Two economic statesmen chart paths to recovery
Henry H. Fowler, a former secretary of the Treasury, and Paul W. McCracken easily rank as senior statesmen in the economic area. Mr. Fowler, chairman of Goldman Sachs International Corporation, and Dr. McCracken, a professor of economics at the University of Michigan, are also cochairmen of a national nonpartisan commission that has as one of its goals the restoration of United States competitiveness, innovation, and productivity.
In an interview, the two explain the background of the current economic crisis and suggest routes for a return to a healthy economy.
Make sure there are adequate resources to deal with the problem of developing-country debts, and soon, they both urge. Mr. Fowler has a formula for reducing the US budget deficit. Dr. McCracken wants business activity in the industrial world ''moving upward a little more rapidly,'' but without boosting inflation.
Here's what they said:
What is the nature of today's present economic crisis?
McCracken: It is a compound of several things. The industrial nations of the world did allow public government claims on economic resources to rise far too rapidly, particularly in the decade of the '70s. You have countries like Sweden, for example, where government outlays relative to GNP (gross national product) are starting to crowd 70 percent and the ratio is still rising.
This, together with sudden shocks, such as the oil shock, even going back to the collapse of the Bretton Woods (monetary system), did weaken the checks to inflation. So we moved out of the 1970s and into the 1980s with a serious inflationary problem.
There was going to be no painless way of dealing with that problem. The kinds of moves toward restraints which were essential were bound to have as side effects an interlude of sluggish employment and business activity.
Compounded with that are some of the international financial problems. The challenge the industrial world faces is to try to find a narrow path here, getting business activity in the industrial world moving upward a little more rapidly without at the same time just starting us off on another trend toward inflation. I think that can be done.
Fowler: As I see it, it's a mix of two problems which are closely interrelated and, unhappily, are recurrent in the economy over the last decade. The industrialized democracies or developed countries lost the healthy mix of job-creating growth in a non-inflationary pattern without losing reasonable price stability. They lost that mix which roughly characterized the dynamic period of the '50s and the '60s . . . and which had its first manifestation in a serious outbreak of global inflation.
This was exacerbated by the oil crisis. In the wake of the oil crisis, expanding deficits in the balance of payments - particularly of the developing countries, but not confined to them - brought an increase in the reliance on the part of governments to handle their balance-of-payments difficulties by external borrowing, particularly in the nonregulated Eurocurrency and offshore capital markets.
And although there was a measure of recovery from the recession that followed the first outbreak . . . of double-digit inflation in 1973-74 - the recession of '75 was not too rugged and we recovered from it - we went back into another phase which eventuated in a second explosion of double-digit inflation. This naturally resulted in the imposition of monetary restraint and brought on the recession or the stagflation over the last 2, 21/2, years, at a time when developing countries in particular were still greatly expanding their reliance on the international private banking structure.
This eventuated last summer in a kind of a recognized crisis which is now well known. It has required the intervention of government, such as the United States and its principal allies - the IMF (International Monetary Fund) and central banks - to join hands . . . with the private international banking system in inaugurating a workout process which would, in connection with IMF loans, put in place long-overdue adjustment programs. Those adjustment programs are now in place in connection with IMF borrowings in countries such as Mexico, Brazil, and Argentina.
Fundamental to a successful workout of this debt crisis is of course some measure of recovery in the developed economies. These represent the export markets on which the developing countries must depend in order to expand their ability to pay not only interest but principal. This also requires a continuation of the lending process, both private and public, so that there is a measure . . . of new money that can keep the developed programs of these countries somewhat afloat and not entirely aborted, which would otherwise result in: social and political difficulties, if not disaster; and massive defaults, which would endanger the private international banking system on which developed countries, developing countries, and the least-developed countries all depend.
How do we handle this?
Fowler: The most important element to contribute to the solution . . . is a healthy, developing, free-world economy in the industrialized countries, on a growth pattern that will be non-inflationary. Carefully non-inflationary. That is not easy. We've tripped off that narrow path at least once, maybe twice, in the last decade and therefore have to be doubly careful in the measures that governments put to work.
