of recession is when the GNP falls two quarters in a row. But there was other bad news today. The rate of inflation, which had declined to an annual rate of 6.4%, was back at an annual rate of 9.4% in the third quarter. Today`s figures underlined other statistics already out showing a decline in industrial production, a major slump in housing starts, and a sharp drop in auto sales, together with government predictions of higher unemployment. It all adds up to the fact that we are in the eighth recession since the second world war. Tonight, how bad will it be, and will it force President Reagan to change his economic game plan? Jim?

JIM LEHRER: Robin, Democrats moved swiftly and predictably to label this recession the Reagan recession -- the product of the administration`s failed and misguided economic policies, while Republicans moved off in more than one direction, some steadfastly defend-ing the President and urging him to stand firm, others backing off a bit, urging him to find some way to prevent the recession from growing deeper. The second round of the Reagan economic plan was already in some trouble in Congress even before today`s recession confirmation. His request for $13 billion more in budget cuts this year was considered iffy at best by Republican leaders in both houses. They have also been publicly skeptical that the President`s goal of balancing the federal budget by 1984 was now possible. Harry Ellis, senior economics correspondent for the Christian Science Monitor, has been feeling the recession pulses around Washington today. Harry, are the Democrats going to try to make political hay out of this recession?

HARRY ELLIS: They may try, Jim, but they are still searching for a positive alternative themselves, because really what happened is that the solid phalanx of conservative Demo-crats linking up with the Republicans for the first round of budget cuts began to fall apart when the President asked for another $13 billion worth of cuts. We have to remember that of the first $35 billion worth of cuts, about 70% affected programs which dealt with the poor. And so, the conservative Democrats were not ready to go along any farther with that $13 billion worth of cuts. At least they had broken away from solid support, However, their problem is that they still have not been able to come up with an alternative which is viable themselves.

LEHRER: Was there talk in the wind today, "My goodness, we must now do something. The recession is here, we must get the country moving again" -- the predictable recession talk?

Mr. ELLIS: I think that, really, it is more confusion that has so far characterized things, because, although we now have the figures which say that we are in a mild recession, actually the economic situation was well known to everyone. And the problem was, how do we keep that budget deficit from soaring far beyond what the President expected, and that problem engulfs Republicans as well as Democrats. At the moment, since these figures have come out, just as before, it is the Republicans who have been trying to debate among themselves what do we do now? The problem even for the Senate Republicans, and there, of course, the Republicans are in control, is that they simply do not think that they can work through Congress any kind of specific cuts of the magnitude which Mr. Reagan now wants.

LEHRER: What about this new talk the last couple of days about increasing taxes some-what, particularly the so-called "sin" taxes? Is that going anywhere now?

Mr. ELLIS: First, the White House does not like to call them tax increases, and so you have these phrases like "revenue enhancers" and "receipt strengtheners" which you and I would call tax increases. The White House is adamant that they would not want any postponement of the central tax cuts that already have been put in place, that is, the personal income tax cuts -- 10% next July 1 -- and also the corporate income tax cuts. So they are feeling around the edges, and there is a move to try to introduce some kind of taxes that would raise revenues without really hurting -- what Treasury Secretary Regan calls "painless," and that includes excise taxes on cigarettes and tobacco-- on cigarettes and liquor. It also involves, perhaps, at least a discussion of taking away from all of us as consumers a tax break we have had, and that is exclusion of interest on credit card accounts, leaving only exclusion of interest on home mortgages and cars. This is talk so far only in the corridors of Congress and in the White House, but probably those kinds of tax [increases] are in the works, perhaps not before Congress adjourns, however, at the end of the year.

LEHRER: Harry, of course, recession is a word that has a technical meaning; today we arrived at its technical meaning, but there is also a psychological factor involved in this. It`s kind of a scare word in a way, too, particularly to politicians. Do you see that scare factor growing just because, now we`re in a recession, we have to do something these next few days and weeks?

