Economists hope for recession 'cure' to inflation
Boston — It is almost weird. Most economists and even the Carter administration are hoping for a recession. These people aren't economic masochists. They don't enjoy more unemployment or increased business bankruptcies. It is just that they have little faith in any other cure for inflation and high interest rates.
"The only way for things to get better is for things to get worse," said Alan Murray, an economist with Citibank, citing a popular theme.
If the recession had started last year, inflation might not have reahed the 18.2 percent compounded annual rate of January. The prime interest rate which banks charge their best loan customer might not have soared to 17 1/4 percent as it did Tuesday. The Carter administration and Congress might not be under such pressure to reduce federal spending. Sen. Edward F. Kennedy (D) of massachusetts might get less political mileage from his call for wage and price controls in the current battle for the Democratic presidential nomination.
But the Federal Reserve System let the money supply grow much more rapidly than it intended last spring and summer. Consumers maintained a high spending pattern. The economic expansion "dragged on and on" -- if that is the right expression. This is the longest non-war- time business expansion in the history of the US business cycle. It is now 58 months since the trough of the 1973-75 recession. This record has been exceeded only twice. The expansion from June 1938 through February 1945, pushed along by World War II, lasted 80 months. The Vietnam war kept another expansion going for 106 months, from February 1961 through December 1969.
"You have to regard the great incompetence of this administration in its inability to get a recession at the right time," commented Sam I. Nakagama, an economist with Kidder, Peabody & Co. "To get reelected, Carter should have planned for a recession in 1978 or 1979. It shows this administration's pristine innocence. They had no business being there. It is as if they had not been around for the last 30 years."
He added: "You have to recognize that a recession is the only way to stop inflation."
Mr. Nakagama, who is obviously not a Carter fan, figures that "the smart thing" for the administration to have done after the 1973-75 recession would have been to plan for slow growth. This, he noted, is what West Germany and Japan did. As A result, those nations got relatively low inflation rates.
In a way, the Federal Reserve System could be blamed for not getting a recession when politically desirable. It attempted to slow the economy down (and perhaps even prompt a recession) in the fall of 1978. But because it insisted on attempting to control the pace of money creation through managing interest rates, it printed too much money. Businessmen, the foreign exchange markets, and perhaps even consumers figured more inflation was being slipped into the economic system. And prices did move up more rapidly.
Theoretically, the Fed is an independent agency. But its policymaking body, the 12-man Open Market Committee, usually has a political ear to the ground. It attempts to help the administration if such help is not complete economic foolishness.
Mr. Nakagama criticizes President Carter for appointing to many "moderates" to the Fed's governing board. He questions the determination of these appointees when monetary restraint is needed. At an earlier stage, administration officials openly criticized the Fed's tentative moves to tighten credit.
Now, however, the Fed has nearly a "blank check" to write as tough a monetary policy as it regards necessary. The nation and its politicians have been alarmed by today's high inflation rate.
Will the recession to overdone now -- made more severe than necessary?
Interestingly, Mr. Murray of Citibank thinks this is less likely. The new monetary management technique announced by the Fed Oct. 6 -- paying more attention to the growth of monetary aggregates than to interest rates -- means that the central bank should have better control of the growth of the money supply and thus not overdo its restraint, he believes.
Thus citibank has revised its earlier forecast of a sharp recession, a prediction based on an assumption the Fed would cut back money growth to severly. It now expects a modest recession in the second and third quarter with the nation's total output declining around 1.5 percent from peak to trough.
The rate of inflation -- "the payoff from the recession" -- should drop to around 9 or 10 percent in the second half of this year, measured by the so-called gross national product deflator, the broadest measure of inflation. It should come down even further next year, predicts Mr. Murray.
As for the administration's plan to trim the budget by about $4 billion in fiscal 1980 and $15 billion next year (according to reports from Washington), Mr. Nakagama holds that that would be merely "standing still." Expenditures would likely run that much above target without any so-called "cutbacks."
It is a recession -- not controls or modest budget cuts -- which will moderate inflation, he figures.