An Economist Looks At the 80’s

At the start of a new decade it has become traditional for assorted “prophets” to emerge from the woodwork with Delphic visions of things to come. These exercises in futurology are not totally worthless. At the very least they may have entertainment value, especially when read retrospectively. Beyond that, they provide an occasion for examining the past since, in the final analysis, forecasts consist largely of extrapolations of recent trends. A postmortem on the period just completed may, in fact, be more interesting than speculations about the period ahead. On the assumption that we are clever enough to identify past policy errors, we should be able to avoid similar mistakes in the future.

This essay begins with a brief description of the state of the U.S. economy ten years ago. It then reviews some representative forecasts for the 1970’s and compares them with actual events. I exhume these long-forgotten relics not to ridicule their authors, all of whom are respected economists, but rather to evoke the prevailing mood as the seventies began. Equally important, one should stress the substantial fallibility of economists as long-range forecasters. I perform this review despite uneasiness that some future critic may do a similar job on the present piece a decade hence!

The 70’s began as they ended, in recession. The mild downturn that began late in 1969 was the first American recession since 1961, a remarkable achievement in cyclical stability. Still more remarkable was the nearly 50 percent rise in total output (hereafter, “real GNP”) from 1959 to 1969. This translated to a compounded annual growth rate of 4.1 percent, well above both the 2.9 percent rate that was recorded during the preceding half century and the 2.6 percent rate of the Eisenhower years. Thus John Kennedy’s 1960 campaign pledge to “get the country moving again” was abundantly fulfilled, although little progress was made toward this goal during his own brief presidency. We need not explore here the reasons for the spurt in economic growth in the 60’s, other than to mention the favorable impact of the sizable tax cuts that were enacted in 1964.

Unfortunately, the urge to drive the economy ahead through stimulative policies soon got out of hand. By fiscal 1968 the federal budget deficit had climbed above $25 billion to its highest level since World War II, even though the economy was running full blast and obviously had no need of stimulation. Meanwhile, the Federal Reserve was adding to the money supply at grossly excessive rates. The result, as always, was inflation, which reappeared in 1965 after a lapse of seven years. When Richard Nixon began his first term in January 1969, the consumer price index stood 4.6 percent above its year-earlier level. In contrast, at the beginning of Lyndon Johnson’s full term four years earlier the one-year inflation rate in consumer prices was a paltry 1.4 percent. But despite the unveiling of Nixon’s “game plan,” which was supposed to restore stable prices gradually by patient application of responsible monetary-fiscal policies, the inflation news got worse. By the final month of the 1960’s, consumer prices were advancing at a rate of 7.4 percent per year.

As one might expect, the economic forecasts for the 70’s published ten years ago encompass a broad range of views. It is nevertheless fair to say that few, if any, of the more widely publicized forecasts gave an inkling of the extent to which the U.S. economy’s performance would fall short of the achievements in the 60’s. Almost without exception, the future was viewed in highly optimistic terms.

Consider, for example, the outlook presented in the November 1969 issue of The Morgan Guaranty Survey. According to Morgan economists, it would be “reasonable to look forward to a decade of quite impressive economic performance.” A rapidly growing work force would combine with continued strong productivity gains to produce a 4.2 percent annual growth rate in real GNP for the decade, a notch above the unusually high rate of the 60’s. True, a few words of caution were offered: “Unwillingness to come to grips with excessive inflation . . . almost certainly would produce distortions that would threaten to interrupt growth later in the 1970s.” But there was no mention of the possibility of approaching energy problems, productivity slowdowns, double-digit inflation and interest rates, and persistently higher unemployment than had been known in the 60’s.

One of the most elaborate previews of the decade is contained in Economic Growth in the Seventies, published in 1970 by the Conference Board, a nonprofit business research organization. The Conference Board foresaw real GNP growth continuing at about the same rate as in the 60’s. It anticipated especially strong showings for investment in plant and equipment and in housing, with housing starts reaching 2.4 million by 1980. Inflation, as measured by the broad GNP price index, was expected to average 2.7 percent for 1968—75 and 3.2 percent for 1975—80. Again, there is no hint of energy problems, productivity shortfalls, or radically higher rates of inflation and interest.

