Many Economists Say Fed Should Lower Interest Rates

Gulf war will not lift US out of recession, they agree

WHETHER it's war or peace in the Middle East, the United States must deal with a recession at home. To reverse the economic decline, most economists - 62 percent of 42 economists quizzed by Blue Chip Economic Indicators (Sedona, Ariz.) - are calling for the Federal Reserve System to loosen monetary policy.

``The Federal Reserve should get every push and shove the Congress and the administration can give it to move aggressively to ease credit and lower interest rates,'' Robert Eisner, a Northwestern University economics professor told the Senate Committee on Labor and Human Resources last week.

Generally, economists do not see war with Iraq as a way out of the recession.

``The amount by which we could expect to get a fiscal push from a war has got to be small,'' says Allan Meltzer, a Carnegie-Mellon University economist.

A brief war could provide the defense industry with fresh orders for ammunition, bombs, and some other military supplies. A longer war would lengthen the demand for those supplies. But since the end of the cold war has left the US with a surplus of tanks, aircraft, and warships, any losses of such equipment probably would not be replaced.

If hostilities do break out, however, experts anticipate a period of price volatility in financial markets here and abroad. In the stock market, it will be a contest between those investors selling in alarm and those calculating on picking up a bargain. The foreign-exchange markets could see a flight to safety - to the US dollar.

Moderate recession expected

If war disrupted the flow of oil from the Gulf, it could prompt a run-up in oil prices. However, the International Energy Agency, a 21-nation group of oil-importing nations, adopted an emergency plan last week to bolster oil supplies by releasing 2 million barrels a day from government reserves if war begins in the Gulf. And stocks of oil in the industrial nations are at their highest level since 1982.

Some economists say peace also could revive economic activity.

``By doubling oil prices and crushing consumer confidence, Iraq's invasion transformed an economic soft landing into a hard one or even a crash,'' writes Roger Brinner, chief economist of DRI/McGraw-Hill, a Lexington, Mass., consulting firm. ``A pullback could promptly reverse our fortunes again.''

``When the war scare is over, the recession will be over,'' says Michael Keran, chief economist, Prudential Insurance Company of America.

Most economists expect the recession to be moderate. Two-thirds of the economic forecasters polled by Blue Chip say the downturn will end in April, May, or June, with June being the favored month.

Robert Eggert, editor of Blue Chip Economic Indicators, says these economists ``are counting on the historically demonstrated rejuvenative power of the American economy.''

However, economists have a poor reputation for forecasting the severity of recessions. Nor do data from the first few months of a recession foretell what eventually happens, notes Leonard Lempert, director of Statistical Indicator Associates in North Egremont, Mass.

``I do urge that all prediction, however great the authority, be received with something varying between amusement and contempt,'' John Kenneth Galbraith, a Harvard University economist, told the Senate Labor committee.

Public works investment

Professor Galbraith recommended as a counter-recessionary measure a multi-billion-dollar investment in public works - highways, bridges, urban streets, airports, other transportation, and public structures in general.

``As a gesture to fiscal conservatism, let there be an increase in personal and corporate income taxes to cover added interest costs and effectively also the amortization of the cost and debt,'' he said.

Heidi Hartmann, director of the Institute for Women's Policy Research in Washington, said any such program should be construed to include the social ``infrastructure'' that delivers human services such as health, education, and child care. This is because the slowdown is affecting sectors where women are employed heavily. ``The need of families dependent on women workers will be disproportionately great,'' she also told the Senate committee.

Dr. Meltzer says such a public works program should be launched only if it has merit in itself, not as an anti-recessionary program. He's concerned that the Fed's shift toward easy money is ``behind the [interest rate] curve.'' That is, a reduced demand for money by business and consumers means that the Fed has not been reducing interest rates fast enough to get the money supply - the fuel for the economy - growing faster. One important measure of money, M2, that includes currency, demand deposits, and some savings, has been growing at only a 1.3 percent annual rate in the past three months.

If the Fed doesn't move faster, says Meltzer, the recession could drag on.

The Blue Chip panel of economists had other suggestions for countering the recession: Reducing the capital gains tax and other taxes on business investment, stimulating exports, holding firm on the five-year budget agreement of 1990 - and negotiating a diplomatic solution to the Gulf crisis.

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