US locomotive is on too fast a track for the long-term good
It is time to change the diagnosis of the American economy. Warning lights are beginning to flash. The American locomotive is moving too fast. Just a year and a half ago, the experts guessed that the new recovery would be a weak one. Reagan's economic adviser, Dr. Martin Feldstein, predicted that 1983 would show only 3 percent real growth - less than half of what is par for the first year of a typical postwar recovery. That seemed overly pessimistic at the time. But the evidence available then could justify some degree of pessimism.
Actually, 1983 was very strong. Japan and South Korea immediately felt the pull of the American locomotive. Soon Europe, even if in lesser degree, felt the lift out of its recession from the buoyant United States demands.
The experts could never quite believe the emerging numbers. Repeatedly they played down the strength of the expansion. Each momentary episode of faltering and hesitation - as at last Christmas and in snowy March - the experts hailed as confirmation of their hypothesis that the American recovery was a fragile one.
Now we should know better. The nearly 9-percent annual growth rate of the first quarter was too much for the sustained health of the boom. The April and May data suggest to me that the middle third of 1984 may be in the 5-to-6 -percent growth range.
For a typical Japanese, Brazilian, Swiss, Italian, or Pakistani isn't this fast American pace a good thing? No, in my opinion.
The little that you gain in the short run from an American sprint stands to be outweighed by the threat that the life expectancy of the US recovery may be severely curtailed by rising interest rates and, ultimately, by quickening inflation fears.
Debtors in Argentina, Brazil, Mexico, and Nigeria, with loans on a sliding scale, are harmed by step-ups in our interest rates induced by overheating.
The Federal Reserve has been alert to soaring credit demands. Chairman Paul Volcker and his Fed colleagues have let interest rates tighten in the marketplace.
Ronald Reagan's campaign advisers have been fearful lest monetary policy be so tight as to kill off house-building and abort the economic recovery. Secretary of the Treasury Donald Regan has publicly criticized the Federal Reserve. Privately, President Reagan has put pressure on Paul Volcker to be sure to accommodate the credit needs of the expanding economy. The supply-siders in the Reagan camp, particularly Congressman Jack Kemp of tax-reduction fame, have been even more militant in their criticisms and threats. Kemp has even proposed legislation to curb the independence of our central bank authorities.
This time I think the Federal Reserve is right.
I say this as an American concerned with the problem of restoring job opportunity and of maximizing long-run employment. But, speaking as a citizen of the world with the needs of the developing countries in mind and the interests of the industrial nations as well, I urge credit control designed to slow down our growth rates to levels compatible with a long-lived recovery.
It is better to have higher interest rates now when the boom is strong, so that later when the recovery is weak the Federal Reserve can act to ease the availability and cost of funds for investment and durable-goods spending.
The IMF and the private banks, working with governments of the leading nations, should devise ways to put a cap on the extra interest payments that would be involved under the old loan contracts when the US credit market heats up. That way lies a better compromise than to let the American boom roar out of control for fear of adding to third-world debt burdens. Contriving such an interest cap will not be easy. But the rewards will be well worth the costs.
The future is what counts, not the past. Just as I am declaring the economy's temperature to be too great, who is to say that insidious weakness may not be developing? I could be wrong. Weakness on Wall Street could call off investment plans. Once the Federal Reserve starts to tighten money, house construction could plummet. All this has happened before and could again.
One can only go by the weight of the evidence. That evidence suggests strength for the several months ahead.
Fortunately, a thoughtful policy of leaning against the wind does not require an irrevocable long-term commitment by the Fed. Any autumnal weakness will cast its shadow before it, and can evoke a tentative loosening of the Fed's grip on the supply of credit.
I will be the first to urge on it a change in course when signals indicate weakness ahead. Fine tuning and precision navigation are neither needed nor feasible.
Political economy is an art based on science. Old precepts must be constantly tested against new experience. The conservative Ronald Reagan unwittingly contrived a super-Keynesian fiscal deficit and a Franklin Roosevelt recovery. Too much of a good thing, economic history reveals, leads to a hard landing and a short-lived boom.
Earlier, consensus forecasters expected the recovery to last for 38 to 40 months after its beginning in November of 1982. That meant the world could look ahead to an American expansion until early in 1986. Now experts are becoming concerned for 1985. It would be a pity if the recovery came to an end next year. That is why workers and business executives should speak up for a prudent policy of leaning against the overstrong wind.
The whole world has a stake in the US expansion, even though without our locomotive, Europe and Asia can still make some positive headway. But surely it is easier for all when each is strong. Fortunately, the way ahead looks manageable. All we need at this time is to exercise good sense.