Doctor Walter Heller has served in a number of prominent positions. Most notably as chairman of the president's Council on economic advisers during the Kennedy administration and later as a consultant to President Johnson and to the Congressional budget office. An impressive number of board memberships affiliations with professional and Civic associations Awards and honorary degrees is testimony to his service to our country and to Minnesota. He currently serves as Regents professor of Economics at the University of Minnesota. Ladies and gentlemen, dr. Walter Heller. Senator Rodger Mo members of the legislature other distinguished participants ladies and gentlemen I hope and believe that this 3-day program will prove helpful to legislators and others and sorting out those factors economics and otherwise that lie beyond their reach but still impact heavily on Minnesota's economic and fiscal fate. From those factors that lie within their control and require action in 1983. Tell my assignment is to speak chiefly about the former namely the likely developments in the nation's economy at our National Economic policies. The wrong Winds of recession have chilled Minnesota's economy to the bone that procession Trace is largely to the TUF Tite money policies of the Federal Reserve which were initiated in 1979. how to battle inflation by taking the wind out of the sails of the economy sometimes called the sadomasochistic way of fighting inflation and those policies were then sharply intensified in 1981. I'm trying to be bipartisan when deep tax cuts coupled with the biggest defense buildup in our peacetime history generated simply mountainous Federal deficits the FED became the only anti-inflation game in town interest rates soared and Minnesota, like other states took it on the chin. Pinterest cost Zoom well for years recession and stagnation ate a big hole in the state's Revenue base at the same time Sharp Cuts were made and federal grants as part of the Reagan program the net result four times in the past two years that legislature the legislature had to go back to the fiscal well to avoid going to the fiscal law for times we had to have a budget fix boosting taxes cutting spending and using a few ingenious accounting devices is the recession going to push us into r v budget fix. Will answer is quite possibly even if the recession ends this morning at say 10:10 a.m. Why because we've been mired in an economic slump in an economic swamp really one of the deepest periods of stagnation that we've known for four long years today. It really the central economic fact is that the United States economy is producing no more goods and services that it was four years ago. Biolage the longest. Of economic stagnation since the Great Depression that's reflected and National figures showing Factory's operating at only two-thirds of the rated capacity in the United States today and I say that cuz today's headlines tell us the lowest operating rates. Once more since the Great Depression. It's reflected in not 12:00, but 15 or 16 million unemployed when we take discourage workers that is dropouts from the labor force as well as part-time workers who want to work full-time and do a car and it's reflected and 300 to 350 billion dollars a year and lost output about 10% of our nation's ready productive capacity is running a waste. Now why highlight these dismal numbers but because I tell us several important things first that it's not just the direction of the United States economy. That is whether it's still receding or whether it's starting to recover that's going to decide Minnesota's fiscal fate, but the level of that economy that is 10 degrees below normal second. It tells us that if there is to be a 1983 recovery as I believe there is and as Gerald Corrigan site chapter and verse on and the factors that he and I agree will generate enough turn this year. It's not the fact of an upturned but the speed of the recovery that will tell the tale. I'll come back to that the moment third the decimal numbers tell us in no uncertain terms that this is no time to be timid about National Recovery or about National Recovery policy. There is so much slack in the economy that are further easing of money on interest rates and I hope Jerry is listening coupled with this year's tax cuts and federal deficit will translate into more consumer demand more output more jobs more profits and not into higher prices and more. Play Usher when demand goes up, there's always a little upward movement of prices as a part of the bargain, but in terms of recurrence of the terrible inflation that we've been experiencing that will not happen and I'll come back to that. Also, we can stand a good deal faster recovery. Then we're likely to go recovery. Since World War II came out of the Starting Gate at an average clip of about 6% real growth in the first year after the trough of the recession the Reagan Administration having taken off. It's a rose colored glasses and the put on it Shades tell us that we will grow it only a two and a half percent clip between the end of 1982 and the end of 83 that's equivalent to a year-over-year increase of about one and a half percent. For the First Time The riggin Economist and the Reagan Economist both are below the private consensus, which is closer to three and a half percent growth from year and the year and