3rd-quarter GNP: slower not necessarily better
North Egremont, Mass.
''Slower is better'' seems to be the general reaction to the small third-quarter rise reported for the United States real gross national product, the quarterly measuring stick most revered by economists.
Some of those fearful of a runaway economy worry about a resumption of inflation and the need for the Federal Reserve to slow the growth of the money supply. Unfortunately, a slowing real (i.e., inflation-adjusted) GNP in an economic upswing has too often been the prelude to a recession. Moreover, a slowing rise at this time is a cruel blow to long-term growth.
The slow-up in third-quarter GNP came about as demand moderated and producers , having added massively to inventories in the first half of '84, reduced their rate of growth appreciably. It must always be remembered that GNP is a measure of production, not demand.
Why should slower production be desirable? Can a country produce too much when so many are unemployed, so many are retired and on pensions and social security, when so many would like more, not less? If production gives life to demand, what good can come from slowing the increase in production? Why not produce as much as possible, thus engendering the demand that will absorb the production?
Slowing the rise in production is an attempt to bring consumers and businesses closer to consuming all that has been and is being produced. But a minor slowing is often inadequate to correct the situation and may create conditions that exacerbate the situation. Profits decrease, more borrowing is needed, the cost of borrowing rises. With everything geared to a particular rate of improvement, a slowing disrupts the production process.
Thus it is that the economy has not moved smoothly and steadily upward, but every three years or so a correcting recession has taken place.
All of the past six recessions have been preceded by relatively subdued quarterly GNP increases. The idea that recessions follow rapid run-ups in GNP is a myth. It is not a myth that rapid GNP increases follow unusually deep recessions. A rapid GNP rise this time, then, was more ''normal'' than frightening. What is most important about the small third-quarter GNP increase is that the attempt to make up for the loss of economic growth since 1980 is being further delayed.
Unfortunately, the conventional stereotyped methods of measuring the strength of an upswing do not provide an accurate picture of where the economy has come from in the last four years and where it stands today.
Magnitudes of upswings are usually expressed by showing increases from the low levels from which they started. The lower the starting level, the stronger the increase. But a strong increase from a low point may leave GNP at an unsatisfactory level. So another comparison can be made, between the current GNP level and the previous GNP peak level before GNP fell to its recession low.
Ordinarily, this peak-to-peak comparison is significant because the economy from peak to peak in the post-World War II years has always grown substantially higher. In 1981, however, the upswing under way as we changed presidents petered out and ended abruptly only seven months later. Thus, we experienced the shortest, weakest upswing in 40 years. GNP at its '81 peak was only 3 percent above its '80 peak! (The '80 peak was 17 percent above its '73 peak.)
In making a comparison of today's GNP with the previous peak, then, we obtain a fairly good reading of 9 percent. But it looks good only because the comparison is made with the low, totally unsatisfactory 1981 peak level.
To show how economic growth has been stunted in the past four years because of the inadequate upswing in 1981 and the deep and prolonged recession in 1981- 82, compare the current GNP level with its 1980 peak and the 1980 peak with its 1969 peak. Those comparisons show that real GNP increases between quarterly highs were 35 percent between 1969 and '80 and 12 percent between '80 and '84.
What has happened in the two upswings since 1980 is woefully below what happened in the previous two upswings. GNP has ''miles'' to go before it even begins to make up for the tremendous losses of economic activity in the past four years.
At this point, the contention that ''slower is better'' is highly questionable. First, a slower rise does not hold within itself the promise of prolonging the upswing. A slowing in the rate of rise in GNP too often leads to a recession, an ending of the upswing, not its prolongation. Second, even a slower, prolonged rise will delay making up the economic losses during the past four years.
At the end of 1980, real economic growth in the US was still on course. With the unusually short and mild recession in 1980 behind us and an upswing under way, even a mild upswing would have perpetuated the country's long-term growth potential. The subsequent cutting short of that upswing before it could even be labeled mild, and the deep recession that followed, make the gains since the recession totally inadequate thus far to restore previous growth trends.
A slowing economic rise at this time is a warning that we may not restore that growth for years to come.