A case for optimism on world economy
The consensus view on the world economy gyrates 'twixt optimism and despair. Gloom prevailed all summer long. Now, suddenly, autumn has brought talk of renewed growth here and abroad. As fear of a world recession abates a bit, apprehension returns concerning a reigniting of inflation.
Let me reappraise the evidence, clarifying why it would be rash to bet on really strong American growth in the fifth year of the present recovery -- and why the flap in Wall Street and Zurich concerning dangerous inflation by year's end is not based on solid evidence in the United States or worldwide data bases.
First, let me tick off some of the straws in the wind suggestive of new economic strength.
Both Japan and West Germany have recently reversed the decline in outputs with which 1986 began.
American unemployment dropped a bit in August. Even manufacturing employment was able to attain a small rise.
Purchasing executives, in their most recent report, put out a cheerier survey of events.
The OPEC cartel has stiffened its controls over production quotas. Oil prices firmed.
Instead of there being no discernible bottom for energy prices, the broad interval of $10 to $20 per barrel of oil is beginning to look likely to hold.
Platinum prices soared as blood ran in the streets of South Africa. Gold chimed in. Even silver seems to have found a bottom at long last. Other staples' prices have as yet not confirmed the move.
Draconian reductions in the interest rates charged on car loans may possibly move the swollen inventories of the four domestic auto producers and permit their production to stay relatively strong in the final months of the year.
The story I have been able to spell out for strength in the North American and world economies is not a very impressive one.
Let me qualify it further by reporting some discouraging news on the other side.
The US July trade deficit was not merely bad. It was awful. An $18 billion deficit is a record; and this after the dollar has been depreciating for more than 18 months!
How can the last half of 1985 show vigorous overall growth in gross national product if domestic purchasing power keeps getting siphoned off abroad?
Current indicators -- for example, Business Week's monthly barometer of business -- continue to show languid performance.
Those few of the 50 consensus Blue Chip forecasters who have won the annual medals for persistent accuracy I perceive to be still doubting the rosy White House predictions.
At best it is the yellow light, not the green light that these experts are flashing. The same doubts are largely true of such consulting firms as Data Resources Inc., Chase Econometrics, and Townsend-Greenspan.
The Federal Reserve governors will surely find it difficult to persuade themselves to make further cuts in the discount rate.
New bad reports on the economy will have to come in before Paul Volcker's expansion-minded colleagues will have the power to force through rapid increases in the supply of money.
If Wall Street fears that the Fed is overdoing stimulus, the long-term interest rates may well stiffen relative to the short-term: For home mortgages and investment finance, it is long rates that count most.
Despite all the ballyhoo about tax reform and about coming to grips at last with the basic fiscal deficit, it is unrealistic to expect new macroeconomic stimulus to emerge during President Reagan's second term from either of these sources.
Taxes on people have not been simplified. They have only been lowered. Taxes on corporations will remain both high and complex.
Overall deficit reduction must still depend on cuts in spending programs that will be hard to engineer and whose short-run terminations might be painful rather than stimulating.
Do not infer grave pessimism from my words. You should still give 2-to-1 odds against an American recession by 1987. A worldwide slump is equally unlikely.
Japan ought to shift to a more expansionary macro policy in its own long-run interest.
Prime Minister Yasuhiro Nakasone is wrong to insist on fiscal balance for a nation that is piling up assets at so awesome a clip.
Now is the time for Japan to turn inward for economic stimulus, and to do so before its export-led programs backfire and engender virulent protectionism in America.
Our economy has room to advance faster than it succeeded in doing since mid-1984. Let us hope it will not be panicked by inflation hysteria into losing out on this opportunity.
With the International Monetary Fund and World Bank in Washington for their annual meetings with government officials from all over the world, I hope they will not waste time on impractical ventures for pegging exchange rates. Rather, let them face up to the prosaic task of keeping the world recovery strong.
Paul Samuelson, institute professor emeritus of economics at the Massachusetts Institute of Technology, won the Alfred Nobel Memorial Prize in Economics in 1970.