Democratic economist Arthur M. Okun yesterday flatly predicted that the United States "is running a very severe risk of recession" later this year or early in 1979 because of the tight monetary policy being followed by the Federal Reserve Board.
Okun, chairman of the Council of Economic Advisers under President Lyndon Johnson, is now a senior fellow at the Brookings Institution. His informal advice is widely sought on Capitol Hill, and by the Federal Reserve System and the Carter Administration.
His admittedly gloomy scenario implies the prospect of rising unemployment rates and a weak economy after the Congressional elections this fall, and prior to the Presidential campaign in 1980.
Privately, officials in high Carter administration circles share some of the same worries articulated by Okun, although perhaps not to the same degree. But they too are known to be concerned about the steady increase in interest rates fostered in recent months by the Fed.
The President's economic advisers would have preferred it if the Federal Reserve Board had not notched interest rates one degree higher last week. In the belief that little progress is being made in the fight against inflation the Fed boosted the Federal funds rate to 7 3/4 percent, the fourth successive upward boost in the past three months.
The Federal funds rate is the one at which member banks lend money to each other, it sets the basis for other short-term interest rates, including the banks' prime lending rate.
There has been increasing concern in business and academic circles lately that economic growth would wane toward the end of this year and might turn into a recession. A survey released by the American Statistical Survey this week showed that economists are predicting a real growth rate of only 3.6 per cent this year. Three months ago, they forecast 4.3 per cent for 1978.
But Okun's forecast yesterday was the most specific and the most bearish of any economist of national reputation. He cited the Fed's insistence on keeping to a money growth target of 6.5 per cent, while inflation rates have moved somewhat over 6 per cent.
"That can be interpreted as nothing but a collision course," he told reporters at a press conference called to explain a new set of Brookings papers on innovative ways to fight inflation. He repeated the warning later in a speech here to the National Economists' Club.
Okun said that he sympathized with the Fed's concern over rising inflation, and the absence of a strong Administration program to battle rising prices. But he predicted that the eventual result of rising interest rates would be to produce a "crunch" in the availability of credit.
"That could lead to a 'soft' landing, with a very soggy economy," he said. "But it is more likely that we will have a recession that would go into the history books, according to National Bureau (of Economic Research) standards."
The NBER is a New York research organization, the semi-official arbiter of economic cycles. The NBER defintion of a recession is two successive quarters of negative economic growth. Okun said that the "soggy" economy he mentioned is what has sometimes been called a "growth recession," in which the real GNP continues to advance, but not enough to reduce the unemployment level. Generally, economists believe that the economy has to grow by at least 3.5 percent to prevent a rise in unemployment.
The Brookings economist said that chances favored a real recession, with negative growth rates, by odds of about 55 to 45.
According to White House officials, real growth in the second quarter will turn out to be at a high level, representing a recovery from a depressed first quarter. The rate might be in the neighborhood of 9 per cent.
After that - provided interest rates don't advance any higher - they anticipate a continuation of a return to a more normal pace (around 4 per cent growth) for at least the next year. That is the forecast President Carter plans to take with him to the Economic summit at Bonn next month. But White House economists concede that recession worries would loom large if the Fed turns money screws any tighter.
Okun and his colleague George Perry yesterday released a special rookings volume on tax-based income policies (known as TIP) by which the tax system would be used as carrot or stick, to induce unions and companies to moderate wage and price increases. Brookings volume on tax-based income.
Although they warned the unilateral policies like tight money might abort economic expansion instead of inflation, they admitted "one shouldn't hold his breath" waiting for Congress or the President to take their advice.