The federal government (and that includes the Federal Reserve System) is more concerned about the fragile state of domestic and international economic conditions than it dares to affirm publicly. The hard reality is that the global economy could be teetering on the brink of a major disaster that can be averted, most experts agree, only by signs of courageous leadership by the United States.
Lately, there has been a series of steps taken here that symbolizes the degree of the crisis and an effort to turn the tide. President Reagan, belatedly, has agreed to a significant boost in the bail-out resources of the International Monetary Fund. Emergency funds have been dispatched by the United States to Brazil, and the IMF is completing a bail-out package to avoid the prospect of a default by Brazil on its $85 billion international debt.
And now, the Fed--also belatedly--has acted to lower interest rates by again cutting the discount rate. The Fed is privately concerned about the international crisis. Moreover, its economists see no certain end to the U.S. recession and, at best, an anemic recovery in 1983; and while the U.S. economy is flat on its back, recovery chances in the world are limited.
Thus, realism is taking over in Washington, and that's a far cry from the blinders-on, ideological propaganda of the past couple of years. Back in February, Treasury Secretary Donald T. Regan was telling the National Press Club that the U.S. economy "is going to come roaring back in the late spring" of 1982.
Many of the keenest analysts think that American economic activity in 1983 won't increase by more than about 2 percent, not the 3 to 4 percent Regan has been advertising. That would mean that unemployment, almost sure to pass the 11 percent mark, will come down only very little and very slowly. It is easy to visualize unemployment dropping no lower than 9 percent in 1983, and then starting up again.
"With 2 percent real growth you don't get relief for those businesses and sectors of the economy that were sharply hurt the last couple of years," says Salomon Brothers economist Henry Kaufman. "They may not recover significantly, and then you have the risk of going at that low speed (which can cause) stalling any time."
A Salomon Brothers report expands on this theme: "No business cycle recovery in decades has been so constrained by illiquidity and credit uncertainties. Among these constraints are unemployment and job insecurity, the fall in the value of real estate and other tangible household assets, as well as the costly debt burden under which business firms still struggle."
In the latest advisory sent to his business clients, economist Alan Greenspan observes that at this time last year, there were reports that companies intended to shut down their factories for Christmas, and keep them closed through January. As a result, industrial production fell 3.8 percent from November 1981 through January 1982. Now, Greenspan hears similar reports: in some cases, entire operations are to be shut down, not just production facilities.
A critical factor is the failure of the president's highly touted tax program to stimulate business expansion. Instead of picking up in response to tax incentives, business spending for plant and equipment, as reported by the Department of Commerce, will actually fall next year. The welcome reduction in inflation -- at the price of high unemployment -- hasn't caused consumers to spend money recklessly.
What incentive is there for business to build new factories when the utilization of existing plant capacity is now less than 69 percent, a postwar low? In fact, Greenspan suggests that the Commerce data are too optimistic, citing a McGraw-Hill survey and a Conference Board summary that suggest an even more pessimistic outlook for expansion.
The recession here is only one part--an important part, to be sure--of a prolonged international slide that lies behind the debt problem of the Mexicos, Brazils and other developing countries. As a recent Wharton study points out, not only is there worry that the IMF's resources might not be adequate to "plug all the leaks at once," but whispers are heard that some major country might decide to "turn its back on the established world banking system and repudiate large amounts of foreign debt."
Lower interest rates should alleviate such fears, and the Fed's latest moves may provide a necessary tonic. But increasingly, economists all over the world are calling on governments to recognize that a concentrated effort must be made to switch to expansionary policies that will create jobs. Recession is the No. 1 global problem today, not inflation.