Recession, Inflation and Energy

SIR ARTHUR CHETWYND:

Reverend Sir, Your Worship, distinguished guests, ladies and gentlemen: We are all influenced by that compelling magic box which occupies a central place in most of our homes--television. At times, TV is referred to as the "idiot box" or "a wasteland of cultural mediocrity".

Sometimes such accusations are true but, as one who makes part of his living from television, I remind you that there are many superb programmes on television, programmes which provide important opinions and information, as well as entertainment, for millions of viewers. The David Susskind show over CFTO on Monday nights is one of those excellent programmes which I seldom miss.

Several months ago I watched an exciting and learned panel discussion on U.S. and world economics. One of the panelists who stood out was a John Bunting who, apart from looking young and vibrant, was obviously expert and had some interesting things to say about Canada and Canada's economic future. Of particular interest is the fact that Mr. Bunting and his organization provided the initial U.S. financial backing for the Bricklin car now being manufactured in Canada. Through one of our hard-working directors, Hugh Stewart, we tracked down the gentleman concerned and I am more than pleased that Mr. Bunting accepted my invitation to be our guest speaker today.

John Bunting is chairman of the First Pennsylvania Corporation and the First Pennsylvania Bank of North America. Throughout his career he has been a banker, but he has also been a teacher, an author, an adviser, a trustee, a company director many times over, for the most part a businessman. His experience has always touched on those facets of society which are of particular interest to the economist, and this should not surprise us. For our guest's formal training has been in Economics and it is as an economist that he comes to us today.

He is a practitioner of what Thomas Carlyle in 1850 described as "the dismal science". Economists at that time were putting forth the proposition that the misery of the world was due not to "the gigantic hucksters but to the immortal gods." Economics has more recently been referred to as the "plonking science" and the "black art". My research tells me that "plonking" may be defined as the art of making the utterly obvious stupefyingly clear! It would be reassuring to believe that this were so, as our speaker comes to us at one of the most interesting times in economic history.

Unemployment is increasing at the same time as inflation is accelerating but under the old rules they were supposed to go in opposite directions. All of this is aggravated by the so-called "energy crisis". In recent days I have read headlines in two American magazines--one asking "HOW BAD A SLUMP?", the other inquiring "HOW FAR IS DOWN?" The most recent issue of our own Maclean's Magazine uses the whole front cover to announce "Eight Ways to Save our Crumbling Economy".

Our speaker was educated at Temple University, taking his Bachelor of Science in Business Administration in 1950 and his M.A. in Economics in 1952, after service in the U.S. Army from 1943 to 1946 when he saw action in the South Pacific.

From 1950 to 1964, he served with the Federal Reserve Bank of Philadelphia, rising to Vice President. In 1964 he joined the First Pennsylvania Banking and Trust Company as Vice President and Economist, and in January 1972 was appointed to his present position as Chairman and chief executive officer of the First Pennsylvania Corporation and the First Pennsylvania Bank of North America.

He has lectured at Temple University on Economics and has been guest lecturer at a number of other prestigious schools of higher learning. He serves as a trustee and/or adviser to groups involved with community and educational concerns. He holds honourary doctorate degrees from St. Joseph's College, Philadelphia, and Temple University, and is a Fellow of the Hebrew University in Israel.

Herman Kahn, the noted "think tanker" from the Hudson Institute, recently told Canadians: "If the U.S. gets a cold, you get pneumonia." Our own Prime Minister has asserted that Canada feels "every twitch and grunt" of the American elephant. And yet the current issue of The Financial Times of Canada, in its lead story, offers the opinion "With a little bit of luck and good management, Canada will come out of this recession as the richest country in North America, in terms of per capita wealth." . . . "Recessions", it says, "are when Canada catches up to the United States." Of course, this view may have emerged in the frantic search for an eye-catching headline and, in any event, is based not so much on Canada "doing better" but rather on the United States "doing worse".

There are not many people in Canada who would cheer such a turn of events, for in our lifetime the United States has been our great friend, and our two countries (both, not one) are inextricably entwined economically, and when the chips are down, also very close ideologically-we both love freedom.

It is particularly fitting, then, to introduce to you a most distinguished economist from the United States who undoubtedly "zeros in" on the current dilemma by entitling his speech, "Recession, Inflation and Energy". Ladies and gentlemen, it is with great pleasure that I introduce to you Dr. John R. Bunting.

