A quote by Salomon Brothers Inc. chief economist Henry Kaufman in a story in yesterday's Business & Finance section was inaccurate as printed due to a transmission error. The quote should have read: "We must ragard it as an achievement if our economy continues to sputter and spurt, lurching from recession to recovery, but with no sustained period of economic growth of lower inflation and interest rates."
Henry Kaufman, the highly respected Wall Street economist whose dire predictions have vexed the administration, said today that President Reagan's policies will weaken the nation's credit system further and "in turn, our economy will experience a greater deterioration."
Kaufman, chief economist of Salomon Brothers Inc., said under current conditions, "we must regard it as an achievement if our economy continues to sputter and spurt," lurching from recession to recovery, but with a sustained period of economic growth or lower inflation and interest rates.
"To expect more would be downright unrealistic," Kaufman said in a speech here to the Financial Executives Institute. The Reagan administration has been angry that Wall Street--as evidenced by a declining stock and bond market--has not been more enthusiastic about the Reagan administration's economic policies.
But predictions of continuing inflation and high interest rates by economists like Kaufman have made investors wary about the future. They worry, like Kaufman does, that budget deficits will be higher than the president wants and predicts and that the resulting federal borrowing will crowd out private companies from the debt market.
Meanwhile, the chief economist for the Conference Board, a research group sponsored by business, said the second U.S. recession in as many years appears to be under way.
Albert T. Sommers said the recession was triggered by high interest rates, but that once a progressive weakening in the economy has started, it "runs on its own internal en ergies. Even reversals in the originating causes--in this instance, a reversal into a significant decline of interest rates--are unlikely to have much effect for a considerable period."
Sommers, in a biweekly letter, noted the sharp increase in unemployment in recent months--it increased from 7.2 percent in August to 7 1/2 percent last month--as evidence that a recession is under way. But he said there is no reason to think an economic slowdown need be "severe or prolonged."
The tax cut, which earns Kaufman's criticism, will help moderate a slide. The reduction, Sommers said, "which appeared far too large in the circumstances of just a month ago, will look a lot less undesirable as recession proceeds in the fourth quarter."
Kaufman's scenario, which he calls a Catch-22 situation, is one of conflicting policies that will result in successive recessions and halting recoveries. "Escapes, if any, are very few and hold real problems . . . In today's predicament, as in all Catch-22 traps, the best-intended decisions may produce the wrong results; measures of relief for some may produce unanticipated pain for others."
Kaufman has been a persistent critic of President Reagan's policy of trying to achieve budgetary balance by cutting civilian spending and relying upon a tight monetary policy while at the same time sharply boosting defense spending and lowering tax rates.
The high interest rates that have made it so difficult for the economy to resume a steady growth after last year's brief recession are in large part the result of the stringent policies maintained by the nation's central bank, the Federal Reserve, which has tried to slow the growth of money in the economy by making it both expensive and scarce.
There is a conflict betwen tight money and loose budget policies, Kaufman said, that has resulted in difficult problems for everyone needing credit. Long-term financing is difficult to obtain and is expensive, forcing already strapped companies to borrow their money for months at a time rather than years.
State and local governments are having a hard time selling their bonds, while banks, although seemingly faring well, are not in good shape for the long haul. Housing construction has sputtered to a standstill. Auto sales are sluggish.
"Indeed, a noose is now tightening around the credit markets, painful in some sectors, but not yet too uncomfortable in others."
The widely followed Wall Street economist said the recent slowdown in growth of one of the key monetary targets (called M1-B) that the Federal Reserve tries to influence, may convince the central bank to ease up on its policies and that as a result short-term interest rates might fall for a while.
In recent weeks the Federal Reserve has appeared less hard-nosed about its policies, and a key interest rate, the so-called federal funds rate, has dropped from the 16 percent range to less than 13 percent. As a result, the prime lending rate has dropped from 20 percent to 18 1/2 percent at many major banks.
Kaufman said he anticipates the prime rate, the key banking rate for short-term loans to businesses, will fall to 16 percent or 17 percent soon, but that rates will climb after that when the Federal Reserve finds itself forced to tighten its purse strings again.
Kaufman said that he agreed with Reagan that defense expenditures need to be increased. However, Kaufman said, then "the tax cut should have been viewed as a discretionary decision and would have been prudent only if the resultant budget were in reasonable balance."