Is business better off than it was 4 years ago? An economist's balance sheet has mixed tally
The public has been pestered lately with the question: Are you better off today than you were four years ago? Now it's management's turn to face that question.
One would think that business people would answer it with a nearly unanimous yes. A recovery that leaped ahead like a mighty jackrabbit, record profits, stepped-up deregulation, tax breaks - these are the happenings of the past four years.
Not so fast, warns Lawrence Klein, professor of economics here at the Wharton Business School of the University of Pennsylvania.
According to this purple-bow-tied Nobel laureate, who was an adviser to Jimmy Carter, the answer for managers, and for consumers, ''is a mixed bag.''
Speaking before a group of journalists last week, Dr. Klein said he ''was surprised'' when he examined the statistics and found that real corporate profits - profits adjusted for inflation - will actually be less this year than they were in 1980, the last year of the Carter administration.
Adjusted for inflation, after-tax profits for this year will turn out to be around $69 billion, in 1972 dollars, he says, compared with $83.9 billion in 1980. Even though ''profit growth has come up nicely,'' he says, ''it has come up from low recession points,'' and that made it difficult for earnings to pull ahead of the 1980 level.
Using the rates on Treasury bills as a yardstick, he pointed out that today's interest rates weigh more heavily on business. Unadjusted, the figures show the opposite picture, with the 9.95 percent T-bill rate for 1984 lower than the 11. 43 percent of 1980.
But adjust those rates for inflation - which gives the most accurate appraisal - and today's interest rate turns out to be three times that of four years ago: 6.3 percent vs. 2.2 percent.
On the other hand, inflation ''is a measure of clear improvement,'' Dr. Klein pointed out. The GNP deflator, which measures price increases for all goods and services, not just consumer goods, has tumbled from a 9.2 percent growth rate in 1980 to 3.7 percent this year.
Inflation as measured by the consumer price index is even lower, now down to a quarter of what it was under Carter's last year in office. Also on the positive side, productivity in the nation's factories and offices has improved substantially. Gross national product (again, measured in real terms) is far out in front of 1980 GNP.
The recession, however, dragged down the overall four-year growth rate of GNP during the Reagan administration, giving President Carter's people the advantage there.
Dr. Klein has two worries: the federal deficit, which he calls ''extreme,'' and the trade deficit. He puts the federal deficit for fiscal year 1984 at $171. 8 billion, compared with a $59.9 billion deficit in 1980.
Until now, he quietly explains, business has not been crowded out at the borrowing counter. (The argument goes that there is only so much money to go around without stimulating inflation. If government borrows too much, it puts the squeeze on what's left over for business - and drives up borrowing rates, too.)
''We can see the reasons why no crowding out has occurred,'' he goes on. Business has been able to get cash from a number of sources: the influx of foreign investment, corporate America's own high retained earnings, and tax breaks, Klein says.
''But are we sitting on a time bomb?'' he asks. ''Some of these reasons (that have forestalled tight borrowing) are volatile, waning, or petering out.''
These concerns, however, don't terribly dampen Dr. Klein's economic forecast for the next two years. Interest rates will drop during the next quarter, then begin to rise. They will rise to such a height as to trigger the next recession, which he predicts will be ''relatively mild.''
A recession, he says, will probably start in the first quarter of 1986, last a short two quarters or so, then end up with a recovery beginning again at the end of that year.