VIEWPOINTS : Six Economists Offer Their Views for 1991
E conomists have been predicting a recession since the mid-1980s. Now, most agree, the feared downturn is upon us. But will it last long, and will it be severe?
6 Economists Offer Their Outlooks for ’91
E conomists have been predicting a recession since the mid-1980s. Now, most agree, the feared downturn is upon us. But will it last long, and will it be severe?
For a look at the outlook for 1991, Sharon Bernstein interviewed six members of The Times Board of Economists.
Irwin L. Kellner, chief economist at Manufacturers Hanover in New York. Last year Kellner predicted that “at best, (1990) will be a period of stagnation and at worst it could resemble something akin to the old-fashioned recession.”
We’re starting out not only in a recession but in a rather unusual recession. Most recessions in the post-war era have begun because the economy overheated. Wages went up too rapidly, reflecting a tight labor market; prices went up too rapidly, reflecting a tight product market.
This one was a financially induced recession. It occurred even as inflation was moderate and wages and product prices were not too high. Commodities, precious metals and oil were down, although oil of course shot up with the crisis in the Persian Gulf. The seeds of this recession began to sprout in 1987 with the market crash. They were planted even earlier.
Technically speaking, we’re looking for three quarterly declines in gross national product, starting with the last quarter of 1990 and the first two quarters of 1991. My guess is that the recession will last about 12 months; it began in July or August and will end next July or August.
But the real world will not feel as though it is passed until well into 1992. Economists may stop using the R word by this time next year, but the real world will still feel glum.
George L. Perry, a senior fellow at the Brookings Institution research organization in Washington.
We’ve started a recession, but I expect that it will not be the historically large one that some people expect, for two reasons. First, we don’t have a situation where production has been ahead of sales for a long time, causing a convulsive inventory explosion. The weakness in construction has been coming for a long time and has gradually brought us down in terms of inventory. In business, there has been a lot of concern over the last year, and because of that, manufacturing production has been kept pretty much in line with sales. Retailers had fairly pessimistic views of how their businesses would go and did not overstock. The car makers have been careful not to build inventories and have cut their sales predictions.
Second, everyone thought that bank problems would feed back on to the economy and deepen the recession. It now seems to me that the problem is a major one for banks, but the effect back onto the economy will be modest rather than major.
There’s no question that some small businesses and some start-up businesses are being hurt by the situation, but I think it’s going to be something we can break out of and ride through. I don’t think we’re going to get a war that would drive the price of oil up sharply and hurt the economy from that side.
Paul R. Krugman, professor of economics at the Massachusetts Institute of Technology. Last year, Krugman predicted a growing U.S. trade deficit, more foreign purchases of major U.S. corporations and the possible avoidance of a recession. He now says he was off on all three.
I didn’t catch the financial problems that have come on. I didn’t realize the extent (to which) we were going to have the credit crunch of the banks, the real estate slide, the collapse of the Japanese stock market, all of which have contributed to the slowdown coming on much stronger than we expected.
The biggest single factor in the economy for 1991 is going to be the recession, which is a much steeper downturn than anyone was figuring on. It basically caught the Federal Reserve by surprise, so they did not react enough to stop it from coming. By the end of 1991 there will be the beginning of recovery, but only barely.
The other big piece of news is going to be financial distress, corporations and banks in financial trouble. Surely some major banks will be in trouble, possibly some insurance companies in trouble, and surely some major corporations in trouble. The Milken-Trump hangover, if you like.
Laura D’Andrea Tyson, professor of economics and business administration at UC Berkeley and director of its Institute for International Studies.
The outlook for 1991 seems to be bleak and uncertain. It’s uncertain because there are a number of imponderables that no one can predict, and those all revolve around the Persian Gulf crisis. I say bleak because even in the absence of the events in the Gulf, the United States faced economic slowdown, and the events in the Gulf can only intensify that.
The standard view right now is that the recession will be short-lived. Even if that’s true, my concern is that when we exit from the recession we’re going to be on a long-term down trend. The United States has a number of unresolved big problems that it must confront in the 1990s, and they stem from everything from the savings and loan crisis to profound problems in our educational system to profound problems in our social structure--including drugs--and we are the only advanced industrial society to have this set of problems. We stand out for having a foundation for an economy in this decade that is much weaker than the foundations in Europe and Japan.
For the United States, this is a precarious decade, a decade of diminished prospects. We can get out of it, but to get out of it we face a very difficult task, because having lived off our wealth in the 1980s, we are going to have to confront these tasks from a poorer position.
Murray Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis. Last year, Weidenbaum correctly predicted that the widely publicized cuts in defense would not be a major cause of economic slowdown.
We’re starting off in recession, and a recession that hasn’t bottomed out yet. It looks like it will last at least through the middle of the year. A lot will depend on what happens in the Persian Gulf. A quick and successful resolution would sow the seeds for the beginning of the upturn. The price of oil would come down. And there would be less uncertainty in the economy. Consumers and businesses would start spending some more.
A long, drawn-out war would increase uncertainty. People would start worrying that we might have another Vietnam on our hands. And that would sour the whole outlook.
What worries me is not just the downturn in production of automobiles and housing and defense. Because in the past you could see after a while we’d run out of supplies, and orders would come in, and you’d see an upturn in the economy. What worries me now is our financial institutions are in very fragile condition. And you have to worry that a recession with a lot of defaults, especially in real estate, will really bring down some of the financial institutions in sort of a snowball effect.
Allan H. Meltzer, J. M. Olin Professor of Political Economy and Public Policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute. Last year, Meltzer said that if the Federal Reserve acted quickly enough to loosen the money supply, the nation could avoid a recession. Now, looking back, he points out that the Fed didn’t do that.
The two big questions are what’s going to happen to monetary policy and what’s going to happen in the Persian Gulf. If we assume that there is either no war or a very short war, then you don’t get very much of an after-effect. If it turns out to be a long war with substantial destruction of oil supplies, then it puts a wrench to the world economy for the year.
The other question is what happens to Federal Reserve policy. The classic mistake people make in times like these is to think that because interest rates are coming down, monetary policy is easier. In fact, interest rates are coming down because the Fed is following. The market is very weak, the rates are following and the Fed follows them by lowering interest rates. Money growth remains very slow. Money is not easier, it’s just that the economy is weaker than expected, and the Fed has been following it down.
I assume that that will change, that money growth will begin to pick up during the early part of next year. The Fed will move to an extent that’s sufficient to get money growth up again. They have a history of having only two speeds, too fast and too slow. A concern should be that we don’t shift from too slow to too fast. The reason for that concern is that the next inflation starts often in the present recession, when money growth becomes much too fast and gets the economy stimulated--but then in a couple years leads to higher inflation and another ecession to bring the inflation down.
