Inflation Now went forward with great fanfare that fall. It was a low point
of economic policymaking. It made me glad I'd canceled the CEA's press
briefings, because I was never called upon in public to defend Whip Inflation
Now. By the end of the year it was totally eclipsed by the worsening
recession.
The main economic policy group at the White House met each workday
at 8:30 a.m., and since the economy was at center stage politically, everybody
wanted to participate. The group included five or six cabinet
officers, the director of the budget, the so-called energy czar, and more. On
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key issues Arthur Burns would sit in to advise. Many days there would be
twenty-five people in the room. This was a good forum in which to air issues,
but not a place to make the real decisions. The inner circle of economic
advisers was much smaller: Treasury Secretary Simon, Budget
Director Roy Ash (later his successor, Jim Lynn), Arthur Burns, and me.
At first it seemed as though all any of us did was bring the president
bad news. In late September, unemployment suddenly ticked up. Soon orders,
production, and employment all started to fall. By Thanksgiving I was
telling the president, "There's a possibility that we may have very severe
problems going into next spring." On Christmas Eve, the policy group
wrote a memorandum warning him to expect more unemployment and the
deepest recession since World War II. It was not a nice present.
Worse, we had to tell him we didn't know how bad the recession would
be. Recessions are like hurricanes—they range from ordinary to catastrophic.
The ordinary ones are part of the business cycle: they happen
when business inventories exceed demand, and companies cut production
sharply until the excess inventory gets sold. The Category 5 kind happens
when demand itself collapses—when consumers stop spending and businesses
stop investing. As we talked through the possibilities, President Ford
worried that America would find itself trapped in a vicious circle of falling
demand, layoffs, and gloom. Since none of the forecasting models could
deal with the circumstances we were facing, we were flying blind. All we
could tell him was that this might be an inventory-based recession, aggravated
by the oil shock and inflation—maybe a Category 2 or 3. Or it might
be a Category 5.
The president had to make a choice. With the discomfort index nearing
20 percent, there was tremendous political pressure from Congress to
slash taxes or massively pump up government spending. That was the way
to deal with a Category 5. It could revive growth in the short term, though
it risked pushing inflation even higher, with potentially disastrous long-
term effects. On the other hand, if we were facing only an inventory recession,
the optimum response—economically, not politically—was to do as
little as possible; if we could keep our hand off the panic button, the economy
would correct itself.
Ford was not a man given to panic. In early January 1975, he instructed
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us to develop the mildest possible plan. It ended up including steps to ease the
energy crisis, restraints on federal budget growth, and a onetime income-
tax rebate to give families a boost. The rebate was the brainchild of Andrew
Brimmer, a private-sector economist who'd served in the LBJ years as the
first African American governor of the Federal Reserve Board. A few days
before presenting the plan to the public, President Ford quizzed me closely
on whether a $16 billion tax rebate would hurt our prospects for long-term
growth. Economically speaking, the rebate was a prudent response, I told
him, and explained, "As long as it's a one-shot deal and doesn't become
permanent, it's not going to do much harm."
I was a little startled when he answered, "If that's what you think should
be done, then I'll propose it." Of course, he was also consulting with advisers
more senior than I. But I thought, This is interesting. The president of
the United States is taking my advice. I felt a big sense of responsibility—
and gratification. Ford didn't owe me anything, politically or otherwise.
Here was proof that ideas and facts did matter.
His restrained program made good economic sense. It jibed with my
own decision-making philosophy. In reviewing a policy, I always asked myself
the question, What are the costs to the economy if we are wrong? If
there is no downside risk, you can try any policy you want. If the cost of
failure is potentially very large, you should avoid the policy even if the
probability of success is better than fifty-fifty, because you cannot accept
the cost of failure. All the same, the choice President Ford made took a lot
of political courage. He was well aware that his program would be denounced
as inadequate—and that it might, if it proved too mild, prolong
the economic slide.
I decided the CEA had to treat this as an emergency. The president
needed to know whether we were facing a temporary inventory shock or a
major meltdown of demand. The only surefire economic measure of that
was the gross national product, a comprehensive description of the economy
that the Bureau of Economic Analysis derived from a vast agglomeration
of statistics. Unfortunately, the BEA produced the GNP only once per
quarter—well after the fact. And you can't drive using a rearview mirror.
My idea was to rig up an emergency set of headlights: a weekly version
of the GNP that would enable us to monitor the recession in real time. I
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believed this was possible because at Townsend-Greenspan we'd developed
a monthly GNP. It appealed to clients who had to make decisions and did
not want to wait for the official quarterly figures to be announced. So the
analytical foundation was there; creating a weekly measure would mostly
mean more work. Some crucial statistics, such as retail sales and new
unemployment-insurance claims, were already available on a weekly basis,
so those were easy. Other key data, such as auto sales or statistics on orders
and shipments of durable goods (factory gear, computers, and so on), were
normally reported every ten days or once a month. Inventory data too were
monthly, with the further complication that the surveys were often inaccurate
and subject to large revisions.
A way to fill these giant information gaps was to get on the phone. I'd
built a large network of clients and contacts over the years in companies,
trade associations, universities, and regulatory agencies, and many of these
people responded generously when we called to ask for help. Companies
shared confidential information about their order books and hiring plans;
business leaders and experts guided us with their own observations and insights.
We were able to build a clearer picture of inventories, for example,
by combining this anecdotal information with sensitive measures of raw-
materials prices, imports and exports, delivery schedules, and more.
