Seeking Muscle for a Flabby Recovery

MUSCLE Builder Charles Atlas might describe the present U.S. business recovery as a 97-lb. weakling --too puny to rout the bullyboy of unemployment. Members of TIME'S Board of Economists use more scholarly analogies, but they make the same point. At a recent all-day meeting, they offered this analysis of the nation's economy:

> The recovery from last year's recession is the slowest and lowest of any since World War II.

>Unemployment, which rose last month to 6.2% of the labor force, matching December's nine-year high, will still hover around 6% by year's end if nothing is done to put more muscle into the recovery.

> Inflation is slowly subsiding, at least in terms of consumer prices, and a large growth in worker productivity will help to check it further this year.

> The fast rise in productivity will also hold down new hiring.

> Given these factors, the U.S. sorely needs a combination of tax cuts and accelerated Government spending to speed the recovery. Otherwise, this year's gross national product is likely to be about $1,050 billion, far off the Administration's forecast of $1,065 billion.

This analysis differs sharply from the reading of Administration economists and the monetarist school led by Milton Friedman, who see a vigorous expansion developing. Friedman recently went so far as to say that the problem is "to keep the economy from going too fast" and setting off another inflationary spiral. Yet most economists and businessmen tend to agree with TIME'S board.

Martin Gainsbrugh, chief economist of the Conference Board, a nonprofit business research organization, has compiled figures to prove that so far the current upturn has been notably weak. Gainsbrugh calculates that the 1970 "recession"--which was officially given that name by the National Bureau of Economic Research two weeks ago--hit bottom in November. Thus, by the end of April, the present recovery was five months old. At that stage in the four previous postwar recoveries, industrial production showed increases ranging from 6.4% to 10.2% above recession lows, while real gross national product went up anywhere from 2.1% to 5%, and manufacturing employment rose 1.2% to 3.8%. In the current recovery, by contrast, industrial production has struggled up only 2.8% from its low point, real G.N.P. only 1.7%, and manufacturing employment a mere .6%.

Sleeping Giant. Assuming no change in Washington policy, members of the Board of Economists see small reason to expect a speedup soon. Despite much talk of expansionary federal budget policy, they find that Government tax and spending programs are not very stimulating. Arthur Okun pointed out that the major force in the recovery so far has been a jump in home building from an annual rate of 1.1 million starts in January 1970 to 1.9 million recently.

The housing upturn, however, may be leveling off. Construction is getting close to the annual rate of 2,000,000 starts that some housing experts believe to be the probable average for the 1970s. Besides, mortgage interest rates have begun to rise again, and are likely to go still higher because other interest rates are climbing.

Business spending for new plants and equipment promises little help. A Government survey last week showed that companies are budgeting only a 2.7% increase in capital expenditures this year, the smallest rise in a decade. The consumer, says Walter Heller, is still a "sleeping giant." Consumers increased their liquid assets--mainly currency and bank deposits--by a startling $91 billion from January 1970 through last April, to $812 billion. But they show little inclination to spend this hoard until unemployment starts heading down decisively.

Some bankers make a case for a deliberately slow recovery. Heller summarized their view--with which he disagrees--as a belief that "by prolonging the agony of slack and unemployment, you increase the ecstasy of a lower rate of inflation at full employment." In other words, the longer it takes to get to full employment, the less inflation the U.S. will suffer when that point is reached. Okun also rejected that idea, contending that there is no certainty that a slow recovery will ever achieve full employment. "There may well be a certain orbital speed that you have to get to in order to make a recovery self-sustaining," said Okun, "and if you do not get that momentum, I can see a risk that the recovery could actually peter out."

