The intricate global economic system has long since passed the point where concerted economic policies in one nation do not have major impact on other nations. One need only recall the OPEC oil cutoff back in the early '70s to grasp how far-reaching sweeping policy changes can be. But even more fundamental day-to-day policies can also profoundly affect the world setting. That is especially true in the case of the United States. For that reason, it is vital that US fiscal and monetary policy be formulated in terms that take careful account of the larger world economy.
It is to a large extent the consumer-led US recovery that is spurring global recovery. And the US economy continues to look good. This week's output and inflation data out of Washington show the economy moderating from its pell-mell growth earlier this year. The government's "flash" growth estimate has the nation's gross national product increasing by 4.5 percent after adjustment for inflation during the final three months of 1983. Because of technical factors, the estimate may be lower than later, more complete, analysis will indicate. The administration still believes the economy will grow by around 4.5 percent from the final quarter of 1983 to the final quarter of '84.
As pointed out by Treasury Secretary Donald Regan, the final quarter's slower growth rate is a plus, since it means that the economy "is not overheating, as a lot [of economists] had feared." And inflation, while still a long-range problem , remains under control compared with the period of double-digit rates several years back. Consumer prices rose by a seasonally adjusted and modest 0.3 percent in November.
The slower growth rate and the slight rise in prices bolsters Secretary Regan's case that the US is "now on a sustainable, noninflationary growth path." That would mean, as Mr. Regan argues, that the Federal Reserve Board does not "have to lean quite so hard" as it has been doing in slowing the growth of the nation's money supply so as to thwart a possible sharp resurgence in inflation.
The rise in the Dow Jones industrial average in the middle of the week suggested that Wall Street was now hoping that the Fed, based on the latest growth and inflation data, would not take actions that could adversely constrict money growth -- and might in fact even take steps to loosen money reins somewhat.
Since 1979 the Federal Reserve -- preoccupied as it is has been with fighting inflation -- has often brought about some wide swings in the growth of the money supply. Some analysts, for example, believe that the downturn of 1980 was triggered in part by the fact that the Fed first sharply constricted and then overly eased up on money growth.
What needs to be kept in clear focus is that the global upturn is still essentially a US- and Japanese-led recovery. Granted, Europe is growing. But according to the Organization for Economic Cooperation and Development, Western European nations will show only minimal growth next year -- about 1.5 percent. This year's growth will have been even less -- about 1 percent. And the OECD sees unemployment continuing to rise in Europe, compared with declines in joblessness in the US.
The Fed will have to do a careful calibrating act during the months ahead.The great gains that have been made in reducing inflation must not be lost. On the other hand, it is vital that money growth be kept at a rate that allows the recovery to be sustained. Any overtightening could choke off the recovery.
Beyond monetary policy, there remains the matter of the deficits. One wishes that Secretary Regan had been as forceful on this point as he was regarding monetary policy. Interest rates may fall during the weeks ahead if the Fed expands money growth. But both short- and long-term rates are expected to jump next year if inflation, as expected, inches upward. The continuing high deficits will only shore up and increase pressure on interest rates. So European central bankers may be tempted to take steps to hike their own rates to hold investment funds at home. But that in itself could imperil European growth.
Mr. Regan has a good case regarding the dangers of an overtightening of money growth. There is an equally strong case for doing something about the budget deficits. At stake is not just the US economy, but global recovery.