Is the US headed for a depression?
Too many voices are now sounding that alarm, or at least posing the question. The rising business failures, the difficulties of the thrift institutions, the ailing auto and homebuilding industries, the mountain of consumer and corporate debt -- these and other factors are spurring negative talk about the country's future. Amid the gloom and doom, it is important that the public keep a perspective on the problem. While the US economy is in a bad way at the moment, the nation needs least of all a feeding of panic which could sway the government from holding to a steady, measured course aimed at putting the economy on a sure footing. What the nation does need is patience and a cool head.
Speculation about depression is misplaced. What brought on the Great Depression of the '30s was in large part the dramatic decline in the money supply and the Federal Reserve System's failure to rescue the banking system. Conditions today are different. For one, there is a system of insured deposits; for another, the federal government would likely step in to prime the economy if extreme circumstances warranted.
This is not to underestimate the severity of the current recession or the very real hardship it imposes on millions of Americans. But it bears reminding that strong treatment is being administered to the economy in the interests of stable long-term growth and that this has to be given time to work its way through the system. No one is sure that the Reagan prescriptions are the right ones, but there are some positive signs to warrant cautious hope -- especially if combined with corrections in the administration program.
One goal of this treatment is to break the back of inflation -- an insidious phenomenon that erodes the citizen's real income. Let it not be forgotten that the inflation rate had climbed to over 13 percent in 1979; it is now at about 8 percent and could come down further by fall. Most significant, perhaps, is the virtual revolution taking place in labor-management relations. For the first time organized labor contracts are being brought under control -- in the auto industry, trucking, airlines. Inasmuch as excessive wage contracts are one factor contributing to higher prices, the new trend could mean better control of inflation in the future.
The other prong of the economic treatment is the President's program for spurring growth through reductions in individual and corporate tax rates, a drastic cut in the growth (not magnitude) of government spending, and less government regulation of industry. Here there remains a great deal of uncertainty. Business, because of so much unutilized production capacity, is using the tax breaks not to expand investment, but to shore up its financial position and to buy up companies. Wall Street remains jittery.
Yet some faint rays of light seem to be breaking through the clouds. Long-term interest rates are coming down. Also, there are signs of a stepup in individual and corporate savings due to the IRAs and other incentives legislated by Congress. This has yet to reach the level required to shift the nation from a credit-based to a savings-oriented society, but it is moving in the right direction. To finance growth the US needs precisely the kind of savings ethic practiced in Japan, West Germany, and some other industrial countries. Until Americans get out of the habit of borrowing and into the habit of saving, they cannot expect the economy to expand as it should.
If there is no cause for depression fears, neither is there cause for complacency. Congress must do something about those budget deficits, now expected to be far larger than Mr. Reagan's forecasts. The deficits in themselves are not intolerable measured against the nation's GNP; but they do seem to affect interest rates and are creating nervousness in the financial community. The Business Roundtable is but the latest corporate group to warn that economic recovery will be delayed if the deficits are not reduced. Military spending is the primary target for such cuts, but there are other budget categories that could be pruned or frozen. Tax expenditures are also a fertile area for reform that could have far-reaching impact on economic growth. Eliminating deductions of consumer-credit interest, for instance, would both yield revenue and encourage savings.
Revision of Mr. Reagan's budget should not overlook the nation's high unemployment -- the sad price being paid to bring down inflation. It is all good and well to expect an economic upturn to take up much of the slack. But there will remain millions of Americans, especially young people, who are ill-fitted for participation in an economy entering the age of robots and shifting toward a focus on high technology. Whether the private sector can be relied upon to retrain the jobless -- without some government help -- is doubtful. The issue deserves thoughtful consideration.
In sum, the picture today is not cheerful. There is no easy way out of stagflation, and the American people have to be prepared for a slow recovery. Experience of the past decade has in fact taught the danger of pushing an economic recovery too quickly with accelerated money growth, and thereby reigniting inflation -- which, in turn, again forces the government to induce a recession. The demand for monetary restraint and fiscal prudence will thus persist. But if all sides pull together -- if the Fed holds firm to its targets , if the lawmakers produce a budget alternative that reduces those deficits, and if the President is willing to compromise (and he apparently is) -- there is no reason why the nation cannot begin to emerge from the long winter of its discontent.