The principal contribution that governments can make is to tackle the fiscal and monetary problems that are involved in budget deficits and excessive rates of spending. This must be done in such a manner as to give confidence to the private sector that somebody is adequately in charge, and therefore they can go forward with investment programs that will increase both productivity and capacity; and utilize both raw materials and commodities, as well as some of the industrial products that can be produced and exported - particularly from those developing countries that are in the most difficult situation, such as the big Latin American countries.
[Another factor involves] increasing the capability of the IMF in terms of funds to cope with the existing problems and those country problems . . . that haven't surfaced yet. That involves a substantial increase in the quotas of the IMF and an acceleration of the procedures to make those increased quotas available as soon as possible; an expansion of the so-called General Arrangements to Borrow, which was set up in the early '60s, and changing of the pattern so that the expansion of the GAB funds would be available not just to those Group of 10 [major industrial] countries which provided the funds, but to any member of the IMF. [Finance ministers from around the world agreed in Washington Feb. 11 on a 47.4 percent boost in the resources of the IMF.]Third, I think it would be useful for the IMF at this time to establish its capability to borrow in the private capital markets, because the increase in the quotas and the increase in the available funds and the GAB may take action by governments. That, in our case, is the Congress, which might be on a timetable which would leave some room for doubt as to the availability of the IMF to shoulder its burden . . . .
We can learn from past experiences the lesson that history teaches, so that this situation can be avoided in the future. That means a very careful reexamination of the pattern of international borrowing over the last seven to eight years, and what the IMF and the central banks and the private banking system could have done had they been better coordinated to minimize the crisis that has occurred.
Another point is undoubtedly a high degree of continuing coordination and cooperation between the IMF and governments and central banks on the one hand, and the private banking system on the other.
McCracken: If I may just add one footnote. History makes it very clear that paradoxically the more certain we are that there are resources to handle the problem, the less probable will be the need to use all those resources. You look back at the experience in the early 1930s. It was always too little too late coming along, which finally produced an enormous problem. And if it's very clear you can deal with a problem, the problem is not so apt to occur.
You don't differ too much from the administration.
Fowler: No. The current approach is very commendable. The Group of 10 meeting in Paris has produced a measure of accord on some of these items, particularly the increase in the resources available to the fund and an emphasis on a concertation of policies among the developed countries that will lead to a recovery in the free world economy without taking great risks to reignite inflationary explosion.
Are the amounts to be made available adequate?
Fowler: I'm not concerned so much about the adequacy as I am the timing - as Paul McCracken has indicated - of the availability of the resources. If you have the weapons to deal with a problem, the problem isn't nearly as likely to occur.
To invoke the 1930s again, it was often said that depositors who were producing a run on the bank often said, ''If we're sure the bank has the money, then we don't want it. It's only if they don't have the money that we want it. We want to make sure there's money there.''
How would you concert economic policies?
McCracken: Here I would see a variant of what years ago used to be called the key-country approach. You have four or five key industrial countries which are particularly important in the world economy. Let's take the so-called Big Seven in the OECD world [of industrial countries]. Perhaps the OECD [Organization for Economic Cooperation and Development] is one institutional arrangement by which concerted consultation on programs could be followed.
But I don't think we need to wait for that in the US. We don't want overly inflationary monetary policy, but I think we want one that is now going to be consistent with a good rate of growth in the economy - say, from here on, 3 or 4 percent per year. At that rate, in real terms, that's a modest trend not much over half of the normal pattern. We ought to be able to achieve that without tripping off inflation again.
We do have to deal with the budget problem here and in other countries. I see this as a sort of Damocles sword over the industrial world at the moment. Maybe that's too dramatic, but when we're facing $200 to $300 billion deficits . . . . Relative to their economies some countries are facing even more serious problems. This is going to be a tough one to get hold of, but I think we have to do it.
Six former secretaries of the Treasury, including yourself, have recently offered a program for dealing with the budget crisis. What do you recommend?