Mr. ELLIS: The scare factor, I think, will grow if the recession proves to be deeper and longer than the White House and many economists now expect, especially if the rate of personal bankruptcies and business bankruptcies - - both of which have been rising -- suddenly seem to mushroom, and especially if a major corporation such as Chrysler or International Harvester got into real trouble. Then, I think that scare factor would increase. Or, if unemployment should go up -- 7.5% now; if it goes up over 8%, then I think so. However, there are many Americans who, in a sense, will benefit from the recession if it does not go too deeply, and that is because it will tend to cool inflation; it will tend to bring down interest rates. And so you have a mixed picture. An American who loses his job, to him that recession is catastrophic. To many Americans it will seen as though things are a bit easier for the time being. Then, of course, looms the problem, what happens when lower inflation and lower interest costs prepare the ground for business expansion. Then we have to be careful we don`t get back into the same situation we have been.

LEHRER: Harry Ellis, thank you. Robin?

MacNEIL: Now the views of an economist largely sympathetic to the Reagan plan, and an outside advisor to his administration. Alan Greenspan was chairman of the Council of Economic Advisors under President Ford, and now runs his own economic consulting firm in New York. Dr. Greenspan, how long, and how deep, do you expect this recession to be?

Dr. ALAN GREENSPAN: Looking at the data now, it cannot be very deep, largely because many of the areas which are usually cyclically sensitive are already down: car sales, housing, inventory levels, in that sense.

MacNEIL: You mean, things can`t get much worse. Is that--

Dr. GREENSPAN: In a sense, that`s correct. I think we can get and will get some modest inventory liquidation, and some mild weakness in the capital goods markets, and that suggests to me a recession which will creep lower into the early spring, and probably stabilize and, if, as I expect, interest rates are declining at that time, I think we`ll find recovery rather significant.

MacNEIL: You heard Jim say that some Democrats are already calling this the Reagan recession. Is it? Who caused it? What caused it?

Dr. GREENSPAN: Well, first, let`s remember that it is an interest-rate recession, that it is high interest rates which have been prolonged, and depressing for a good long period of time, really, extending back into 1980. The problem as I see it is that the financial markets consider that our budgets are essentially out of control and have been for quite a long period of time. In that sense, in a way, it`s either everybody`s recession or I would be more inclined to say, it is largely the Congress in this respect in that it is they who have been more the creator of these vast programmatic expansions in the budget, which in my judgment are at the root of the high interest rates, and therefore the cause of this mild recession we`re now looking at.

MacNEIL: Because the financial markets don`t believe that Congress will go along with trimming the deficits, as they would like them to be trimmed. Is that it?

Dr. GREENSPAN: That`s correct. In a sense, I would say that, in one sense, that`s good news, in that the markets are very skeptical. They believe, as best I can read them, that there will be almost no additional cuts. I think they`re wrong. I think there will be. I don`t think the President`s going to get anywhere near what he`s asking for, but I think he`s going to get some. And to the extent that he does, I think that will lower the long-term inflation expecta-tions, thereby lower long-term interest rates and short- term interest rates, and lead to a fairly vigorous recovery later in 1982.

MacNEIL: So you`re in favor of the President continuing to push, and Congress enacting, further budget cuts, both now in 1982 for this fiscal year that we`re already in, and for the projected budget for `83?

Dr. GREENSPAN: Yes, I am, and largely because we are in a different type of economy than we have ever been in, and it really goes back to 1980, when there was a fundamental change in the long-term view of the markets, of the people who invest, about the potentials of inflation in this country. So long as there continues to be a general expectation that inflation over the next 10 years will be 10% or more, as the markets suggest, we will not recover. And it`s therefore incumbent that we get at the root of the problem, which is long-term inflation expectations, and not tinker with short-term fine tuning on this recession.

MacNEIL: By short-term fine tuning you mean putting a bit more money into the economy to stimulate activity to get out of the recession -- deflating?

Dr. GREENSPAN: Yeah. I don`t think that reflating is stimulative anymore. It used to be. I think we`re in a different environment, and the old tools of reflation and stimulus, which used to bring unemployment down, will actually be counterproductive now. The only way to get out of this recession is to bring long-term interest rates down, and the only way to bring them down is to get our long-term budget outlook back on track.

MacNEIL: Well, does that boil down to advising the President to hang tough with what he`s trying to do now?

Dr. GREENSPAN: Yes, it does. It says that, as I read it, that the President has a policy for the long term, and that it is only a long-term policy which will succeed in improving the economy short term.

MacNEIL: Well, thank you. Jim?

