At year's end the American recovery sputtered a bit. Does this require a basic reassessment of the world economic outlook, presaging a fragile and short-lived expansion?
Weighing all the evidence, I do not think so.
Two leading monetarists, however - Milton Friedman of the Hoover Library and Karl Brunner of Bern - take a more dire view. Because the Federal Reserve made the money supply grow too fast in the first half of 1983 and made it grow too slow in the second half, these monetarists think the odds favor an American recession before midyear.
If Friedman and Brunner turn out right, that will be a bad thing for people all over the globe. The European and Japanese recoveries are barely under way. The developing countries are still waiting for a rebound in price for the metals , fibers, and foods they export.
President Reagan's bid for reelection would suffer if the last three quarters of 1984 were to involve recessionary drops in production, employment, and profits. His prospective landslide victory would turn into a close-run race. Case for the pessimists
Let me review and interpret the facts:
1. In 1983's last quarter, United States real output grew at only a 4 percent annual rate. This is a significant drop from the previous quarter's hot pace of 7.5 percent. More ominous, the best-informed experts had expected only two-thirds of this actual drop.
2. Actually, the most healthful growth rate to be prescribed for 1984 would be that in each of its quarters the real GNP should grow at 4.5 percent annual rates. That way the unemployment rate would continue to decline. That way economic progress could be sustained into and through 1985.
Why then the flap?
3. What concerns Wall Street is the fear that the deceleration in America's pace of expansion will, from its own momentum, continue into the future. In that case the present 4.5 percent growth will give way to a 2.5 percent rate, which in turn will give way to 0.5 percent and to negative growth rates. Each of our earlier recessions has been generated by just such a sequence. Favorable offsets
To form a balanced view, I believe you have to take into account the following relevant facts:
1. The recovery is still young.
2. Consumer polls show a peak in confidence.
3. Surveys of business show an upward jump in plant and equipment investments just ahead.
4. Inventories, which play a pivotal role in traditional trade cycles, still look low rather than high.
5. The money supply is but one determinant of aggregate economic spending. Scientific studies of what causes what in cyclical fluctuations show that you do better in interpreting developing trends if you do not put all your bets on a single determinant such as the money supply. Eclecticism pays off at the bank; and history sadly shows that those who try to beat Wall Street by rubbing the philosopher's stone of monetarism alone generally have holes in their shoes and rowboats where their yachts should be.
Even monetarists do not speak with one tongue. The gyrations in currency and checkable bank deposits that alarm Friedman and Brunner were not matched by similarly extreme gyrations in the other components of more broadly based definitions of the money stock. (In economists' jargon: M-2 and M-3 give rise to less ominous GNP projections than M-1 does.) Summing up
A well-informed observer in Zurich, Tokyo, New Delhi, Peking, New York, or Iowa can at this point take a non-alarmist view of the outlook.
A. A prime reason for the cooling off of the US recovery has been our enormous appetite for imports from abroad. Overvaluation of the dollar was not the intended goal of Ronald Reagan's colossal fiscal deficit, but an expensive dollar has been one effect of the bloated real rates of interest contrived by Reaganomics. Willy-nilly, America has thereby served as a good economic neighbor.
What finally brought economic recovery abroad was the kiss of the US trade deficit. A slowdown here, traceable in considerable part to our importings, cannot rationally be reckoned by foreigners as an economic tragedy.
B. Being an ostrich is as dangerous in economic as in military matters. The message of Dr. Geoffrey Moore, who plies his long-term skills in interpreting leading and lagging indicators at Columbia University, is perhaps worth more attention than the Jeremiahs of the monetarists.
Trouble in 1985 is what Dr. Moore sees in his crystal ball. That is what he thinks the recent dips in the leading indicators are telling us.
C. The lessons for economic policy seem clear.
It is a mistake to put off until after the election the tax increases that will be necessary to contain and reduce the structural fiscal deficit that's keeping real interest rates too high, making the dollar be overvalued on current account, and crowding out investments needed here and abroad.
The ostrich buys short-term peace of mind at too high a price. What a pity it is that President Reagan does not think more of the place he will be accorded in the history books and listen to conservative Martin Feldstein rather than to those who are expert in piling up electoral majorities.
Fortunately, the Reagan mistake is not the stuff that worldwide depression is made of.