Still another optimistic assessment was offered by Beryl W. Sprinkel of the Harris Trust and Savings Bank. In a March 1970 speech, Sprinkel—a prominent “monetarist”—maintained that “the capacity of the economy for significant future growth in the decade ahead remains largely intact.” He saw no reason to quarrel with the estimate of the Council of Economic Advisers that potential real output would rise by about 4.3 percent per year. With regard to inflation, Sprinkel stated: “The present serious inflation is an exception in our long history and the decade of the 1970s is more likely to return to the long term pattern of 1% to 3% per year rather than the current 6%.” This rosy view apparently was based largely on Nixon’s appointment a few weeks earlier of Arthur F. Burns as Federal Reserve Chairman. Sprinkel was convinced that inflationary monetary policies would never be tolerated by Dr. Burns. Declining rates of inflation, of course, implied much lower interest rates.

Finally, consider the opinions of Henry Kaufman, partner and economist at Salomon Brothers, a leading Wall Street investment banking firm. Kaufman, who is one of the most widely respected forecasters in this country, wrote on “The Challenging Seventies” in the January-February 1970 issue of Financial Analysts Journal. While he did not pin himself down to specific numerical estimates, Kaufman left little doubt that he expected good economic growth in the 70’s. While noting that the decade “will have its share of surprises,” Kaufman did not foresee the coming energy problems nor did he dwell on the seriousness of inflation as a possible disruptive factor. To his credit, Kaufman did mention briefly the improvement of productivity as a major challenge for the 70’s. He concluded by saying that “we should look forward to this new decade with neither euphoria nor despair. Barring another war, it will probably be a more orderly decade than the 1960s.”

II

As we now know to our sorrow, the 70’s proved to be anything but orderly. According to preliminary estimates for 1979, actual growth in real GNP from 1969 to 1979 was about 2.85 percent a year, far below both the 4.1 percent of 1960’s and the optimistic forecasts of economists. Inflation in consumer prices proceeded at an amazing 7 percent rate over the same time span, nowhere near the modest rates that most economists had expected. Moreover, the inflation problem grew worse as the decade wore on, with steady double-digit rates in 1979. The unemployment picture was equally bad. Except for a few months at the start of the decade, it never approached the assumed full employment rate of 4 percent, its best reading being a lofty 4.6 percent in October 1973.

Indeed, it would be hard to imagine a more turbulent period, economically speaking. The list of economic shocks during the disorderly 70’s is long but would surely include abandonment of the Bretton Woods system of pegged exchange rates, the Arab oil embargo of 1973—74, a tenfold rise in crude oil prices and a fifteenfold rise in the price of gold, bankruptcies of the nation’s largest city, a $4 billion bank, and Penn-Central, near-bankruptcy of Chrysler, the Three Mile Island accident and its aftermath, and dramatic penetrations of American markets by foreign producers of autos, steel, and many other products.

What went wrong? Why were economists so far from the mark in their expectations for the 1970’s? One can think of three possible sources of error: bad luck, bad management, and bad analysis. Bad luck refers to wholly unforeseen adverse developments such as natural disasters. Bad management, on the other hand, involves policy errors. Bad analysis reflects intellectual errors, in the sense that the experts derive their forecasts from faulty economic models. Obviously, the distinction between these latter two is often fuzzy; they will be combined in this discussion.

Probably the clearest cases of bad luck were the poor grain harvests of 1972—73 and the simultaneous disappearance of anchovies from the coastal waters of Peru, which reduced fertilizer supplies. These misfortunes held down incomes and raised prices around the world as well as in the U.S., but they had only a negligible impact on the accuracy of decade forecasts. Far greater in importance were the formation of an international oil cartel by OPEC and the Arab oil embargo, although the harm to the U.S. economy from these shocks was immensely magnified by an incredible series of policy blunders.