LEHRER: A very different view of it, now, from another nationally known economist and former chairman of the President`s Council of Economic Advisors. The economist is Walter Heller; the president was John F. Kennedy. Dr. Heller is a professor of economics at the University of Minnesota, and he`s with us tonight from the studios of public station KTCA- St. Paul. Dr. Heller, do you think it`s fair to call this recession a Reagan recession?

Dr. WALTER HELLER: Well, let`s put the recession in perspective, first of all. You know, this economy has been under wraps for about three years. The remarkable thing is, and I think people don`t pay too much attention to this, that our level of output this quarter is only 2% above what it was three years ago. You remember, Mr. Reagan has promised us that in the next 10 years output will rise -- GNP will rise -- in real terms, boiling out inflation, 15%. So this is coming at the end of a long period of doldrums of the economy. And I don`t know that I would per se call it more of a Reagan recession than I would give Mr. Reagan credit for the easing of inflation. I think it`s partly a Volcker recession, partly a Reagan recession, partly a leftover from some of the Carter policies designed to kind of ease inflation out of the economy by slowing down the economy.

LEHRER: I see. What is your forecast? You heard what Alan Greenspan said. What`s your forecast about how deep this is going to go, and how long it`s going to last?

Dr. HELLER: Well, I hope it doesn`t disappoint you, but I`m not going to differ terribly from Alan`s forecast. That is to say, I think that it isn`t going to be a real deep recession. You know, 1974-75 the recession dropped the economy by 5 or 6%; this might go about 2%. But I do feel that it will run well into 1982. We`ve been slow getting into it. I think we`ll be slow getting out of it. But then, once we get the 10% additional tax cut in place in mid-1982, then I think we`ll see the economy begin to move up. But I would say I would not expect it to move up in the first quarter, and possibly not in the second quarter of `82.

LEHRER: Do you agree-- let me try a place where I think you`ll probably going to disagree, and that is Alan Greenspan`s suggestion to the President that he hang firm on his tax cuts and his budget cuts, and go even further than he already has. What`s your feeling about that?

Dr. HELLER: Well, I think there you have to distinguish between the short term and the long term. In the short term, in a sense, Mr. Reagan and the Congress already have an anti-recession program in place. You`ve got the 5% cut on October 1st. That will be offset in considerable part by the payroll tax increases on January 1st; but then we`ve got a 10% cut coming in July. Sure, those ought to be held in place. It`s the later cuts -- the 10% third-stage cut, plus the indexing of the income tax -- that give us fits, and that promise a $100 billion deficits almost as far as the eye can see. Now, along with that, I would differ perhaps-- well, I wouldn`t even differ on interest rates. I think that Alan would agree that the recession will tend to bring interest rates down some; that`s part of the anti-recession movement. Finally, I would want to be very sure that landing nets are in place for the 8 1/2 million unemployed who are sort of our sacrificial lambs in the fight against inflation. And we might differ a little bit there. I`m sure we differ some further out. I would certainly roll back those later tax cuts; I`d cut out indexing--

LEHRER: Why? Why?

Dr. HELLER: Because those are the real source of the trouble in the financial markets and the fact that the Fed has to keep interest rates so high. It`s not the past action; it`s the future. What Wall Street fears, and I think that what the Federal Reserve fears is that when you have put into place $750 billion of tax cuts for the next five years, and about $150 to $200 billion of defense increases, and you have in place only $250 billion of budget cuts -- I`m taking a five-year perspective -- that`s just, you know, that`s $700 billion out of whack. And unless there is-- later on, not now --- unless there is either a rollback of some of the tax cuts or some beefing up of the revenues, we`re just destined for whopping budget deficits.

LEHRER: Wouldn`t that subject the President to the criticism that he`s inconsistent, and bring the financial community down on him for that?

Dr. HELLER: Well, I would say this, that you have to do some timing. By the way, if I were going to blame the President for anything on the recession, I would blame him for having such a rosy view last March when he told us we could have steady growth and steady reduction of inflation and interest rates at the same time. What I`m saying now is that we need to leave in place what`s in place for 1981-82, but then we need to hold back for that period when the economy will again be expanding, when inflationary pressures will very likely be generated, and when the Federal Reserve will have to come down hard on the economy with high interest rates again.