just so there's no confusion or Illusion about this a two and a half percent rate of growth from urine to year-end would mean the 1983 is a whole would wait a damn about one and a half percent over 1982 while three and a half percent growth during the year would put 1983 about two and a half percent above 1982 and I might say to the legislators here always insist that your advisers tell you whether they're talking about growth or inflation or any other magnitude during the year or about the year-over-year averages. In any event, the vast majority of forecasters are telling you that the 1983 recovery will be weak. In fact, I've been collecting adjectives as various forecast cross my desk and I now have 37 of them 37 synonyms for a week and I want to share that with you and I promise you I have not opened it. Just pick these out of things that come across my desk in here. They are moderate modest mild muted and miserable weak wobbly hesitant and holding slow sickly sluggish buttering subdued subpar subnormal uneven and uncertain dampened downsized and disappointing listless, lethargic lackluster lukewarm and lopsided gradual grudging an anemic Fable fragile faltering restrained retarded reluctant and rickety. There's a bright Prospect for you, but let me say this. Barring a string of financial failures or an international debt default crisis and I think Gerald Corrigan will talk a bit more about that possibility. I'm inclined to believe that the house forecast is too Bleak this time around last time for 2 years. They promised us a Rose Garden without thorns and now they're emphasizing the thorns. Especially if the consumer regains his or I should say her confidence the recovery could pick up a little more steam later in the year than the consensus forecasts would now have no please don't misunderstand a robust recovery is not in this year's cards. There are too many down drags one with the whole world in the economic doldrums of a Dollar too strong and World Markets are exports are taking a beating and Minnesota Agricultural and Industrial exporters are feeling a pain. And two with so much excess capacity business investment in plant and equipment is still sliding the latest Commerce estimates to show Once More that business man and women have reduced their forecasts of the amount. They're going to spend on plant and equipment machinery this year and our Machinery industry and the Iron Range for this and other reasons are the victims third state local spending which used to be one of the steady Eddy's of recovery always going up since the World War II is of course being rained in throughout the country and not just in Minnesota and forth. So far consumer confidence has been clobbered. By the highest unemployment in 40 years the number show that over 20% of the country's families were impacted by unemployment at some time during 1982 and a survey that showed the Shapiro survey showed that another 20% were afraid that unemployment might hit them and right there in that 40% you can account for the enormously close to the chest game that consumers have been playing. But if unemployment stop growing and even if it hovers at totally unacceptable rates of 10% or above in the official unemployment, right employed Lady Gaga May begin to come in from the cold May begin to loosen their purse strings and start spending a little more freely Consumer. Debt is wait on Liquidity of consumers is up all-time high and lower interest rates are making purchases of Housing and photos and other durables more affordable granite real consumer interest rate. You're still terribly hot drops to 5% is it has and some consumer interest rates are still 17 and 20% though. Some of them will come down to 13 and the auto companies are talking about 11.9 very high real rights to respond by saying What proportion of my income does it take to for Lancer particular purchase and they're finding proportion is going down. Even though real interest rates are still very high. So it's possible that the consumer and maybe get him to come out of his shell or her she'll know if consumers to respond to all this and remember Diwali conomic activity that is there two thirds of a gross national product. We could see a somewhat stronger recovery, then we're all forecasting but that leaves you with at least three questions 1 what's in it for Minnesota to if recovery gets a little friskier won't that arouse the sleeping Dragon of inflation and 3 how should the White House the Congress and the Federal Reserve behave to step up recovery without speeding up inflation. On the first point, it's no longer news that Minnesota is not shielded or sheltered from National recessions. And what's worse we will probably like the National Recovery our farm economy. Like the nation's simply cannot generate a quick comeback in the face of huge grain surpluses and beans to high debt and high costs of production. Second. The Iron Range is caught in the grip of a domestic recession and more than recession sort of a long-term stagnation than the iron industry. Tough International competition and stealing autos and high energy costs and no overnight relief is inside. That's why it's so terribly important to have some of our state initiatives that provide some relief but the nation, provide and many of our manufacturers thirdly heavy industry in particular will be