Since the errors in long-range forecasts for the 70’s cannot be blamed mainly on bad luck, they must be attributed either to misguided public policies or to intellectual errors committed by the forecasters. In my judgment, there were miscalculations in three major areas: inflation, productivity, and energy. While these problems are intertwined in many ways, they deserve individual attention, especially since I believe they will be the critical issues of the 80’s as well.

As noted earlier, the Nixon administration set out in 1969 to attack inflation through the orthodox method of cutting aggregate demand by means of tight fiscal and monetary policies, applied moderately in the hope of producing gradual progress while avoiding a sharp rise in unemployment. Firm attachment to this “game plan” was emphasized again and again by Administration spokesmen, and the alternative expedient of adopting price-wage controls was vehemently rejected on countless occasions. Arthur Burns’s appointment as chairman of the Federal Reserve Board at the beginning of 1970, and the early actions of the Board under his leadership, provided every reason to think that inflation would be relentlessly pursued and eventually whipped by this approach. By the summer of 1970, this policy had in fact begun to show good results: inflation as measured by the consumer price index (hereafter “CPI”) crested at a 6.3 percent rate in the spring of that year and had backed off to 4.4 percent a year later.

Unfortunately, there was not at that time (or even now) sufficient appreciation of the long delays that typically occur between policy actions and desired results. Judged by today’s standards, a one-third drop in inflation over a span of one year would seem to be quite an achievement, but it was not so perceived in 1971. Moreover, the Fed’s policies in 1969, prior to Burns’s arrival, were anything but moderate. Monetary growth, which the Fed controls, plunged from about 8.5 percent a year at the end of 1968 to essentially zero in the fall of 1969. The usual recession soon appeared, and unemployment shot steadily upward throughout 1970. The Burns-led Fed then proceeded to do what central banks always have done: it promoted a resurgence of monetary growth to counter rising unemployment. By mid-1971 we once again had excessive monetary growth of more than 8 percent a year. No doubt this wild swing toward easy money had beneficial effects on employment, though not at once, but it probably also impeded progress in the fight against inflation. It had further adverse effects on foreign exchange markets, where many holders of dollars decided it was time to move into marks or other sound currencies. This development early in 1971 served as a clear warning to the Fed that it could not continue for long on such an expansive tack without weakening the dollar. On the other hand, a return to the kind of monetary policy implied by the “game plan” would have involved an even worse risk for the Nixon administration, loss of the 1972 election.

In mid-August 1971, Nixon decided to scrap the “game plan” in favor of an entirely different approach to economic stabilization, the key elements being comprehensive price and wage controls, devaluation of the dollar (and ultimately, destruction of the Bretton Woods system), and the adoption of a more stimulative fiscal policy. The package also included, one surmises, an intention to resume stimulative monetary policies.

It can plausibly be argued that this abrupt policy turn was the single worst policy mistake of the 70’s. This is a large claim since there were dozens of serious mistakes during the decade. One of the great drawbacks to reliance on “incomes policies,” as price-wage controls are euphemistically known, is that they divert attention from the fundamental cause of inflation—excessive demand for goods and services, fueled by rapid monetary growth. Nixon’s experiment with an incomes policy was a perfect example. By the first quarter of 1972, the Fed was again shoving money into the economy at obviously inflationary rates, confident that controls would hold back the impending price rises. Unduly rapid monetary growth continued through 1972 and 1973. By the beginning of 1973, however, pressures were mounting on prices and wages. The election now won, the administration in January 1973 faced up to the futility of maintaining weakly-administered controls in the face of such pressures. CPI inflation, which had been brought down to a mere 3.2 percent in the spring of 1972, snapped back to 5.7 percent in the winter of 1973 and to 8.7 percent by spring. But the economy still had not worked off all of its excess cash, so inflation continued to climb, reaching double digits for the first time early in 1974 and finally peaking in the fall of 1974 at 12.4 percent.

There are, of course, other views of this episode. Conventional wisdom treats the 1973—74 price explosion primarily as a result of supply disruptions, notably in oil and grain. This view is superficially appealing and quite naturally is much in favor with U.S. policymakers, who prefer to direct attention away from their own lapses. But it ignores the magnitude of repressed inflation during the Nixon controls, when the normal relation between monetary growth and inflation was temporarily suspended. Once controls were lifted, the ultimate amount of inflation corresponded quite closely with what one would have expected on the basis of prior monetary growth.

