Fresh candor on logy economy from top US adviser
We sat in Murray Weidenbaum's office the other day and watched him extend his metaphors. Through the summer, the genial chairman of the Council of Economic Advisers (CEA) went around calling the economy ''spongy.'' Now unemployment is up, industrial output is down, and things are looking a bit more damp. The batch of reporters called for a briefing pressed for the right word: Was it still ''spongy''? No; now the operative term is ''soggy.'' Everyone wrote it down. With winter coming on, this is the sort of economic forecast we can understand.
How soggy will things get?
Mr. Weidenbaum guessed the gross national product would decline at a 3 to 5 percent annual rate this quarter. The first half of next year he sees as being essentially flat, with an upturn around July dragging '82 annual growth up to about 1 percent. Unemployment might approach 9 percent of the labor force. For an administration whose past forecasts sometimes seemed to have come from Mary Poppins, this is extreme candor.
''I was pleased to see that they are coming clean,'' says Walter Heller, CEA chairman under Presidents Kennedy and Johnson. ''The Stockman affair might be therapeutic in that sense.''
When administration officials look at the economy through rose-colored glasses, several of the past chairmen say, they're only fooling themselves. ''Candor and realism in formulating and selling policy are essential,'' says Herbert Stein, the chairman in 1972-74. ''You get only a momentary advantage from being excessively optimistic.''
Still, those employed by the White House often meet resistance when they want to say bad things about the economy. In 1960, when Mr. Heller's appointment was about to be announced at Joseph Kennedy's Palm Beach home, John Kennedy took the economist aside and asked, ''What are you going to tell them?''
Heller allowed as how he would say that America had suffered 7 years of slow growth, 3 years of slack, and one of recession.
''Recession!'' Mr. Kennedy replied. ''Do you have to use that word?''
Heller persisted. Eventually, with a wave, Kennedy gave in. ''Well, I hate that word. However . . . .''
Heller says he has been surprised, not by the current administration's lack of candor, but by its cacophony: ''I'm surprised (they) have spoken with so many voices. Of all people, (Commerce Secretary Malcolm) Baldrige was the guy that called shots forthrightly. Now Murray is next in line.''
Perhaps, as reporters speculated on the sidewalk afterward, Weidenbaum is sliding over to occupy some of David Stockman's space as the administration's economic spokesman. Perhaps, as Dr. Paul McCracken, President Nixon's CEA chairman, observes, he was ''trying to get all the bad news into 1981.''
Or perhaps, as an economist who held a high post in the Carter administration suggests, the White House simply decided to acknowledge the ''reality'' seen by most other economists. ''You get a little 'antsy' if you find yourself well outside the pack,'' the economist says.
The recession, whatever its depth and sharpness, eases some of the contradictory forces in Reaganomics, economists say. Specifically, a flat economy won't be pulling against the reins of tight money growth. Consumer spending is down. Inventories are ballooning: up $17.6 billion last quarter. Retailers, waiting for a Christmas rush that may be more of a stroll, are pulling their hair; but businesses don't need to finance new output, so the demand to borrow money has fallen off. Interest rates have started a slow float to earth, though the Fed has barely eased its tight grip. Timothy Howard of Wells Fargo Bank predicts a prime rate of 15 percent at the nadir of the recession.
But what happens when the economy starts heating up again? A good question. ''I don't think there's any disagreement on the down side of the recession,'' says the former high Carter official. ''The real area of controversy is what will happen in late '82.''
Weidenbaum is sanguine. He expects the economy to rise from its nap and go bounding along at a 5 percent annual rate in the second half of next year.
Will a strong economy, with everyone scrambling to borrow money, send interest rates back up? ''I don't see that,'' he says. ''I expect '83 will be a very prosperous year.''
Others aren't so sure. The ex-Carter man says there's a ''two-thirds chance'' interest rates will soar right back up, reaching close to their '81 heights. And an important part of Reaganomics, the business tax cuts, may not work as well because of the recession.
''Reaganomics was designed to work in a growing economy, not one sinking into a severe recession,'' says economist Edward Yardeni in an E. F. Hutton newsletter. He doubts that a Promethean surge in capital spending is just around the corner. ''Firms aren't going to increase their productive capacity just because they're given more cash flow. They must see their markets growing.''
Mr. Yardeni believes the business tax cuts won't become effective until next year - making any economic recovery somewhat sluggish.