lagging the nation's recovery as investment lags true recovery will help and strong recovery would help more but realism says that Minnesota will come into its own late not early in the recovery. I think we will show perhaps more than average growth rates later in the recovery, but not early now. Let's turn to inflation. Turn off recovery. Send us Off to the Races once more on inflation. Well, I don't think it will the way it has and in previous post-war recoveries. I think we've gone through kind of watershed some people think it's just the Woodshed and once the economy recovers inflation will come bouncing out again, but just stopped for a few moments to consider what it would take to get a sizable inflation going again. It would have to take one of three forms either excess demand inflation too much money chasing too few goods or secondly external shock or commodity inflation or special Factor inflation, like food prices oil prices commodity prices generally interest rates spreading again, all of these could spurt in price rather independently of what the economy itself does. Now a third form is cost-push mainly consisting of wage costs. They could search Once More. Seems to me. None of these is in Prospect, even if the economy too weird to recover at a pretty good clip for 2 to 3 year. First of all too many dollars chasing too few goods. No way. It's too few dollars chasing too many Goods when you look at that number in today's paper that 67% capacity is is of capacity is the average operating right you're recognized and you look at the unemployment numbers you recognize that we had just have this enormous amount of unused productive capacity that can respond to a stimulus from either the Federal Reserve 150 billion dollars less purchasing power list him. And then the economy is productive capabilities can readily Supply What about rock inflation? What about the prospects of food or oil or commodity prices are interest rates my zoom again food painful as it is for Farmers the prospect is that consumers are going to continue to get a break on food prices for some time to come arising on that is limited but overall the prospects look favorable for consumers. What about a while? Well oil prices were the cause of a lot of our world difficulties. We sometimes forget that oil prices were 250 a barrel back in 72 and here we are in 83 and they're $34 a barrel. My guess is that those prices will ease there's even the possibility which some consider disastrous and some consider delightful that OPEC my fall apart and an oil prices could drop as much as $10 a barrel I thinking thinking about that possibility of sure one recognizes that the awfully tough on the Mexico's and all the oil industry and on the banks. But just think of what a $10 dropping their own price with me 50 billion dollars. We consume 5 billion barrels a year 50 billion dollars in the hands of American consumers and business. That would be the best single stimulant we could get it would be a deflationary in terms of prices stimulant that would be expansion area for the economy. So I'd say with that 50 billion dollars we could compensate the losers that Mexico is in the bank and still be way ahead. But I think it was most likely Prospect of some further softening of oil prices rather than a sharp drop materials prices will eventually start edging up but I don't think we're in for any sharp rise as the interest costs. Let me say this and this is the most hazardous area of forecasting. I think they are not only falling stock market jumped a little yesterday because they think thought that interest rates were going to fall further. Weak economy low loan demand and fears of a financial crisis will keep the federal reserve's foot off the monetary brakes and help shave another one and a half to two points off of short-term interest rates, even as the economy begins to recover and let me just say I think that recovery will start sometime in the first quarter asked a long-term right? I'll come to those the moment now the third form of inflation cost-push With wage increases finally catching up with price increases. I don't mean that all the erosion has been made up but at least in terms of rates with unemployment hanging, and with labor productivity poised to rise briskly as the economy recovers wage push has been and will continue to moderate that is average wage increases will be in the 5 to 7% range while productivity per labor hour will step up as output Rises and employers whole car and new hiring and check the other side of that coin. Of course the better price we pay for this curbing of Hardcore cost-push inflation will be continued double-digit unemployment through all of this year. The realize the greatest danger renewed inflation. It's in those gargantuan 200 to 300 billion dollar deficits projected for the so-called out years 1985 to 88 and the possibility that will get used to them instead of developing policies to stamp them out as they, he regains its head after all when a president who promised a balanced budget in 1984 Now talks rather calmly about a 200 billion dollar deficit that here you can see how far we've come or gone. No answer these huge deficits. Let's be clear on three things first because they are we can stand them today in 1983 and into 1984 because they are very largely absorbing credit that the private economy