We are still struggling with the legacy of policy errors committed in the early 70’s (and more fundamentally, with those of the 60’s). The 1973—74 explosion triggered a change of heart by the Fed, but the abrupt switch to tight money ushered in the sharp recession of 1973—75, which caused still another shift by the Fed toward ease, thus laying the basis for the current inflation. And so it goes.

Three major fallacies are responsible for the Fed’s destabilizing behavior. First, many policymakers still do not understand that today’s inflation is a result of monetary growth that took place two or three years ago. A substantial amount of empirical work suggests that it is highly unrealistic to expect quick responses to policy changes. Second, the Fed often has ignored monetary growth because of its preoccupation with interest rates and credit market conditions, which obviously are matters of high political sensitivity. The misguided attempt to stabilize interest rates has led to excessive monetary expansion again and again. Third, most policy-makers as well as many prominent economists have become snared in the “Phillips Curve” trap, which assumes that low inflation can be achieved only with high unemployment, low unemployment only with high inflation. According to this view of the world, the main policy issue is choosing the best point on this trade-off curve. Understandably, policymakers have hesitated to purchase lower inflation at a price of more unemployment. However, recent research suggests that there is no dependable Phillips Curve trade-off. Indeed, rapid inflation may lead to more rather than less unemployment.

III

Preventing inflation is still regarded as a minor policy goal by some economists. Achieving rapid output growth and moderating business cycles should be the main policy concerns in their view. Unfortunately, this overlooks the influence of inflation on growth. If we cannot return to a regime of low inflation, slow growth is likely to continue throughout the 80’s.

The growth rate of real GNP can be studied in terms of two broad components: employment growth and the rate of improvement in labor productivity. Standard forecasts for the 70’s assumed that the work force would expand by 1.7 percent a year, productivity by about 2.5 percent. This would produce a real GNP growth rate of about 4.2 percent. Actually, labor force growth in the 70’s was much higher than expected, 2.3 percent a year, reflecting mainly a greater propensity of women to seek jobs than previously. Hence the slowdown in real GNP resulted entirely from a drastic lag in labor productivity.

Productivity depends on many factors, including:

1. the state of technology.
2. quality of the labor force (reflecting levels of education and health, the age-sex composition of workers, job experience, and the like).
3. the volume of capital (and other nonhuman resources) per worker.
4. the mix of industries in the economy.
5. the overall size of the economy, reflecting the possibility of achieving economies of large scale production.
6. the regulatory framework.
7. the stage of the business cycle.

In principle, it should be possible to identify the reasons for the productivity shortfall of the 70’s in terms of some combination of these factors. In fact, however, it appears that all of them have played a role, and available data do not permit even a precise ranking. We know, for example, that real R & D expenditures, the major determinant of technological advance, were no larger in 1976 than a decade earlier, after having doubled in the preceding decade. Also the rapid laborforce growth of recent years surely has placed large numbers of inexperienced workers in jobs. Changes in industry mix have been a drag on productivity growth as well: the easy gains from shifting farm labor to higher productivity nonfarm jobs have largely been used up, while the rising importance of the service sector (standard example: hair cutting) seems to imply productivity bottlenecks in the future. Most opportunities for scale economies may already have been exploited, so that is no longer the strong positive factor it once was. But even productivity specialists cannot agree on the relative importance of these factors.

There is little doubt, on the other hand, about the importance of items three and six on the list. Slow growth in the volume of capital per worker is probably the main reason for the productivity lag of the 1970’s. During 1960—69, when labor productivity rose by 3.1 percent a year, the capital/labor ratio rose by 3.3 percent; during the slow growth period of 1973—78, in contrast, these rates fell to 1.1 percent and 1.3 percent respectively. Moreover, a close correlation exists among countries between productivity gains in manufacturing and the proportion of GNP devoted to non-housing investment projects. The U.S., by the way, ranks near the bottom of the list in both respects.

