THERE has always been an element of risk that Washington's efforts to control the worst inflation since the Korean War would tip the U.S. economy into a recession. The Administration's policy of gradual slowdown has been shaped to avoid any pronounced increase in unemployment. Though a few pessimists have been issuing warnings for several months, the danger of recession has generally seemed remote. Rather suddenly, the mood has shifted. In the privacy of executive suites, top bankers and corporate leaders have begun to voice their fears that the U.S. might be sliding into an economic slump that could have important political and social consequences.
Businessmen see the signs of decline in their sluggish sales and softening profits. Investors discern the portents in falling stocks; the Dow-Jones industrial average has dropped 9% in the past five weeks to a three-year low. The Consumer Confidence Index, measured by the highly regarded University of Michigan Research Center, has plummeted from 95 in January to 79.7 now. President Nixon's economic policymakers recognize the signs of danger. "We are now at a critical period of economic events," says Budget Director Robert Mayo. "The economy is in a state of delicate balance."
The majority of economists outside Government believe that U.S. business still has enough momentum to avoid what would be the first recession in nine years. They point to such sources of strength as record capital investment. Still, businessmen have a sense of foreboding. That anxiety has been intensified by the bearish warnings of one economist who was once ignored and ridiculed, but whose views have lately had an important influence on Government policy. He is Milton Friedman, the leading iconoclast of U.S. economics. "We are heading for a recession at least as sharp as that in 1960-61," he warns. "There is more than a 90% chance of that. There is a 40% chance of a really severe recession, such as occurred in 1957-58, when unemployment reached 8%."
Friedman, a 57-year-old economics professor at the University of Chicago, is still regarded by critics as a pixie or a pest, but he has reached the scholar's pinnacle: leadership of a whole school of economic thought. It is called the "Chicago school," and its growing band of followers argues that money supply is by far the most important and fastest-acting of the economic regulators at the Government's disposal. Friedman has succeeded in persuading many leading economists to adopt his monetary theories, at least in part.
Most economists also follow the teaching of Britain's late John Maynard Keynes, who articulated how changes in taxes and government spending can stabilize business cycles. The philosophy of Keynes, who died in 1946, has dominated the economic policies of industrial nations since World War II. Today's prevailing belief, however, is a hybrid; most economists now consider themselves "Friedmanesque Keynesians." Having risen from maverick to messiah, Friedman ranks with Walter Heller and John Kenneth Galbraith as one of the most influential U.S. economists of the era. Heller, who was chairman of the President's Council of Economic Advisers under President Kennedy, has whimsically classified Friedman's supporters: "Some are Friedmanly, some Friedmanian, some Friedmanesque, some