A substantial increase in interest rates could choke off the economic recovery now under way, economist Lester Thurow said yesterday.
"Higher interest rates are a real disaster if you let any substantial rise stay out there long," Thurow said on "Face the Nation" (CBS, WDVM).
There is little doubt that the recovery, which government indicators show has been gaining strength, will last at least another 12 months, he said. However, "the real question is whether we will have another two years of recovery."
The answer depends largely on where interest rates go in the near future, indicated Thurow, professor of economics at the Massachusetts Institute of Technology and adviser to several Democratic presidential candidates.
Last week, The Washington Post reported that the Federal Reserve will begin tightening credit conditions and will let interest rates rise this week to make sure the recovery does not speed out of control.
The problem with letting interest rates increase is that "you abort the recovery," Thurow said yesterday. He said he believes that the first two stages usually seen in an economic recovery--a rebound in business inventories and an increase in consumer spending--are under way.
Yet, he said, "I think an increase in interest rates will stop the third stage" of recovery: an increase in business investment.
If that happens, he added, it will be a "critical point" because the economy will begin feeling the negative effects of increasing interest rates about the time of the 1984 presidential election.
Nonetheless, Thurow said, "Ronald Reagan will probably make it through November, 1984, with an economy that hasn't yet petered out." But by late 1984 or early 1985, the recovery could slow, he said.
Thurow urged the Fed to stop trying to control the money supply and instead return to its earlier policy of trying to control interest rates.
Any increase, he noted, also would hurt the "Brazils, Venezuelas and Mexicos" of the world whose ailing economies have heavily indebted them to U.S. and foreign banks. Most of these countries' loans have floating interest rates that would rise along with any increase in U.S. rates, Thurow said, adding, "At some point it simply becomes sensible for them to say, 'I just won't repay.' "