Why do we add to our stock of capital goods at such a sluggish pace? One reason is that we tax investment income heavily, thus depressing after-tax returns. Our tax system is especially punitive during times of rapid inflation. Inflation pushes taxpayers into higher rate brackets without adding to their pre-tax real incomes, it results in the taxation of fictitious capital gains, and it prevents owners of capital goods from allowing adequately for depreciation. Inflationary periods dull incentives to save as well as to invest, and there can be no investment (i.e., additions to capital) without saving.

It must be noted that large fractions of the investment that does take place these days do not add to the real GNP since they are devoted to government-mandated expenditures for pollution-abatement equipment or plant modifications to enhance worker safety. Edward Denison, a leading scholar in this branch of economics, believes that productivity has been held back by as much as one-fourth of its expected gains in recent years because of these two factors plus similar expenditures to cope with rising dishonesty and crime.

But we still have not mentioned what may be the major reason for the failure of capital per worker to increase much since 1973. This is the transition to high-cost energy. A significant fraction of our industrial plant and equipment was built before 1973 and thus embodies energy-intensive technologies. Given the high relative prices of energy today, it is no longer efficient to use these facilities as originally intended. Instead, business managers have tried to adapt them to labor-intensive energy-saving technologies, labor suddenly becoming the relatively abundant factor of production in the U.S. In effect, a substantial share of our capital equipment instantly became obsolete, leaving us with a lower real capital stock than before.

If this argument is valid, it should apply to other countries as well, although many of them had faced higher energy costs than the U.S. before 1973 and therefore have found it easier to adjust to OPEC’s new prices than we have. Accordingly, one would expect to find lagging productivity since 1973 in most countries, not just the U.S. And that is precisely what one finds.

It is clear, then, that the productivity lag has been intimately connected with both the inflation disasters and the energy disasters of the 70’s, but it also has reflected a wide variety of anti-productivity public policies. Since bad management is deeply implicated in the inflation and energy debacles as well, it is fair to say that our economic policymakers did not serve us well in the 70’s.

IV

We should not be too hard on forecasters of a decade ago who failed to predict the energy crisis. At the start of the decade, the oil problem was perceived to be one of protecting high-cost domestic producers from low-cost imported oil. Policy was aimed at raising, not lowering, oil prices. The weighted price of energy in the U.S. in 1970 was about 15 percent under its 1960 level, despite the inflation of the late 60’s, and even further below its 1950 level. The outlook for nuclear energy was bullish, and environmental standards were just beginning to cut automobile fuel efficiency and limit coal’s use as a fuel source. All signs pointed toward continued energy abundance.

Today, oddly enough, there is greater worldwide energy abundance than in 1970, even in relation to a much larger world GNP. Yet energy prices have not fallen; they have jumped about fourfold relative to other prices. How did this happen? The fact that an effective oil cartel, OPEC, was established early in the decade is obviously part of the answer. A second ingredient is the growing U.S. reliance on imported oil as an energy source. Yet the main reason for our energy difficulties has been a long series of policy actions that have made us easy game for the OPEC monopolists. Especially damaging has been our steadfast refusal to allow free market pricing of oil. Oil came under the Nixon price ceilings in August 1971 like most other products. But when other products were decontrolled in 1973, ceiling prices for oil remained in effect. And they are still in effect early in 1980. As a result, Americans have made comparatively little headway in conserving energy, and domestic energy production has limped along at a leisurely pace.

Preoccupation with the state of oil company profits—the gut issue that lies beneath this sorry mess—has already cost Americans dearly, and it has brought the country to an extremely dangerous situation internationally. It is hard to think of any aspect of economic policy more important to our future as a great and prosperous country than energy policy. In the minds of most economists, the basic answer is clear: decontrol U.S. oil prices immediately and stop moralizing over the “windfall” gains that may accrue to producers.

V

Now let us turn to the 1980’s. Understandably, the mood of economists has turned somber since a decade ago. Virtually all forecasters look for “more of the same”: rapid inflation, slow growth, and a continuing squeeze on energy as well as possibly some new commodity problems. It is worth noting, however, that once again we find a long-range outlook that essentially extrapolates present conditions and those of the recent past. We should consider carefully whether there is a significant chance that predictions for the 80’s will turn out to be as inaccurate as those for the 70’s.

