February 12, 1975
The outlook is unsettled. Previously, our directors felt comfortable in attempting to fix the timing of the 1975 economic rebound; now they are more insecure and uncertainties cause them to dwell on short-term developments. In December, the New England unemployment rate moved up by .7 percent from the previous month to 9 percent; a year earlier, 6.5 percent of the labor force was unemployed. The Massachusetts unemployment rate was 9.9 percent in December.
Retail sales in the region are not reassuring the directors. In some
markets, inventories are very heavy, according to
year-end
statements. Those firms which were able to report higher revenues
note that they were reasonably successful in selling their way out
of stock. However, their fortunes are attributed to capturing a
larger share of their specific markets, declining auto sales, their
offering good values (very aggressive promotions and liquidations by
manufacturers are critical here), and, possibly, trading against
spring sales. These factors do not contribute to sanguine forecasts.
As the unemployment figures are released and as major local
manufacturers continue to announce extensions of furloughs,
cutbacks, and layoffs, the retailers are growing even more cautious
in ordering and planning.
The directors report that most investment in the region is tied to things one "must" do: cost reduction, replacement, compliance. Expansion is nil, and there is worry that today's musts could be tomorrow's luxuries.
A major national firm was recently required to face red tape to get a $1 million loan at an aggressive regional bank. Previously, the red carpet would have been shown. Now, the bank is not sure it wants the business.
There is a growing fear of realizing a "second tier" in the recession. The directors are attempting to determine whether this recent experience is a "flushing of the pipelines or a snowball." Continuation of dreary prospects may lead to further substantial reductions in growth targets for firms and banks introducing another drop in economic activity. Desirable or not, much business is looking to Washington to lead the economy from the slump: a helpless passive attitude is gaining ground.
Our academic correspondents, Professors Samuelson, Solow, Eckstein, Tobin, and Duesenberry, all agreed on three points: 1. The economy is in a serious downward spiral, 2. The proposed tax cuts are insufficient to ensure a recovery, and 3. The Federal Reserve must pursue a more aggressive expansionary policy. Several economists also predicted restrictive monetary policies would unleash a strong political backlash against the System.
All the economists emphasized the severity of the current recession. Eckstein said that for the first time since the 1930's, we are in a pure Keynsian spiral of falling incomes and employment. There is no certainty, he concluded, that the economy will generate an upturn. Tobin characterized the economy as in an emergency situation". Solow believes that all the current forecasts are too optimistic. Samuelson said that the economy is giving only one signal: it needs strong fiscal and monetary stimulus.
The proposed tax cuts were viewed as inadequate. Tobin pointed out that fiscal policy will be snarled up in Congress for some time, while the need for stimulus is immediate. Like Duesenberry, who argued for $30 billion in tax cuts, Tobin felt that a $16 billion cut was not enough. Samuelson felt that Ford had a minimal program and that the $7 billion tariff would do more for depression than the tax cuts would do for recovery. Solow felt that the budget was inadequately expansionary and that expenditures should be increased. The long lead time on expenditures would be no problem, he noted, since we are at least 3 years away from full employment.
On monetary policy, the call was for expansion. None of the economists were impressed with the fourth quarter reserve growth as a reason for not pushing harder to get interest rates down and money supply growth up. Tobin argued that if it is true that demand is not out there, then it cannot do any harm to push reserves out. There is plenty of time to sop up any reserves during a recovery. While he would not be upset by 12 percent growth in M1 if that is what is required to keep interest rates from creeping up, he is personally skeptical that the federal deficit will require it. He thinks the problem has been blown out of all proportion. He sees corporate borrowing as refinancing, not as an additional drain on savings.
Samuelson echoed the same theme. He argued that getting reserves out isn't the job. One cannot take the multiplier as given. If the multiplier is low because demand is weak, the Fed has to push out even more reserves. He noted that Friedman's criticism about Fed actions during the depression was not that we did not get the reserve out. The Fed did, but it did not push out enough, given a falling multiplier. The real question is whether we forsee too much demand in 8 months. If not, he argued, we cannot effectively say that by doing too much now, then the money will be out there to haunt us. When velocity picks up, we should take the money out. The worst of all possible worlds is for the Fed to stick to one policy too long.
Duesenberry thought that financing the deficit might cause a temporary spurt in money supply growth, but that we should not let this be an excuse for letting rates creep up. He believes open market rates should be down a bit more and kept there.
Eckstein argued that it was foolish for the Fed to delay in getting
rates down. Eckstein agreed with Tobin that the Fed needed to do
something dramatic and immediate. Eckstein said the Fed should stop
decrying the deficit and should say straight out that the economy is
in danger of a depression and that the Fed will do whatever it can
to prevent it. He felt that at this time, it was not constructive
for the Fed to be concerned about banks' capital adequacy. Our
concern should be to help businesses re-establish their liquidity.
Both he and Solow thought it was time for the Fed to begin buying
long-term securities—either agency issues or corporate bonds—as
a means of helping business liquidity and reviving investment.