LEHRER: I see. Thank you. Robin?

MacNEIL: So, Alan Greenspan, you and Walter Heller both agree that it`s going to be a slight recession, and the economy, without doing anything differently about it, is likely to pull out in the spring, in your case, perhaps a little later in Dr. Heller`s case. Is that it?

Dr. GREENSPAN: I would say we`re saying that somewhere around mid-year the econ-omy will be heading upward. If we`re anywhere remotely close to that, I think we`ll both be rather satisfied.

MacNEIL: I see. You agree with that, Dr. Heller?

Dr. HELLER: I couldn`t agree more. With the mistakes we`ve made in forecasting, we`ll settle for that, won`t we, Alan?

Dr. GREENSPAN: Indeed.

MacNEIL: Now. On the-- Dr. Heller says that what`s really giving the financial markets and the Federal Reserve Board anxiety is the long-term picture, and he strongly urges rolling back some of the tax cuts that are planned after mid-year next year. All right, does that mean the 10% tax cut-- the second 10% tax cut that`s promised in `83?

Dr. HELLER: Absolutely. Plus the indexing which is going to cost $30-$40 billion a year by 1985-86.

MacNEIL: Now, what do you say to that?

Dr. GREENSPAN: Well, let`s remember what that tax bill in effect does, especially the indexing. It in effect prevents inflation from creating excessive increases in federal revenues. What that tax bill has done is eliminated one of the major problems which confronts this country, namely what we`ve inelegantly called "bracket creep," namely, this process of ever-increasing, unlegislated tax increases. That tax bill has effectively eliminated that prob-lem, and as I understand what Walter is advocating, and where I think we do disagree, is that we allow bracket creep to reemerge. I am adamantly against that; I think that is bad economic policy. I think it would drain the incentives from the system, and in the long run, I think, would probably create more, rather than less, deficits.

MacNEIL: Is that what you mean, Dr. Heller?

Dr. HELLER: Well, I`d rather talk in terms of alternatives. I happen not to like indexing. I think that we`ve corrected for bracket creep over the years, and that Congress can do that as well as putting it in some kind of an automatic formula. But I do feel, if we keep bracket creep, if we keep the third 10% cut, then we better be looking for revenues from some other source, because there is no way, assuming that the President sticks to his military buildup, and assuming that we can`t, you know, squeeze blood out of a turnip in Congress in further budget cuts-- oh, sure, indeed there ought to be more. I have my own hit list. But if we cannot, in other words, bring the deficit down below $75 or $100 billion after 1984-85, we had better be finding ways to increase revenues, or otherwise what we`re saying is, when the economy is getting back toward something like high employment, full prosperity, full employment -- call it what you will -- it`s an open invitation, (a), to new inflation, and (b), to extremely high interest rates because the Federal Reserve will be our only protection against inflation.

MacNEIL: There is already pressure to increase lax revenues by the means that Harry Ellis mentioned. Are you in favor of that in the short term?

Dr. GREENSPAN: It`s too small an issue to be either for or against. In other words, it probably is mildly helpful; my only objection is that the issues are so large -- namely, ihe longer-term budget corrective policies - - that I hate to see our political capital and political discussions focus on things which are probably the right thing to do, but it isn`t all that important--

MacNEIL: Because it would produce too small an amount of revenue?

Dr. GREENSPAN: Too small an amount.

MacNEIL: What would an excise tax that would be politically feasible produce -- on cigarettes and alcohol?

Dr. GREENSPAN: Well, in total, if you get several billion dollars a year on that, those are very big numbers, and, as Walter correctly points out, the longer-term problem is of a dimension that just swamps those numbers.

MacNEIL: I see. Are you in favor, Dr. Heller, of immediate efforts to increase tax revenues to meet the short-term deficit problem?

Dr. HELLER: Oh, no. That would be just the wrong way to go. I would agree with Alan, both for his reason -- you know, why monkey with peanuts when watermelons are your problem -- and, secondly, this would be just the wrong time to boost tax revenues, when we`re going into a recession. So it`s the wrong way to go. The time we need-- and, by the way, let me just say this. This year`s deficit -- fiscal `82 -- is likely to balloon from the $43 billion that Reagan has been talking about to maybe $80 billion if we have the kind of recession that I foresee. That`s the kind of a deficit that you can absorb. Why? Well, because it`s generated by the fact that the private economy is not operating at full tilt, and therefore the public economy can use those funds. The deficit becomes dangerous when the private economy is moving ahead full-tilt, and then Uncle Sam comes along and grabs the first $75 or,$100 billion of credit. That`s the time that you have to act for it.