DR. BUNTING:

Mr. Chairman, ladies and gentlemen: I certainly thank you very much for that most gracious introduction. I'm very happy to be here. It's a wonderful experience for me to have this opportunity to speak to such a prestigious audience, and the trip was made much easier by the gracious way I was received at the airport. I think too that the further you are from home the better you sound, so I'm thankful for that.

I must confess that although I prefer to go far from home to make speeches because they know me too well at home, I prefer to go by automobile because I write a lot of my speeches on the way to them. I give the titles out beforehand, but I write them on the way. My rationale for this is that ordinarily it makes a much more current talk and you can pick up what's going on. In addition, I have a fine driver who permits me to rehearse my speech in the back seat and that's a big thing too. I rehearsed one speech so much on the way, recently, to a place about a hundred and twenty miles or so from Philadelphia called Danville, Pennsylvania, that my driver who is about my size and weight, (he's a little older than I am but he looks about the same), said to me, "You know, Mr. Bunting, I've heard you repeating that speech so much, and it's not too different from others that you've repeated back there in the past, that I really think I could give it."

I said, "Well, Ed, that's a delightful thought. Nobody up here knows me, and we don't do a heck of a lot of business in Danville, Pa., so why don't you give the speech? I'll go and sit in the back, the way you customarily do, and you can go up front and be John Bunting."

So he allowed as how he would, and he went in and he was introduced, and he spoke, and because he didn't have all the ohs and ahs and stutters that I am afflicted with, Ed finished the talk (it was supposed to be a half-hour talk) in about twenty-one minutes. So the Master of Ceremonies very graciously indicated that since Mr. Bunting had finished early, perhaps he would be willing to answer some questions. So he indicated that he would. The first question came up from a Friedmanite, a person who is a Monitorist in the United States, imbued with how wonderful things like M1, M2, and M3 primed, etc., are. The fellow asked him a question about M2 primed and since it was rising at a rate of just 4% in terms of the money supply what effect that would have on GNP in the third quarter in his estimation? And Ed looked at the fellow after he finished and said, "That's the stupidest question I've ever heard in my life." He said, "I don't know how, from an audience of such bright people, the Master of Ceremonies could pick out a stupid fellow like you. That question is so stupid, that I'm going to have my chauffeur, who's sitting in the back, answer it."

I want to assure you, although I may be a disappointment to you, that I'm the real John Bunting. And, by the way, I'm supposed to speak for a half hour too, so you can start timing me.

I thought today, that in treating the subject that we're here to talk about, "Recession, Inflation, and Energy", I would frame it in terms of the future, so that I'm not just explaining to you how I think recession, inflation and energy are coming along in the United States at this time. I thought that generally speaking, I'd frame my talk around two points. First of all, how and why the future has changed. Our Master of Ceremonies implied, and I know it wasn't meant to be a firm prediction, but he indicated the kind of change that people in the States are seeing for themselves. That is, we have a somewhat more pessimistic frame of mind. I'll talk about how that has come about and how long-lived that might be. And then go on from there and draw for you a few potential scenarios of the future in the States, and perhaps, indeed, in much of the rest of the Americas as well. I will give you three potential scenarios. I'm not going to cop out, as we say. I will tell you which scenario that I think is most likely to eventuate.

First of all, the future has changed. I think that anyone who thinks about this subject as much as I do will agree that our conception of the future has changed. We in the States have turned from being essentially a very optimistic people to, at least momentarily, a somewhat pessimistic nation, in the space of about a year and a half.

To some extent I think this is a reflection of the Watergate trauma. A lot of people were very shocked at what was taking place, and those who weren't shocked were, at the very least, saddened. But I would not say that Watergate is responsible for what I'm talking about. I think it was responsible for diverting us, and perhaps we didn't therefore see as clearly what was taking place around us, and perhaps we didn't have the energy, with this tremendous diversion (after all, I guess Watergate was the greatest American drama since the Civil War). It took our minds and efforts away from things where they would have been better used, but I don't think Watergate is responsible for the pessimistic turn. I think to some extent, however, that Watergate is something that we at least have to deal with.