At the end of 1979, a consulting economist, Robert J. Eggert, reported the conclusions of 41 economists on the 80’s. Their average estimate of real growth through 1990 was 2.8 percent a year, which matches the 1969—79 growth rate. They projected an 8 percent average inflation rate—a bit worse than the average for the 70’s but better than the 1978—79 results. Sam Nakagama of Kidder, Peabody & Company believes that inflation will be somewhat higher, about 8.4 percent, and real growth somewhat lower, 2.3 percent.

In a rather detailed study (“Building a Better Future: Economic Choices for the 1980s”), the New York Stock Exchange has explored three possibilities it regards as attainable for the 80’s: a low-growth case, a high-growth case, and a base case which stands about midway between the other two. Real GNP growth will be 2.4 percent a year according to their base case, 2 percent in the low-growth model, and 3.4 percent in the high-growth model. All three assume that productivity improvements will exceed those of the last several years but will not return to the levels of the 60’s. The high-growth prospect rests on the assumptions that tax policy will be used to foster a substantial rise in the share of GNP devoted to capital spending and that government regulations will be eased to promote productivity growth. In addition, all three assume that world oil prices will rise 10 percent annually, that wages will rise 9.5 percent, and that monetary policy will be neither particularly restrictive nor particularly expansive.

The Stock Exchange’s base model foresees inflation of 7.7 percent a year, somewhat below the rate foreseen in other forecasts. Even its low-growth case calls for inflation continuing at about the 1979 rate rather than deteriorating further, while in the high-growth case there will be a rate of only 6.7 percent. The unemployment rate projections are 8.9 percent, 6.7 percent, and 5.8 percent respectively. With unemployment averaging as much as 6.7 percent for the decade even in the base case, it is clear that the outlook for the 80’s, as viewed by Exchange economists, is anything but tranquil.

Professor Irving Kristol of New York University—not an economist but nonetheless a shrewd critic of the economy—believes that the 1980’s will turn out even worse than these sobering forecasts suggest. In his Wall Street Journal column of Nov. 26, 1979, “The Worst Is Yet to Come,” Kristol argues that the new decade “promises to be an absolutely ghastly period,” primarily because of “exogenous shocks” from abroad. The course of economic policy will be determined increasingly by foreign policy and defense policy. The massive increases in military expenditures that will be required will just about guarantee continuation of rapid inflation, an 8 percent rate representing “a not inconsiderable achievement.” Kristol reminds us that a period of slow growth, as this decade is likely to be, will probably generate strains on democratic institutions since attention will turn increasingly to distributional issues rather than to the inherently difficult task of speeding up growth.

I agree with all of these forecasters that inflation will continue to plague Americans in the 80’s. The basic trend of inflation through 1982 has already been set by the Fed’s monetary policies in recent years. It should be in the neighborhood of 6 or 7 percent, although deviations around the basic trend could easily take it well outside that range for brief periods. An inflation forecast for the balance of the decade would have to be based on forecasts of future monetary policy, and I know of no reliable way of predicting how rapidly the Fed will expand the money supply in (say) 1985. An optimal policy in my view would be to aim for gradual reductions in monetary growth to noninflationary levels over the next five years, which could bring inflation to a halt by about 1988. The actual policies adopted by the Fed will depend on a long list of factors, including election outcomes and the degree of success of current efforts to limit federal spending. If Kristol is right about future levels of military spending, the Fed may be less inclined to follow the optimal path.

The trend of real GNP in the 80’s is easier to predict because the major determinants of growth are not apt to shift abruptly. (Recall, however, the energy crisis of 1973—74.) According to the Labor Department’s latest projections, employment will grow at about 1.4 percent a year between 1978 and 1990. This, however, assumes unemployment of 4.5 percent in 1990, which may well be too low. Under a more realistic assumption of 6 percent unemployment in 1990, employment growth would amount to just 1.2 percent a year, but even the higher figure implies a sharp slowdown in employment growth in the 80’s.

