Man in a Box

The eyes of the U.S. last week turned anxiously toward Wall Street, where drama and despair marked the stock market's worst week's plunge since June, 1950.

The sad news on the Big Board did not mean that the U.S. economy was in bad trouble. But it did highlight a dilemma for the economy and the Kennedy Administration. As a keystone of his Administration, President Kennedy promised to do two things: increase economic growth and check inflation. The trouble is that while both aims are laudable in theory, they do not necessarily go together. In trying to achieve both of them at the same time, and in using methods that have alarmed businessmen, the President may have thrust himself into an economic box.

"Normal" Inflation. Inflation has long been a companion to economic boom.

Over the last 60 years, prices have edged upward at a rate of 2 1/2% a year--while the U.S. economy achieved the most remarkable growth in the world's history.

Many economists believe that the price of a prosperous and growing economy is a "normal," or controlled, inflation of 2% or 3% a year, and that economic expansion is bound to raise the price of labor and materials. They point out that although prices have risen, the U.S. consumer has usually got better products for his money--and that his rising wages have given him the added spending power to enjoy them. To such men, the alternative to "normal" inflation--as opposed to the runaway inflation of post World War I Germany--is economic stagnation or downright recession.

The U.S. has achieved comparative price stability over the last four years, but that stability has not been accompanied by robust economic growth and was, in fact, accompanied in 1958 by the worst recession since World War II. Even though the consumer price index has been edging up--the Commerce Department announced last week that it had risen .7% in the first four months of 1962--its rise has been only a modest 1% or 1 1/2% in recent years. In the economic boom of the 1950s, that rise averaged 3%.

Dropping Labels. Yet it is the expectation of rising prices, profits and wages that spurs the whole economy--and that expectation has been badly dampened by President Kennedy's determined anti-inflation drive, particularly by his "guidelines" for industry and labor. The stock market's plunge reflects the investor's belief that prices and profits will not rise enough to give him a chance for good investment gain. The businessman's notable lack of confidence reflects his fear that the President may further interfere in the normal workings of a free market. As measured by the latest Gallup poll, President Kennedy's popularity has dropped four points, to 73%, since he pounded back the steel industry's price hikes.

Recognizing this, the President last week asked a business and labor conference in Washington to "drop our labels" and face economic problems together.

"Unless we can work them out together," he said, "all of us are going to suffer." Yet neither business nor labor showed much desire for togetherness with Government.

Ford Motor Co. Chairman Henry Ford II last week expressed "fear that the enormous power that can be mustered by a determined and resourceful President might be used increasingly to impose informal, but nonetheless direct, controls on the legitimate action of business and, possibly, labor." At a meeting of the American Iron and Steel Institute in Manhattan, steelmen were critical, sometimes bitter, about the President's role in the steel-price rollback. As for labor's guidelines, the A.F.L.-C.I.O. was having none: President George Meany announced last week that the A.F.L.-C.I.O. will open a national drive to win a 35-hour week in defiance of President Kennedy's wishes.

Powerful Rein. By discouraging wage and price increases, the President has also discouraged the ordinary companions of economic growth. He cannot retract his stand on holding down prices in basic industries without losing face, nor can he stand still for major wage increases without drawing cries of favoritism. But while holding business and labor back in the name of anti-inflation, the President has not exactly lived up to his own formula.

He has increased Government spending, will probably run a healthy Government deficit in fiscal 1963--both factors that ordinarily fuel inflation and lower the value of the dollar.

Solid business expansion does not come from Government deficits (which are mainly valuable in perking up a lagging economy), but from expanding business and consumer demand. By standing back and letting wages, prices and profits find their natural market level. President Kennedy would probably do more to spur the economy than by heavy Government spending--even at the expense of an allotment of "normal" inflation.

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