I think to some extent, too, you could say that our pessimistic turn is no more than a reflection of the fact that in a cyclical way the economy is in the downward phase, or we're in a recession. I'd go so far as to say, the way things are going, that we're in a mini-depression, or a maximum recession if you want. We're in a recession that's a bit worse than anything we've had in the whole post-war period. And to some extent, I don't think there's any question about this, much more than Watergate this is responsible for the changed view we have of the future.

More than that, however, I think that in addition to the down phase of the cycle producing apprehension about the future, the changed view of the future does represent a kind of innate feeling that we have that something fundamental has changed. Up until now we don't seem to be reacting very well to it, and we don't quite see how we are going to react to it because the fundamentals that are changing are perhaps going to produce disagreeable, at least momentarily disagreeable, changes in the life style to which we have come to be accustomed in the States.

I would say that the number one factor producing this innate feeling that something fundamental has changed has to do with oil, and specifically of course, the quadruple price of oil. Until the Arab and Israeli war of fifteen months ago, you in Canada may have known that oil was finite and not infinite, and there were some college professors in the United States who knew it, and some scientists too, but the great body of the American people felt, I think, that oil had a kind of infinite supply, that we weren't going to run out in our lifetimes, or maybe in the lifetimes of our children, that indeed when we did begin to run out the cost would go up slowly and gradually, and we'd therefore be able to dig down deeper and go further out into our oceans and discover more, and then the price would gradually go up and we'd be able to replace it with some other form of energy and within the market orientation of our society we felt that the adjustment to this would be for one thing a long way off, and for another thing, would come about very naturally within the market system. Suddenly, however, as a result of the Arab-Israeli war, the embargo, the quadruple price, and the difficulty of changing that price, we see oil as very definitely finite, and that at the rates of increase of consumption that prevailed in the 69-73 period perhaps we have only a thirty to fifty year supply left. That is a deep shock to the American people. Now we see that energy, instead of being plentiful and cheap, most specifically oil but energy in general, is suddenly scarce and expensive. And nearly all of the other major problems that afflict us at this time in the States, have something to do with this new view of oil, these new petroleum realities.

The double-digit inflation of last year which reached into the 11 or 12% range in the States as most of you know, five percentage points of that is directly traceable to oil, bringing that down to 7%, and I would suggest that that is only what is directly traceable to oil. I think oil and its ramifications had more responsibility than just the five percentage points that we can measure. Certainly the skyrocketing utility costs that have produced price ramifications all over our economy are not adequately measured when I say five of the twelve percentage points are traceable to oil.

The plummeting auto sales of the current year, and indeed of last year as well, are mainly a result of the fact that in the States we're not sure that we should be driving the gas-guzzlers that we love so much and that we've driven in the past. It's not too much of a decision to keep yourself in the car that you're in. It is quite a decision to go out and buy another car. We measure them now, you know, not by how many miles to the gallon you get, but how many city blocks! Oil, and all that it means to us at this time, has a great deal to do with the number one detractor from the business environment of the moment, and that is automobile sales.

Certainly the thing that frightens the community, the Jewish community in particular but the whole community in the States in general, Arab purchases of industry, again goes back to the oil situation. The tremendous transfer of wealth that is taking place between the free nations of the world and the OPEC states, most particularly the Arab OPEC states, leads us to wonder about the Arabs buying into some of our peripheral banks (don't tell the bank that was bought into that I called it that!) and indeed perhaps even buying into some of the establishment banks and other industries. So that our view of the world has changed in part, and it's a more pessimistic view. One hopes it is momentary, arising out of Watergate and the downward phase in the cycle. Probably however it will stay with us, even as our spirits rise somewhat as the economy improves, because it does arise out of real causes and deep issues.

Well, enough on why our view of the future has changed. How about the future? What will it be like? Now here I would like to give you three different scenarios. I fear that, so far from home, you might think I really know the future back there, so that I will acknowledge to you that there are three kinds of scenarios that might take place over the near future. I will tell you the one that I think, as the weather forecasters would say, has the 55% chance of success, the others having less.

