U.S. FINANCE PRESIDENT NIXON MUST “TUNE” AMERICA’S ECONOMY

Press, Volume CIX, Issue 31941, 19 March 1969, Page 12

U.S. FINANCE PRESIDENT NIXON MUST “TUNE” AMERICA’S ECONOMY

(By 1

DOMINICK HARROD

in the ‘'Daily Telegraph,” London.)

n LrUnuOTls/ (Reprinted by arrangement.)

On foreign affairs, as in domestic politics, an American President, Democrat or Republican, always seems rather larger than life But when it comes to running the American economy, the President and his advisers might more properly be depicted as Lilliputians attemping with fragile threats, to guide the direction of the giant strides of some erratic Gnlliver.

President Johnson has handed the threads over to Mr Nixon at a moment when the shambling giant of the American economy has perhaps stumbled, or at any rate stubbed its toe. The guiding threads have been badly buffeted; some have even snapped under the strain. At the end of 1965, barely three years ago, the situation was very different from the faintly uneasy—although undoubtedly still enormously robust—condition of today. Between 1960 and 1965, the expansion of activity was phenomenal, with output, jobs, wages, productivity and profits all rising steadily, while prices remained almost stable and no-one, or almost no-one, was worried that the American balance of payments was in aggregate deficit of more than $ll,OOO million for the five years. Since early 1966, however, the picture of endless boom and growing prosperity of all has become badly tarnished. Jobs, incomes and Government spending on social needs have continued to rise, as have output and productivity. There have, however, been two deteriorations. Prices began to accelerate upwards in 1966 and in 1968 increased by more than 4] per cent. Second, the American trade surplus has all but evaporated, from a thumping $5300 million in 1965 to a miserable $720 million in 1968.

business and the availability of cash, resulting in the famous money “crunch” of the summer of 1966, in which the price of money accelerated so fast that funds were rapidly drained out of mortgage societies into banks, and thence to the money market, leaving the housing industry in a major slump. Precautions Taken

the fact that interest rates were still low (but not for long!) led him to put off his request for the increase until July, the heart of a long, hot summer in Congress, where tne heat was coming from the slow roasting of the Administration by a Congress far less pliable than before the elections of 1966. Yet another unwelcome development was the collapse of the “guidepost” policies for wage and price restraint, abandoned at the beginning y®ar as unpractical after prices had risen more than 3 per cent in 1966, and outstripped in any case by actual wage contracts running at an average of over 5 per cent, 2 per cent higher than the old guidepost. Of the Lilliputian controls of the economy, both the guideposts and fiscal policy were in disrepair by mid1967. This left monetary policy, also difficult to use between mid-1967 and mid1968, because of massive borrowing needs of a Government running a 524.000 million Budget deficit. It was thus impossible for the Federal Reserve to keep money too tight; interest rates would have been forced by Government borrowing to move even higher. Finally when the tax increase did eventually come through, monetary policy swung too far towards relaxation, in false hopes that the tax impact would be swift. Only since December have the monetary authorities and the Treasury as well been applying the brakes together. Fewer Changes This is the situation Mr Nixon has inherited. Employment remains high, and an “inflationary psychology” appears to be throughly implanted. Of the various controls President Johnson used in his Administration, Mr Nixon has only publicly disparaged the defunct wageprice guideposts. His advisers also believe that the Democratic Administration was too prone to use “fine-tuning." For their part, the Republicans would prefer less frequent changes in public policy, and appear to embrace with equanimity, if not relish, the present setting of the controls. A final point. It is not reckoned inconceivable in Washington that a Republican Administration can persuade Congress to make reforms in economic techniques that would not be permitted of a Democratic (and thus possibly profligate) Administration. One such reform is to change the rules and allow the Government to borrow long-term funds at a higher rate than the present 4] per cent annual interest limit, a liberality that has never come near being granted to the departed Democratic Administration.

When this condition began to be obvious, the Government took precautions. The 7 per cent investment tax credit was suspended to discourage businessmen from capital expansion, and the Federal Reserve Board lowered the ceiling rate at which banks could pay interest on “time deposits.” The mini-squeeze of 1966 appeared to have done the trick. By the end of the year, businessmen’s plans for expansion had been curtailed and the recovery of the building industry from the money squeeze got under way remarkably soon after the end of the year. Unfortunately, the apparent successful touch on the fiscal and monetary brakes concealed a hidden touch on the accelerator. For throughout the 12 months beginning on July 1, 1966, the Federal Government was spending money at a rate of about $lO,OOO million a year faster than planned. This arose from a straightforward miscalculation of the cost of the Vietnam war—itself based on the optimistic assumption that the war would be over by mid-1967. The real damage done by what Edwin Dale of the “NewYork Times” has fittingly christened the “inflation goof” was not the pumping of money into the economy but the fact that it prevented President Johnson from asking, in 1966, for a tax increase to complement the tight money policy of the Federal Reserve. No Good Argument Without the $lO,OOO million extra war spending (which was not admitted, for fear of discouraging Congress from passing social spending Bills), the President had no good argument for a tax increase in 1966, an election year for all of the House of Representatives and a third of the Senate. By the end of 1966, however, things still looked rea-| sonably all right. The only damage the squeeze seemed to have done was to have set corporation profits back in the second half of the year and to have hurt the housing industry. Worse was to follow in the opening months of 1967. Profits continued to fall sharply, as did expansion plans. President Johnson could not fail to ask for a tax increase to pay for the now admitted cost of the war, but the fall-off in profits, the housing lag, and

The year 1966 was crucial in this deterioration. President Johnson then saw the fruition in Congress of many of his most ambitious social reform programmes; he also saw with undoubted satisfaction that, for the first time since the Korean war, unemployment ran at below 4 per cent, the target of his Administration. Aiming to see output and employment high, with a growing “dividend” of taxes to be spent on education, housing and tending the poor, and prices stable for the growing prosperity of the better off, President Johnson came very near to pulling off the trick completely. Three Methods His team had three methods in hand with which to guide the expanding eco-i nomy in the direction he[ sought. Fiscal policy andcontrol of the Budget was one; monetary policy conducted by the Federal Reserve Board another; the incomes-policy wage and price “guideposts” the third. Walter Heller, chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson, and the hero of the epic saga under the former of bringing these methods of “fine tuning” of the economy to Presidential notice, has said that the test of this kind of policy is whether it works as well when attempting to put the brakes on as it certainly did in the post-Eisenhower years when its task was to stimulate an under-exerted economy. The lesson of 1966 is that, at any rate at its first hurdle, the “New Economics” faltered. The confidence of 1965 gave businessmen excellent reasons to extend their plans for expansion, since profits had as yet to be squeezed; while the Federal Government was injecting large sums of money into the economy. The result was a collision between the aspirations of