Joseph Pechman and Otto Eckstein added that the social price of a slow recovery is intolerable. The chief cost: a recent alarming rise in poverty in the U.S. For ten years through 1969, the number of poor people in the country declined, but in 1970 the total rose by 1.2 million, to 25.5 million, or 13% of the U.S. population. (For a nonfarm family of four, the Government now defines "poverty" as an annual income of $3,970 or less.) A major reason for this increase in poverty was rising unemployment. At its present pace, the recovery is putting few people back to work. There are just enough new jobs opening to offset increases in the number of persons looking for employment. Said David Grove: "As long as businessmen are very uncertain about the outlook, there is much more incentive for them to work their existing employees overtime than to hire new employees." Added Heller: "I don't see any chance of arriving at full employment before 1973."

Prospects for Productivity. In the board's view, a swifter recovery is needed not only to produce jobs but also to contain inflation. Though consumer price rises have moderated lately, the more comprehensive G.N.P. index of prices went up at a high annual rate of 5.6% in the first quarter. Wholesale and industrial prices have been jumping, and steel prices are bound to rise. On balance, however, most board members think that inflation has begun to subside slightly.

It is likely to diminish further largely because of rising productivity. Robert Nathan points out that productivity growth almost stopped between mid-1968 and mid-1970, leaving a gap of about 5% between what the present output per man-hour is and what that output would have been if normal growth had continued. He believes that the economy can make up the gap and get a further normal growth of 3% annually over the next three years--which adds up to a potential 14% rise in productivity by 1974.

Productivity usually leaps when the economy climbs out of a recession, since rising demand enables manufacturers to use machines and workers more efficiently. The trouble is that if recovery is creeping, productivity will not rise as much as it could, and wage increases are more likely to force up prices.

Rising Temptations. How can the recovery be pepped up? Heller offers a five-point program: 1) pull forward into this year the $4.5 billion of income tax cuts scheduled to take effect in 1972 and 1973; 2) have Washington pay now all of the costs of extending state unemployment compensation benefits for an additional 13 weeks, up to a maximum of 39 weeks; 3) enact the Family Assistance Program bill, setting national minimum income levels for welfare recipients; 4) give states and cities a temporary 10% federal "bonus," on top of the grants-in-aid that they now receive, for various programs; 5) provide federal funds that state and local governments could use to fill about 150,000 new public service jobs.*

Such moves, board members think, would have to be combined with an incomes policy to fight inflation. David Grove fears that businessmen whose profits have been acutely squeezed by the recession will be tempted to raise prices as soon as they feel that demand is strong enough to support such action --especially if they have to pay large wage increases. The heart of an incomes policy would be Administration guidelines for noninflationary wage and price increases, and presidential "jawboning" to unions and companies that violate those guidelines.

The wage standard might be 3% to cover long-term productivity increases, plus an add-on to compensate partly for rising prices. Members of the Board of Economists concede that President Nixon could hardly put forward a wage guideline now; it would seem to be aimed specifically at the United Steelworkers in their current negotiations (see story, page 80). But the economists think that a guideline promulgated after the steel settlement would have a strong impact on the next round of labor bargaining in 1972.

Activist Alliance? The Nixon Administration plans to wait until mid-July, when second-quarter figures will be in, before deciding whether to pursue a more expansionist program. Right now, Washington's policymakers are stalemated. Federal Reserve Chairman Arthur Burns has been arguing for a year in favor of an incomes policy, and lately he has been saying that he also favors more fiscal stimulus. So far he has been blocked by Budget Boss George Shultz, who, in Robert Nathan's words, is "ideologically, conceptually, religiously" against an incomes policy because it would interfere with natural market forces. Paul McCracken, chairman of the Council of Economic Advisers, is thought to be on the fence, ready to propose an expansionary tax and spending program if asked.

The balance of power within the Administration quite possibly will be held by the newest member of the President's economic team: Treasury Secretary John Connally. If it appears that a sluggish business pace will hurt the Administration at the polls, Connally may well form an alliance with Burns for economic activism--more fiscal stimulus plus an incomes policy. One final and perhaps decisive argument against a slow recovery is that it does not produce votes.

-The House and the Senate have passed public-service jobs bills putting up different amounts of money, but President Nixon is almost certain to veto the final bill on the grounds that it would conflict with his revenue-sharing plans. He vetoed a similar bill last December.

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