Federal Reserve Board Chairman William Miller charged the other day that economists predicting hard times might actually talk the country into a recession. But while that is theoretically possible, present conditions suggest that warnings do more good than harm.
For the country, and particularly the Fed, is now embarked upon uncharted seas. Shipwreck may be avoidable as the administration and Miller - rightly, I think - believe. But only if there is maximum vigilance against the hidden rocks and shoals.
The big new unknown is the impact of high interest rates on housing. The traditional means for slowing inflation has been a raising of interest rates by the Fed. Since thrift institutions were limited in the amount of interest they could pay, higher rates tended to divert funds to other uses. Mortgage money dried up, housing and construction declined, and economic activity slowed.
But last June the thrift institutions were empowered to issue certificates that make the interest they pay competitive. So despite a rapid rise in interest rates, the supply of mortgage money is still plentiful.
Moreover, in the past five years or so, no investment has been nearly as good as an investment in a home. So would-be buyers are prepared to pay very high mortgage rates to get a house.
Interest rates, accordingly, have to go up much higher than in the past before they make a dent in the housing market. In 1973, for example, housing began to tail off when short-term interest rates reached the area of 6.5 to 7 percent. Now the rate is between 9.5 and 10 percent, Housing, while not rising, is holding steady at around 10 million units annually.
The great danger, of course, is that interest rates will have to be raised so high, and for so long, that they will send the whole economy into a tailspin. Historically, indeed, that has not infrequently been the case. Out of the six postwar recessions, five were preceded by high interest rates, and four by a true shortage of mortgage money - a so-called credit crunch.
Expectations that history will repeat itself prompt most of the predictions of a coming recession. For example, in a report on the economy in 1979 made last week to the America Security bank, Arthur Okan of the Brookings institution wrote: "History warns that when the monetary brakes do take hold they typically grab abrupthy rather than working gradually . . . the policy of restraint generally goes too far by the time the policymakers can see adequate results. I suspect that when high interest rates influence real activity the effect will be strong. And I doubt the Federal Reserve will let up promptly."
The view in the administration is far less dark. Lyle Gramley, the former research director at the Fed who is now a member of the President's Council of Economic Advisers, has recently reviewed a series of the leading indicators on which economists in the private sector place most reliance.
Two of those he considers revealing - the average work week in manufacturing, and corporate profits - have been going up since the trough of the recession in 1975 and are still rising.
Another - the number of new claims for unemployment insurance - has been going down since the first quarter of 1975 and is still falling.
All the others - new orders for durable goods, fixed capital investment, housing starts, the ratio of inventory to sales - are holding steady at high levels. So his view, and the consenus in the administration, is that no recession is in sight for at least six months.
The administration further believes that the Fed will be able to apply the monetary brakes in a gradual way and release them as soon as inflation is checked. One reason is that, with the new credit instruments, a slowdown in housing depends not on the drying up of mortgage money, which tends to be abrupt, but on the impact of rising rates, which tends to come in small bites. Most important, however, the administration - and the Fed's Miller - believe that, because they are alert to the dangers of a sudden credit crunch, they can probably avoid it.
That last point seems particularly telling to me. The calamities everybody expects rarely happen because people fearing the worst take countermeasures. But that means that the gloomy prophets - by keeping the Fed on its toes and making a turnaround politically easier when the moment comes - play a useful role.