is not using in our weak economy second the best bet for shrinking the overall deficit is recovery. That's for the overall actual deficit. And about the you get a shrinkage of the deficit of about 25 to 28 billion dollars for every drop of one percentage point in the unemployment rate. The best bet for shrinking the structural deficit that let me say that the best bet for promoting recovery. Is for Gerald Corrigan that his Federal Reserve colleagues not to Spook at the first signs of recovery and not to start tightening money and reversing the downward course of interest rates. But what does Federal Reserve and the country have to see thirdly is evidence at the White House and Congress are tackling those out year deficits in particular the structural deficit, but which I spoke to go at 75 to a hundred billion dollars of the deficit that would still be there to haunt us when recovery brings unemployment down to about 6% has to be cut to size has to shrink not rise as the economy expands. And I'm going to surprise many of you by saying that the prospects for some kind of accommodation or compromise in Washington that will accomplish that objective are improving and not diminish it when you hear not just Democrats in Congress, but worried Republican sounding more like Tip O'Neill than Ronald Reagan. You know that even though the immediate Outlook is for conflict and seeming stalemate compromise is not all that far off. I might the White House and Congress tackle those huge out your first by balancing the social security budget and it was front page news this morning that the commission and the president are talking about advancing the effective date of a 6.2% payroll tax. It's scheduled to go into effect in 1990 and making a few other changes some benefit delays and so forth. But could cut the basic deficit in the federal budget by about 30 billion dollars a year. Second dropping the income tax indexing if you'll pardon the expression would pick up another 20 billion dollars buy 1988 or 86. Third some type of tightening of the federal income tax could produce another 10 billion fourth defense. There seems to be a movement in Washington that might shave 25 billion dollars a year Auto defense within a couple of years and 5th entitlement programs other than Social Security can stand about a 10 billion dollar trimming. So without cutting further into the bone and Marrow of our social programs one could cut the structural deficit by about a hundred billion dollars and if they cooperate economic expansion will steadily cut the actual deficit. So if the federal deficits tomorrow the tomorrow, I mean 1985 6 and 7. Interest rates can continue to increase as the economy starts on the road to recovery and he's without arousing the economic Devil Within us namely inflation in particular you're deficits are cut to size and the dangers of inflation in 85 to 87 are reduced long term rates will come down further perhaps by two or three points to help housing in business investment and a reducer Minnesota's borrowing cost. It can be done with a combination of some political Courage the spirit of compromise and some straight Thinking by the public and its political Representatives. Now, that's a pretty tall order you remember the story that Adlai Stevenson or the response if he wants and a very enthusiastic woman in the back of the room jumped up and said I had Leo have the vote of every thinking American. He said that's not enough. well while we're thinking let's let's keep in mind. That is we tackle these tough economic and fiscal problems in America we do so from what is still the strongest economic base in the world. I think we sometimes forget that when we measure standards of living by the real test of the amount of goods and services available to us. All we are by All Odds the strongest country. We had by All Odds the highest standard of living in the world people don't seem to remember that a second lay our labor force is still the most productive in the world others are catching up with us, but per hour the American labor produces more goods and services than any other labor in the world. But then people say yes, but our costs are which costs have been rising so much faster than the rest of the world not so we after screening out dollar depreciation elements. We find that our unit labor cost Rose 6% a year in the 1970s compared with 12% in Germany, France Britain and Japan, but then people say they are but we have such spendthrift government. They're following the nest in the United States US Government Federal state and local spend only 32% of the gross national product just half a percent ahead of Japan and Far Behind Germany, France Britain and Italy whose government spend about 45% of the nation's output. But nobody runs government deficits is as big as ours right wrong in the late seventies of the seven leading industrial countries. The US had the lowest ratio of overall government deficits the GNP even with the huge Reagan deficits in the 80s. We're still the lowest except for Canada. So finally, I must ask this question. Does this statistical barrage prove that we're in fine shape by no means but it does tell our policymakers here and in Washington the stop their hand-wringing the stop being so timid and a start putting our economic power to work in generating vigorous recovery. Thank you.