International tensions and stepped-up military spending may make the expected 1980 recession "a little shallower and a little shorter," Treasury Secretary G. William Miller believes.
In an interview late this week, Miller also indicated that the new expansionary thrust for the economy caused by the renewal of cold war with the Soviet Union makes a tax cut "in these uncertain times" even less likely.
"We've got to err on the side of making sure we've got austerity established before we start giving out the dividends of a fiscal package which has yet to deliver the surplus," Miller said.
The prospect for a less severe recession, Miller said, reflected his personal opinion that the economy is likely to be spurred by a psychological pickup. He said that next week's budget for fiscal 1981 would have to be based on classic economics: The underlying economic assumption predicts a moderate recession through the first half of 1980, with a second-half recovery.
But he said the outlook had been changed by the "disturbances in the Middle East" which could escalate further. As a result, he said, the Pentagon could be expected to "accelerate their own purchasing to have themselves better prepared," creating an earlier impact on the economy whether or not total defense spending is pushed beyond the 5 percent real growth already planned.
Similarly, he said it was his opinion that both businessmen and consumers would react to the potentially explosive world situation by making investments and purchases that otherwise might be delayed.
"This is the tendency of human nature," Miller said."You see a snowstorm coming, you get an extra bottle of milk.'"
Miller said that increased military preparedness would not add to inflationary pressures, because other programs would be held down. "I think you're going to find that the new budget overall on an inflation-adjusted basis has no increase in spending in fiscal 1981," he predicted.
He strongly defended the use of economic sanctions by the United States, asserting that the freeze of Iranian assets has "worked remarkably well," and warning that "the Russians are going to have to pay a price for going into Afghanistan."
He said that "in 'x' years or 'x' amount of time," the Russians may be able to overcome a U.S. embargo on shipments of grain and modern technology. "But in the meantime, since their people are in many ways long suffering and long hoping for improvement in the standard of their living, I think this brings home some pressure on their leadership."
He acknowledged that there are both short-term and long-term costs for the United States as well, in imposing sanctions, "but I assess the neglect of our national security is more costly to us than anything else. . . . nThose who didn't stand up to Hitler paid a far greater cost than if they had armed and tested (him) much, much earlier."
Miller said that economic sanctions against Iran had paid two dividends. First, the central bank of Iran is now bringing "most loans into good standing" as a result of the freeze of Iranian assets. Second, he said that other kinds of sanctions "have already resulted in some deterioration in their own economic activity."
Miller insisted that the position of the U.S. dollar would be strengthened by the new shift in the overall economic outlook, "because there's no place better to have your dough than in the United States of America. It's furthest away from the firing line, it's the safest place."
Treasury officials are known to be encouraged by recent reports from the Middle East, which indicate that major oil-producing nations have not stepped up their diversification out of dollars. Miller said that although Iran may have bought some gold during the recent price surge, he doubted that the central monetary authorities in Saudia Arabia had done so.
He blamed the recent run-up in gold primarily on a thin market and the effort of wealthy persons who "in times of trouble begin to look at transportable resources and some way to protect their wealth." He noted that when World War II was coming, "everybody (in Europe) was buying gold like crazy, diamonds and gold, and many families survived because they were able to fly out of the invaded countries with it. There are people who think that way, somewhat, in these troubled lands out there.'