2 top economists sweeten forecast -- with a caution

By , Business correspondent of The Christian Science Monitor

The US economy will grow faster in 1983 than previously predicted, two top economists say, but large federal budget deficits still cloud longer-term prospects.

On the basis of bullish economic signals in the first weeks of 1983, Otto Eckstein, chairman of Data Resources Inc., an economics consulting firm, has increased his forecast for real economic growth this year from 3.5 percent to ''just under 4 percent.''

And Alan Greenspan, president of Townsend-Greenspan Inc., adds that ''in the months ahead we will see a fairly dramatic recovery in new orders (for manufactured goods) and a surprising pickup in industrial production.'' He added , ''the decline in employment is over.''

Recommended: Ron Paul vs. the Federal Reserve: four epic moments

Fueling Mr. Greenspan's assessment was this week's report of a 0.6 percent drop in business inventories during December. Because companies are reducing the amount of goods they have on hand, it is likely that new orders will require a boost in production.

But in testimony before the Congressional Joint Economic Committee, both forecasters cautioned that a recent spate of promising statistics does not necessarily mean the recovery will be robust. Some economic statistics, like retail sales, were aided by favorable weather in January.

''It would be a mistake to interpret the weather-aided favorable January economic data as an indication of a dramatic change in outlook,'' Mr. Eckstein said. ''The case for an abnormally weak recovery, with continued high unemployment rates, remains convincing.''

While there are other factors at work, high interest rates are a key reason that only a mild recovery is in prospect, the forecasters said.

''Interest rates are far higher than they should be,'' said Mr. Greenspan. ''They are an inhibiting factor that will create problems as the (economy) moves beyond the initial and rapid recovery stage.'' Current rates are ''too high to sustain normal'' rates of recovery, he adds.

He argues the main culprit in keeping rates high is projections of large federal budget deficits for several years. Financial markets are concerned the Federal Reserve System will have to expand the money supply greatly so the government can borrow money to cover the deficit. In the markets' view, such an increase in money would reignite inflation.

''Were it not for the fears of financial markets that huge borrowing requirements will induce a major expansion in money supply growth, we would have inflationary expectations down sharply,'' Mr. Greenspan said.

One result of lowered inflationary expectations would be that mortgage rates could drop from their current 12 to 13 percent level to 6 to 7 percent. Whenever economists crank such a low mortgage rate into their forecasts, ''the economy just goes wild,'' Mr. Greenspan noted.

The current economic recovery ''will not solve the budget crisis,'' said Mr. Eckstein. In fact, ''the budget deficit gives every sign of exceeding $200 billion throughout this decade.''

To close this gap, both Mr. Greenspan and Mr. Eckstein think Congress needs to raise revenues as well as cut spending. Mr. Eckstein favors a proposal by House Ways and Means Committee chairman Daniel Rostenkowski (D) of Illinois, which would repeal business and individual tax cuts slated to take effect after 1983.

Among other items, Mr. Rostenkowski's plan would repeal the indexation of the tax system which is slated to start in 1985. Indexation, or advancing tax brackets according to the cost of living, is designed to keep taxpayers from being pushed into higher and higher brackets by inflation.

Mr. Greenspan argues for keeping indexation and imposing a consumption tax to raise additional revenues. ''A VAT (value-added tax) is the 'least worst' way of'' raising additional revenue, he contends. In a VAT plan, a levy is imposed on the value added to a product at each stage of manufacture and sale. But such a levy is ultimately paid by the consumer.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...