A '30s-style depression or an '80s-style stagnation?
Cambridge, Mass. — Usually, for some months after the US economy has turned the corner out of a recession into a recovery, spirits sink even lower. There's talk about depression, bread lines, mass bank failures - that sort of thing.
Right now, with the nation about ready to move up from its deepest slump since the 1930s, gloom and doom have been spreading.
So it was that Harvard University's Institute of Politics this week decided to discuss the question ''Will there be a Great Depression?''
To save any suspense, the answer of two well-known economists, Francis Bator, professor of political economy, Kennedy School of Government, Harvard, and Rudiger Dornbusch, professor of economics, Massachusetts Institute of Technology , was a clear ''no.'' But the two did not rule out what might be called a ''Great Stagnation.''
First, however, they noted that today's recession is a long way from matching the events of the Great Depression. From 1929 to 1933, gross national output (GNP) in the United States declined 30 percent. Since the start of the current recession in the third quarter of 1981, GNP has dropped only 2.65 percent, Mr. Bator pointed out.
Unemployment during the Great Depression climbed from 3.2 percent to 25 percent in 1933, and it remained above 14 percent until 1940. The jobless rate today is some 10.1 percent. The price level declined sharply during the 1930s slump. Inflation continues, though more slowly, today. Industry ran at 40 percent of capacity then; at 69 percent today.
Mr. Bator admitted there is ''no law of physics'' preventing today's recession from worsening into a depression in the three years ahead, as the 1930 recession worsened in the years 1931-33. But, he said, ''It is extraordinarily unlikely.'' Here's why:
* In the 1930s the financial structure was ''exceedingly brittle.'' Today, with federal deposit insurance and an alert Federal Reserve System, plus other safeguards, it is not.
* Government spending five decades ago amounted to only 10 percent of total national output. Today such spending at all levels amounts to some 33 percent of GNP. These expenditures do not automatically go down with a slump. In fact, unemployment benefits and other ''transfer payments'' tend to increase. Tax revenues drop off from anticipated levels. The federal deficit jumps (from an originally expected $40 billion in fiscal 1982 to some $120 billion). All these elements tend to dampen the tendency of the recession to feed on itself by buoying individual incomes.
* In the depression, government followed ''disastrous policies,'' Mr. Bator said. It imposed a large a tax increase in 1932. It allowed the money supply to shrink about 25 percent from 1929 to 1933. The Fed did not intervene to prevent a sequence of bank failures.
''It would take massive, persistent insanity, inanity, on the part of the federal government and the Federal Reserve System to bring on anything like 1933 ,'' Bator concluded. And although not necessarily agreeing in detail with Washington policies, he sees a high level of technical competence among some economists there, such as Martin Feldstein, the new chairman of the President's Council of Economic Advisers. So, in effect, he expects no major dumb economic policy actions. He adds: ''In order to have a world depression, it is necessary to have a United States depression. And in order to have a US depression, you have to have the American government go crazy.''
Of course, what happens to the US economic recovery over the next few years depends on Washington decisions. Right now, Mr. Bator estimates, the economy is running at a level some $300 billion below what it would be if unemployment was 6 1/2 percent and industry operating at 85 percent of capacity. These percentages are considered comfortable for the economy, levels where inflation would not be decidedly stimulated.
If Washington stimulates a classic, deep recession recovery, Bator says, GNP will recover at a 7 percent rate the first year, slowing to 6 percent the year after, and eventually to 2 1/2 to 3 percent. Unemployment will drop between 1 and 2 percent the first year, and 1 to 1 1/2 percent the following year. Inflation would also go up rather rapidly, back to the 8 or 9 percent level of 1979. Total loss in national output during the anti-inflationary recession would be about $500 billion, or more than $7,000 per family.
If Washington determines to continue fighting inflation by permitting only a slow recovery, unemployment would remain between 9 and 10 percent for two years. Inflation might be just 2 1/2 or 3 percent. But the cost over six years in lost output would be $1 trillion, or more than $15,000 per family.
In a third scenario, Washington prompts a middle-ground gradual recovery, with GNP rising 4 to 4 1/2 percent. Unemployment drops about 1 percent a year, reaching a ''high employment'' level in 1985-86. Inflation sticks around 5 to 7 percent. The cost would be $250-300 billion.
Those three scenarios, Mr. Bator admits, are not a happy set of choices. If he had his way, he would proceed with a ''relatively rapid recovery path'' but impose direct wage restraints to prevent inflation from reigniting. Wages are the largest element in costs for business.
He admits, though, that the chances of Washington's adopting such wage restraints are ''just about nil.'' So he basically anticipates a modest recovery , with unemployment remaining above 9 percent for some 18 months, not much progress in further reducing inflation, weak spending on plant modernizations and expansions, and a danger of rampant protectionism ''poisoning'' international politics.
MIT's Mr. Dornbusch offered a slightly higher degree of pessimism. Other economists are more hopeful for the recovery.
Whatever, none of these forecasters see anything close to the Great Depression.