A recession strategy
Though still a minority, more and more economists are predicting that the recession today in the United States will be a deep one. For instance, Robert Genetski, an economist with Harris Trust and Savings Bank in Chicago, warns: "Although it is too early to be certain, the odds are growing that the present recession will prove to be both the longest and most severe downturn since the 1930s."
Mr. Genetski speculates that the experts may at some point determine this recession started slowly back in March, 1979, with business activity plunging sharply only this spring. Whatever the technical merits of such recession dating, it is clear now that the downturn must not be allowed to feed upon itself.
Thus we welcome the moves of the Federal Reserve System Monday to stem the recession. This winter the Fed and the Carter administration wanted to force the economy into a recession as the only feasible way to slow inflation. But neither wish a bone-crushing slump.
One complication is that the administration overdid its restraint program by imposing credit controls on March 14. It failed to notice that consumers were already slowing down their credit demands and that the economy was already slipping into recession. Now it is faced with the somewhat embarassing task of dismantling the program to prevent the controls from further worsening the recession. But as a forthright children's rhyme goes: "Better to burp and bear the shame than not to burp and bear the pain."
To the credit of the Fed, it started the process Monday. It dropped a 3 percent interest rate surcharge on funds it lends to large banks which make frequent and substantial use of what is termed the "discount window" at the Fed. This meant these big banks had to pay 16 percent rather than the current 13 percent discount rate the Fed charges on loans it makes to banks to cover temporarily shortages in their reserves. This should make credit marginally more available to business.
Now the Fed should hasten to remove the other credit controls, such as those on credit cards. Most consumers are wise enough to exercise self-restraint in their use of credit, especially when recession is in the air. If anything, the need of the economy today is for continued consumer purchases -- not fewer.
Also welcome is the Fed's move to bolster the nation's money supply. Money is the lubricant which keeps the wheels of the economy moving. If too much is created, this prompts inflation; if too little, the economy slows down. In the last two months, the money suply has been declining. The basic money stock, known as M1-A, has dropped at an 11.4 percent annual rate in the four weeks ended April 23. That contrasts with the Fed goal for this year's first half of a 4.5 percent annual rate of increase in the measure.Should the money supply decline much longer, it would worsen the recession.
We think the Fed's monetary targets are reasonable. Thus it is desirable that the Fed achieve that growth. By letting the so-called federal funds rate -- the interest commercial banks charge each other on overnight loans to meet reserve requirements -- plummet sharply Monday, the Fed indicated that it does intend to meet its own money goal.
The public should not misinterpret the slide in interest rates as a return to inflationary "easy money." The Fed's monetary targets imply continued monetary restraint. And that restraint will eventually bring down the inflation rate.
Indeed, there are already indications that the government's producer price index, when it is released Friday, will show some moderation in the inflation rate. As summer and autumn come along, most economists expect more good news on the price front, more bad news on unemployment.
What is needed is a steadier monetary policy, one that gradually squeezes inflation out of the economy and does not exacerbate the business cycle. Fed chairman Paul Volcker has announced his intention to pursue such a course. It now looks as if he and his colleagues at the Fed intend to keep this promise.
Meanwhile Congress, worried about the economic slack and re-election, is being tempted more strongly by tax-cut desires. If the legislators show some moderation, tax trimming could be useful. However, the tax program should be designed to encourage increased productivity as well as stimulate consumer demand. Rapid inflation has made depreciation of plant and equipment inadequate. Either indexation of the value of such business assets to the inflation rate or some ohter technique to step up corporate cash flow would be helpful.
In any case, if the recession proves as bad as the pessimists forecast, the Fed, Congress, and the administration should not overreact with excessive pumping up of the money supply or federal deficits. That happened during the 1973-75 recession and the nation ended up with worse inflation than before. The economy needs steady hands on the policy steering wheels.