MacNEIL: I see. We`ll go back to you. Jim?

LEHRER: Yeah. Harry Ellis, what is your reading of the sentiment in Congress for the long-range proposal of Walter Heller, which is, roll back that final tax cut, and also roll back indexing?

Mr. ELLIS: Well, I think that there is very little sentiment for that among Republicans. I think that there is certainly among many Democrats. But I think that the immediate political fight is not going to be over that, but rather over the budget deficit, partly because the President himself has made it a kind of shibboleth of his economic program. In other words, he has said $43 billions in fiscal `82 leading to a balanced budget in `84. Now, it is quite clear to everyone that those goals are not going to be met. This gives the Democrats an opportunity to say that the program as such is not working. Then they have to develop an alternative. In the meantime, what the Senate Republican leadership is trying to do is to work out an agreement that there should be an overall package of $ 115 billion worth of cuts and additional revenues to be spread over `82, `83 and `84. Congress doesn`t have to agree to the specifics now, if it would just agree that`s the magnitude of the problem, then go home at the end of the year, come back, get the President`s fiscal `83 budget in January, and see where they go from there. I think myself that my reading is that the political struggle is going to be over that deficit as the most visible handle of whether the President`s program is succeeding or not, and that the talk about what to do about the tax cuts will be delayed into next year.

LEHRER: What`s your view on that, Alan Greenspan, in terms of the immediate problem of the deficit?

Dr. GREENSPAN: Well, I don`t think there`s any question, Jim, that the deficit is going to be a good deal larger than the President has projected.

LEHRER: As high as Walter Heller just said it might be?

Dr. GREENSPAN: Well, it could be. I`d say that it`s clearly above $70 billion, and depending on the small changes in economic forecasts, between $70 and $80 billion, with the forecast we`re talking about, is not an unbelievable number. The real critical question, however, is that the 1982 deficit is not where the action is, as I see it, as far as the economy is concerned. If it is high long-term interest rates which are a problem which is the major problem clearly, this really means that we have to address the deficit m fiscal 83, 85, 87. and that is the reason why it is essential in my view that we have to get to budget outlays It is a problem which seems to be insurmountable, but what that is saying to me is that resolving the fundamental problems of this country as far as the economy is concerned are insur-mountable.

LEHRER: What do you think of that theory, Dr. Heller?

Dr. HELLER: Well, I think that, as I said a moment ago, I have my own hit list for additional budget cuts. Some of them would be in the military; some of them would be in indexing in Social Security; some of them would be in the rivers and harbors projects -- like Ten Tom, the cloning of the Mississippi -- some of them would be even in such sacrosanct precincts as veterans benefits and tobacco subsidies, and so forth, But when all is said and done you simply cannot get -- either in terms of humane, human considerations or in terms of political considerations -- you can`t get enough budget cuts out of that civilian budget to close the gap enough. You`ve got to go the tax route somewhere along the line -- either the reversal of some of the income tax cuts or some other major source of revenue.

LEHRER: Harry Ellis, finally, let me ask you this. There has been, between the lines these last several weeks the talk that, well, if the economy really does get in bad shape, that there`s going to be a strong anti-Paul Volcker, anti-Fed move afoot, to make the Fed the scapegoat of this. Is that in the wind already?

Mr. ELLIS: I think that it is in the wind in that we already have seen the White House on several occasions saying that the Fed should be a little less tight than it is. I think that the Fed and Paul Volcker become the logical targets because it is interest rates which seem to be the prime problem.

LEHRER: Thank you. Robin?

MacNEIL: Yes. Dr. Heller in Minneapolis, thank you for joining us; Harry Ellis in Washington; Alan Greenspan here in New York. Good night, Jim,

LEHRER: Good night, Robin.

MacNEIL: That`s all for tonight. We will be back tomorrow night. I`m Robert MacNeil. Good night.