The scenario number one would be that we will follow pretty much (I don't say this in any chauvenistic way) a British "muddle-through" kind of policy in the near future, which won't be all bad. But we will tend to meet issues as they arise, and compromise most of them and find the agreeable solutions that prevent revolutions and civil wars and things of that sort. But we will not be blessed with, or afflicted with, however you view it, any real decisive leadership. We therefore won't make any overt adjustment in our life style. Gradually, maybe, the life style in the States will be subject to grudging and gradual change, but it won't be perceived in any reasonable time frame as much of a change. This will take place over a long period of years. And again, very much as the British economy has had to do in the post-war period, we will consistently have to slow our economy down as it gets moving forward, because when we move ahead rapidly, when the economy is expanding, we'll be having to import too much oil, at too high a price. Our balance of payments is something which we're not accustomed to being concerned about, in the States. It's only in the very recent past that we have had enough concern about it to treat with it in speeches. I know it's of great concern to most other countries in the world, but this is not something that we're accustomed to being concerned about in the United States.

The fact of the matter is that it is looming as being of tremendous concern. I think at the present time it's very definitely an inhibiting factor in the current administration's willingness to fuel up the economy and get it moving again, because there's a knowledge on the part of those that really understand the scene, that if we get this thing started again for real, and get the economy back to full employment rapidly, we're going to have to slow it down as soon as we get there. Because as long as we are in our current consumption patterns, as long as Detroit is still manufacturing the gas guzzlers, as long as we're still heating all of our major buildings with oil, as long as our public utilities are 70 or 80% on oil, we will have to import too much oil, and we will have a natural barrier through which we cannot go, unless we want to see the dollar really lose even more value than it has lost.

So that this balance of payments restraint, within an overall petroleum constraint, will produce a kind of a stop-go situation, assuming that we have no decisive leadership. The growth in our economy over the next few years will slow very considerably. To put some dimensions on that, the economy in the States has been growing in the post-war period 3.9%, almost 4% per year. I would think within this kind of an environment we would be talking about something slightly in excess of a 2% per year growth rate, or cut just about in half.

Now the hope in this policy, the one thing that could reverse what I've described here would be that the OPEC cartel will break down, oil prices will back off considerably, and we can run our economy within the current kind of life style, demand patterns, etc. that we are running at the present time. I don't think this changes the fundamentals, except temporarily, quite as much as some of you may. We're not going to wipe out the fact that we have discovered that oil is finite. We're not going to wipe away the fact that if indeed the cartel breaks down, prices aren't going to go back to where they were before. We cannot escape the fact that oil is going to be a factor in shifting funds throughout the world and primarily shifting funds away from the States toward the oil countries.

The second scenario! Remember I'm not necessarily recommending any of these. I will tell you the one that I think is most likely. The second scenario would involve an outbreak of fighting in the mid-East. It would be a war scenario.

This scenario would say that the Israelis will see time working against them. They will recognize that not only are the Arab states that surround them getting stronger, as the result of the quadruple price of oil and all the money that's pouring in there, but time is also working against them in so far as their number one ally is concerned, that is the United States. As wealth is transferred, power is transferred, so the United States will more and more be influenced by Arab wishes and desires.

Within this scenario, therefore, the Israelis will be forced by their own logic, if you will, to start a war within the next six months, let's say sometime before next winter. We, in order to preserve the free world, will grab at least some oil fields, to prevent an economic collapse of the western world. The economies, presumably, in most of the western world will still be in recession, or at least in a very shaky recovery following a very severe recession, and this will provide the rationale or excuse (whatever you want to call it) for us to move in to ensure a petroleum supply.

The Israelis will win a very brief war, win in the sense that the fighting will stop as the Russians intervene, and we intervene too. But it will be clear from the territories gained and lost that the Israelis have gained a heck of a lot more than they have lost. We therefore will have not only territory to barter for a more realistic policy on the part of the Arabs, but we will have the oil fields that we have assumed as well.

This is kind of a harking-back scenario, saying that the world can go back and be the way it was before we discovered that oil is finite. This has appeal for certain romanticists, but it is essentially a yearning, not a realistic policy. I think that people were playing with this as a policy some months ago. The futuristic types in the States were playing with it. I certainly do not mean to imply that we were playing with it at an official level as a policy.

The third would be a more decisive scenario. We would achieve decisive leadership over the near future. The President and the Congress would get together and evolve a tough and realistic energy policy as soon as the economy gets moving again.

Most of us feel that the economy is going to continue down at a slightly slower rate in the near future, turn around probably in the late summer, and begin on the way back up in the fall. I think until the economy has gone through a quarter or two of upturn, it would be not wise to invoke in the States a decisive programme of energy conservation. In other words, I don't think our economy really is strong enough to sustain one at this time. It would just cause it to plummet more rapidly and for a longer period of time.

