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Walter Heller fears that a flabby policy on controls raises an indirect threat of outright recession. He worries that the Federal Reserve Board will feel itself obliged to take on the job of checking inflation all by itself and will continue holding down the growth of the money supply. That policy could push interest rates even higher, curtail the availability of credit, and finally produce a serious downturn in the economy. Monetarist Beryl Sprinkel, a vehement foe of controls, agrees that the Federal Reserve could cause an outright recession (now defined as an actual decline in real G.N.P.). In his view, the Federal Reserve pursued too expansionary a policy last year and is now overcompensating by tightening up too much. He expects that the Federal Reserve will change course—but warns that if it does not, "I am confident that we will have a recession next year."
Would a slowdown, or a recession, stop raging inflation? Board members divided on that question too—although, strangely, their numerical forecasts showed minimal differences. Most agreed that the consumer price index for 1973 will rise 5% to 5.5%—up from about 3% last year and a rate that no one would consider tolerable if continued indefinitely. Greenspan and Sprinkel nevertheless are satisfied that the pace of price increases has peaked and will soon begin to go down.
Some other board members are not so sure. They fear that unions will convert the 5%-plus inflation rate into a kind of floor. Most concerned is Robert Nathan, a labor specialist. He estimates that labor chiefs will demand and win wage and benefit increases of as much as 8% in the first year of new contracts. Such demands may not sound wildly inflationary, but they will be coupled with a slowdown in the growth of productivity, or output per man-hour.
That is normal as businessmen reach the limits of their ability to put formerly underused men and machines to full-speed operation. If productivity rises rapidly, corporations can absorb large wage increases without raising prices; if it does not, they cannot. For all their differences, the economists seemed united on one point: the present boom has a remarkably short life expectancy.