Fowler: We have reissued a program that was announced in broad terms last May. There must be a reduction in the deficit for fiscal 1985 in the order of magnitude of $175 billion. One of the components is a $60 billion reduction in outlays to the so-called entitlements program, which are those built-in statutory increases in social security, civil service pay, military pay, retirement pay, civil service retirement pay, veteran benefits, and a number of other like programs.
Also, a moderation in the defense program resulting in a $25 billion cut in outlays in the 1985 fiscal year, which would have the effect of bringing that program from a projected 9 percent rate of real increase to a 7 percent rate of increase. We would be opposed to bringing it below the 7 percent rate of increase because we think President Reagan's emphasis on rebuilding a stable and steady pattern of substantial increases in the defense program is long overdue to make up for our failures in that regard in the '70s.
The third element is - and we think it's inevitable - that there would have to be an increase in revenues in fiscal '85 in the order of magnitude of $60 billion. On that score we are as one in feeling that those increased revenues should come not in the field of personal income taxes or corporate income taxes, where there would be a real impact on the level of investment and capital formation and household savings; but these revenues should come from so-called consumption-oriented taxes. We don't have a particular selection of those consumption taxes, but the broad emphasis should be to avoid increasing revenues in such a manner that would handicap the personal savings and capital formation process and instead would have its impact on consumption. We think the US economy is overoriented toward consumption and it's vastly underoriented today toward savings and investment.
That's a rough outline of the program. If this happened, we think that payments of interest on the national debt would as a consequence be reduced $30 billion in the fiscal year 1985. This, plus the $60, $25, and $60 billions in the other measures, would bring us to a $175 billion reduction in the deficit. That would not bring us into balance or surplus, but would bring us at least within reaching distance. We'd be moving very significantly in the right direction. And there would be confidence that over succeeding years, '86, '87, and '88, we could reach something in the nature of a healthy equilibrium.
Should the US have a national industrial policy?
Fowler: The best industrial policy the US can have is not to have an industrial policy that's pointed to selecting these industries for encouragement and another group of industries for decline and extinction. I believe the best industrial policy the US government can have is to create a climate which will be conducive for all entrepreneurial elements in US society to invest and create new products, improved products, increased quantities of products, and services.
Therefore, I'm much more concerned that we may overdo the (selective) industrial policy. I . . . would not be in favor of modeling our approach to this problem after the Japanese.
McCracken: I would wholly agree, maybe even stating it more strongly. If we ever go for government pursuing a selective policy, I would confidently predict what the results will be. We will select out the industries that ought to be phasing out of the American economy for help. And therefore the thrust of government efforts will tend to be to put resources into less efficient industries.
Are there any areas we should be working on to improve US quality-competitiveness? Should the government be doing anything in this regard?
Fowler: This is where the Fowler-McCracken Commission comes into the picture. For the government to unilaterally attempt to approach this problem of what it should do to encourage competitiveness, increase productivity and growth, and increase effectiveness in export markets of the world, would be a grave mistake. The function of the Fowler-McCracken Commission . . . is to provide a point where the administration and leading figures in the Congress particularly concerned with the congressional economic and financial committees can meet with representatives of the private sector and work out conjointly a program that is mutually satisfactory to all three of these elements.
McCracken: If one looks at the process by which something becomes a national policy, one can identify, broadly speaking, three elements, or three sets of participants.
Obviously, there is government, because this is where legislation occurs and where policies are managed, etc. That's self-evident. But there are two other sets of participants which are not so visible. At the other end of the spectrum are people at what might be called the idea stage - people in the academic communities, in the think tanks, etc. . . . In the middle there is a kind of intermediation element - the citizenry, the business community. For government to act, there has to be some degree of acclimatization on the part of the citizenry. This is why frequently you will find someone in government who says, ''This is what government ought to do, but of course we can't do it.'' There's no antecedent support for it. I would see the Fowler-McCracken effort in this intermediation as part of the spectrum.