But once the economy is moving again, and I would imagine that this would be about the first quarter of next year, and has been moving for a quarter or two, then the Congress and the President will be able to get together. And that is what is required, because as you know the President is of one party and the Congress is completely dominated by the other party. It requires a melding that does not come naturally in the States, and it makes decisive leadership, no matter what the qualities of the President, a difficult thing to bring about when the Congress isn't in his camp.

But once the economy is moving ahead, and let's put that into the first quarter of next year, then by March of 1976 we would introduce a new kind of a programme. Perhaps we start by finding ways of getting money to our utilities, probably in some way as a result of guarantees or something from the federal government, because otherwise it doesn't seem to me that the utilities are going to be able to do the two things that they have to do in the near-term future from private sources. Near-term, the utilities have to increase their capacity, and near-term, the utilities in the United States have to move from 70 to 80% reliance on oil to a shift-back to coal, and perhaps forward to nuclear and more exotic energy forms. This puts a twin burden of capital spending on them, and in the light of the increases in utility costs that have already been imposed on our citizenry as a result of the hike in oil prices, it is virtually impossible to imagine additional price increases in the normal marketplace to bring about the kinds of investment spending that is necessary. So that perhaps the first thrust toward a decisive energy policy will be some intrusion into the market by the federal government to get funds to our utilities.

Beyond that, I would imagine that a decisive energy policy would include a kind of combination of the use of the price system and rationing in so far as gasoline is concerned. I personally advocate, as of next March, that in the States we would double the price of gasoline at the pump in order to deflect demand, and then give everybody thirty-five or forty coupons per month, worth fifty cents apiece so that for the first thirty-five gallons of gasoline each month you'd be paying roughly the same amount that you're paying now, and it would be beyond the first thirty-five gallons that the price of gasoline would come to be somewhat prohibitive.

I think we're going to have to do more than exhort our automobile makers to produce smaller cars. I imagine we're going to have to come to giving ourselves incentives in the States to buy smaller cars, so that people who trade in large cars and buy smaller ones will get some kind of a tax rebate, so that the large cars, if you want to buy them, are taxed much more heavily than they are taxed at the present time. I'm using "large" as synonymous with "gas-guzzling". I think too, in so far as home heat is concerned, as we get our utilities turned back to the use of coal and forward to nuclear energy, we're going to have to inhibit people from buying homes that are heated directly by oil. Rather we should use electric heat, which would be indirectly of course utilizing coal and nuclear power.

I'm sure we're going to have to do something about mass transportation, but I think that this is a longer programme. Our country, as yours is, is a newer country than the European nations and is pretty much built up around the automobile. We don't really have the same options that they do. It's almost impossible, with industrial parks taking industry to all sorts of places inaccessible to mass transportation, with shopping centres taking our department stores to all kinds of places inaccessible to mass transportation, for us to solve many of our problems in the short run with mass transportation. Vehicles for single-person travel, or for a small number of people, are a necessity as far as the next ten or twenty years are concerned. Longer run, programmes toward mass transportation are coming and would be a part of a tough energy package.

Solar energy! I think very likely in the course of the next year, whether we have a decisive policy or not, that we will undertake some kind of a ten-year solar programme similar to the Kennedy lunar programme that wound up with people on the moon. That is a sure bet. Longer run than that, I would look for the electric car, that is a battery-driven car, for intra-city traffic-not for going from Philadelphia to Danville, but travelling within the city itself.

Such a policy, a tough, decisive energy policy, would recognize the new realities, the new problems that we have in the States, would put us back in charge of our own destiny, and indeed would restore confidence.

I would be very hopeful that this latter scenario is the scenario we will follow. I think it will be. I don't think it will come about in the chronological order that I portrayed it. My best guess is that we will not take decisive energy steps until after our election which is in November of 1976. I would like to see us take these actions as soon as March of '76, but I think we will probably do it sometime after the election in '76. I think there will be between now and the election a period of some business recovery. I don't think, however, that we will have restored our optimism, because I think our optimistic view of the future waits upon the decisive action that I don't really look for until after the election.

I thank you very much for your attention.

Dr. Bunting was thanked, on behalf of The Empire Club of Canada, by Mr. John D. Herrick, a Director of the Club.