The evidence we pulled together was still fragmentary—nowhere near
the standard that the Bureau of Economic Analysis used in calculating
GNP for public dissemination. But it fit our special needs. When the BEA
economists and statisticians learned what we were trying to do, they pitched
in and helped us structure our analysis. After two or three weeks of burning
the midnight oil—our small staff was also busy preparing its annual assessment
of the economy, which is published in early February—the weekly
GNP system was up and running. Finally I was able to start going to President
Ford with up-to-date facts instead of guesstimates.
The policy issues came into much sharper focus after that. Each week,
at the regular cabinet meeting, I would update the picture of the recession.
As we looked at the ten-day auto sales figures, the weekly retail sales, the
data on housing permits and starts, detailed reports coming out of the
unemployment-insurance system, and so on, we became convinced that this
was the milder kind of storm. Consumers, it turned out, were still buying
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THE AGE OF TURBULENCE
at a healthy rate despite all they'd been through. What was more; inventories
were being liquidated at a very rapid clip, a pace that could not continue
for long, or business would soon run out of inventories. This meant
production soon had to rise to close the gap with consumption.
Thus I was able to tell the president and the cabinet that the recession
was bottoming out. I said, with what for me was certainty: "I can't give you
the exact date, but unless there is a collapse in consumer markets or housing,
it's got to happen that way." Week after week, the data were unequivocal—it
turned out to be one of those rare, fortunate occasions in economics when
the facts are clear and you can know for sure what is going on. So when the
time came in March 1975 for me to testify in Congress, I had the strong
conviction necessary to be able to say that America was moving toward a
recovery "on schedule." I testified that we faced another bad quarter and
that unemployment could hit 9 percent, and yet it was now possible to be
"marginally optimistic." And I warned against panicky spending increases or
tax cuts that would overstimulate the economy and trigger another inflationary
spiral.
The political storm surrounding the president's economic plan that
spring was something to behold. There was tremendous fear in Congress. I
used to joke that I had to put on my bulletproof vest and armor when I'd
go up to the Hill to testify. Newsweek put my picture on the cover in February
1975 under the headline "How Far Is Down?" Congressman Henry
Reuss thought Ford, like Herbert Hoover in 1930, would let us slide into a
depression, and was quoted saying, "The President is getting the same kind of
economic advice that Herbert Hoover was given." When I appeared before
the Senate Budget Committee, the chairman, Ed Muskie, asserted that the
administration was doing "too little, too late." Congressmen were putting forward
proposals to stimulate the economy that would have pushed the deficit
to $80 billion and beyond, a horrendous figure at that time. George Meany,
the president of the AFL-CIO, was even more vociferous. "America is in the
worst economic emergency since the Great Depression," he testified. "The
situation is frightening now and it is growing more ominous by the day. This
is not just another recession, for it has no parallel in the five recessions in the
post-World War II period. America is far beyond the point where the situa
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tion can correct itself. Massive government action is needed." Meany wanted
the government to run a $100 billion deficit, including massive tax cuts for
low- and middle-income families, to stimulate growth.
One thing that surprised everyone was the lack of public protest. Coming
off a decade of civil rights and anti-Vietnam War marches, anyone who
could have foreseen 9 percent unemployment would have expected massive
demonstrations and barricades in the streets, not just in the United
States but also in Europe and Japan, where the economic problems were
equally severe. Yet that didn't happen. Perhaps the world was simply exhausted
by the oil shock and the decade that had led up to it. But the era
of protest was over. America was going through this period with what
seemed like a new sense of cohesion.
President Ford held off the pressure, and his economic program eventually
made it into law (Congress did raise the tax rebate by almost 50 percent,
to about $125 per average household). More important, the recovery
began when we promised the public it would, in mid-1975. GNP growth
rocketed—by October the economy was expanding at the highest rate in
twenty-five years. Inflation and unemployment began slowly to abate. As is
so often the case, the political hyperbole not only ceased virtually overnight,
but also the frightening predictions were quickly forgotten. In July,
the crisis having passed, we retired our emergency weekly GNP monitoring
program, much to the relief of the CEA staff.
Deregulation was the Ford administration's great unsung achievement.
It's difficult to imagine how straitjacketed American business was then.
Airlines, trucking, railroads, buses, pipelines, telephones, television, stockbrokers,
financial markets, savings banks, utilities—all operated under heavy
regulation. Operations were monitored down to the tiniest detail. My favorite
description of this was by Alfred Kahn, a wisecracking economist
from Cornell University whom Jimmy Carter made head of the Civil Aeronautics
Board and who became known as the Father of Airline Deregulation.
Speaking in 1978 on the need for change, Fred couldn't resist riffing
on the thousands of picayune decisions he and the board were called upon
to make: "May an air taxi acquire a fifty-seat plane? May a supplemental
carrier carry horses from Florida to somewhere in the Northeast? Should
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THE AGE OF TURBULENCE
we let a scheduled carrier pick up stranded charter customers and carry
them on seats that would otherwise be empty at charter rates? ... May a
carrier introduce a special fare for skiers but refund the cost of their ticket
if there is no snow? May the employees of two financially affiliated airlines
wear similar-looking uniforms?" Then he looked at the congressmen and
said, "Is it any wonder that I ask myself every day: Is this action necessary?
Is this what my mother raised me to do?"
President Ford launched his campaign to eliminate such folly in a
speech in Chicago in August 1975. He promised a business audience that
he would "take the shackles off American businessmen" and "get the federal