Using the 1.2 percent employment growth figure, we can add an estimate of productivity growth to obtain a prediction of real GNP growth. The assumption built into the Stock Exchange’s base model is too low, in my judgment, since it is even less than the anemic productivity growth of 1973—78, which reflected the effects of a very severe energy crisis. Another reason for expecting an improving productivity picture as we proceed into the 80’s is the accumulating experience of the work force implied by the declining importance of new workers. It is also reasonable to expect various tax programs designed to enhance productivity. Taking these and other positive factors into account, I conclude that productivity is likely to improve by at least 1.8 percent per year and that real GNP therefore will achieve a quite respectable 3 percent growth rate in the 80’s. This may not be worth cheering, but neither does it provide a basis for gloom.

VI

One can imagine all sorts of surprises that could lead to radically different results in the coming decade. For example, there might be a fundamental breakthrough in the technology of solar or fusion energy, which would drastically reduce demand for conventional fuels. Among the large number of possible surprises are significant changes in public policies. Change, of course, could be for worse as well as for better. One or two weak appointments to the Federal Reserve Board, for example, could result in a substantial rise in the rate of inflation for years to come. Most of all, of course, any economic crystal ball today is clouded by the storms hovering over the international scene. The arms race goes marching on, and the danger of a nuclear war in this decade haunts all humanity.

Barring such a catastrophe, I believe there is a good chance that, on the whole, the U. S. will pursue better economic policies in the 80’s than in the 70’s, even though I have not relied heavily on this belief in formulating my views on the 80’s. One reason for thinking so is that the main economic problems of this decade are likely to be much the same as those of the previous one, as stated earlier. By now we have tried a variety of approaches to these problems, and it has become fairly clear that some of them simply do not work. The example that comes to mind most readily is reliance on price-wage controls as a cure for inflation, but there are many others. Furthermore, the U.S. is not alone in struggling with these problems, so we can profit from the policy experiences of other nations. Every country of Western Europe, for example, has a higher ratio of investment to GNP than the U.S. The policy measures responsible for this outcome vary among countries, providing a rich menu of policy options for raising our own investment ratio.

Recent events provide a basis for optimism with respect to inflation policy, despite the dismal inflation news that reaches us month after month. If the Fed holds firm to the policies it announced in October 1979, we should begin to see real progress two or three years from now. The most pressing need for a fresh policy initiative at this time is with respect to energy, and the required change is extremely simple: an immediate termination of oil price controls. It must be conceded that the prospects for early termination do not seem encouraging. Nevertheless, the weight of opinion does seem to be moving in this direction.

To an important extent, the problem of slow economic growth will take care of itself once we get the inflation and energy problems under control. A return to low inflation may be many years off, however, and we should not continue to punish growth in the meantime. We need to move ahead without delay on the important task of inflation-proofing our tax system—at the individual level by “indexing” personal exemptions and tax brackets and taxing only real capital gains at the corporate level by abandoning depreciation allowances based on historical costs.

Beyond this, however, it is questionable whether the U. S. should consciously strive for rapid growth. Indeed, it is questionable whether even with a strong pro-growth policy it would be possible to accelerate back to an expansion path like that of the 60’s. The opposite extreme of no growth or even negative growth in decades to come—as articulated in the early 70’s in the Club of Rome publication, The Limits to Growth—seems equally implausible. The most reasonable development, in my opinion, is envisaged by Herman Kahn and his associates at the Hudson Institute in several recent books (e.g., World Economic Development: 1979 and Beyond, 1979). Kahn expects continued growth in the world economy, not just in the 80’s but for the next century or two, at a gradually declining rate. U.S. growth will be slower than that of the rest of the world, primarily because ours is the most highly developed economy. Other nations will be catching up with us, as in recent decades. Obviously, this should not be cause for national shame or dismay. The main point of the Kahn thesis is that income trends will continue to rise, in the U.S. and elsewhere, and will treble within two generations even if the rate of advance is only a “slow” 2 percent a year. If this comes to pass, it will be a notable achievement.