After the recession: Cure could be painful, many economists warn

November 11, 1990|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

Washington -- The U.S. economy, apparently already mired in at least a mild recession, will remain in a protracted economic bind that could last deep into the 1990s, well after a recovery from the current downturn begins, according to a growing number of economists.

Voter discontent in last Tuesday's election, in part reflecting the deteriorating economy, could well erupt again in the 1992 presidential campaign.

"The 1990s will be the slowest growth decade since the 1930s," says Donald H. Straszheim, chief economist for Merrill Lynch Capital Markets. "We are not going to get the kind of bounce back we'd like from the recession."

Few economists doubt that a recession is under way, ending the longest peacetime recovery since World War II. The sharp decline in the number of jobs over recent months affects a wide range of industries, removing any lingering uncertainty among most experts.

In fact, the country has been in what Roger E. Brinner, chief economist at DRI/McGraw-Hill, calls an "undeclared recession" for a year and a half.

"Arguing whether or not the nation is in recession is pointless," Mr. Brinner said, pointing to the economy's lackluster performance since early 1989. "There is no qualitative difference between meager positive growth and a 1 to 2 percent decline."

Spiraling oil prices in the wake of the Persian Gulf crisis tipped the already weak economy into a recession, probably in September or October, economists generally agree.

But economists are divided on whether the downturn will be as severe as the deep recessions of the early 1980s and the mid-1970s, or mild, with the economy pulling out of an average slump by next summer.

The outlook hinges in large part on what happens in the Middle East. Hostilities leading to a break in oil supplies could send energy prices up, ensuring a deep recession.

Most economists think that if the crisis ends peacefully, the recession will be of the garden variety, and that deep-seated economic problems, such as the high level of government debt inherited from the 1980s, will still remain when a recovery begins.

In turn, that would mean another recession could follow in a year or two. Or, in the opinion of many economists, a feeble recovery would come, not strong enough to revive the job market or improve living standards appreciably.

"We are now about 18 months into what will turn out to be an extremely long period of very low average growth," said Lawrence Chimerine, president of Radnor Consulting Services in Wayne, Pa. "We are now paying the price, and will continue to pay the price, for some of the past excesses."

This decline is far different from past recessions since World War II, which often were caused by high inflation and other aspects of an overheated economy, including a tight labor market and large inventory buildups that led companies to scale back production.

Once corrective action was taken, often with the Federal Reserve Board's tightening monetary policy, the economy recovered and expanded into the next stage of the business cycle.

But this downturn is coming from a different, more complex direction, and economists think the cure will be more troublesome to effect.

Experts cite these forces as causes of the recession and impediments to prospects for a substantial rebound:

* The heavy debt burden assumed by governments, business and individuals in the 1980s caninhibit economic growth as companies and individuals hunker down. It also can precipitate a rash of bankruptcies, further interrupting economic expansion.

Debt in the economic expansion of the 1980s soared to 2.4 times the gross national product, compared with 1.7 times before the 1981-1982 recession. Henry Kaufman, a prominent Wall Street economist, says the debt buildup poses "extraordinary obstacles business recovery."

* The severe crunch faced by financial institutions is prompting them to toughen their credit standards. Even if businesses and individuals feel unconstrained by debt, they may be unable to obtain credit.

* The huge overbuilding in real estate will continue to cause a sharp decline in new construction.

* The new deficit-reduction package, combining spending cuts and tax increases, will cause the economy to slow. Fiscal policy is likely to continue to be a constraining influence on the economy as Washington adopts further deficit-cutting measures.

* State and local governments, facing huge deficits, are also raising taxes and cutting spending.

* Growth in productivity, the key to improving living standards, remains dismal in the fast-growing service sector. Improvements depend on long-term investments in education and new technology to make the nation more competitive internationally.

* Capital is going to be severely squeezed by international competition, making it much more difficult than in the 1980s to attract foreign funds to finance the budget deficit and investments.

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