A Question of Psychology

In their offices just across from the White House, the President's hardworking economic advisers are expected to stay on the job until they see the lights blink off in Lyndon Johnson's Oval Room. Last week their lights burned even later than usual as the members of the Council of Economic Advisers grappled with a problem that deeply affects U.S. business: how to keep the economy expanding well into 1965. The council members--and many businessmen--are concerned about speculation that the economy is showing signs of age after its 45-month expansion, and that there is little on the horizon to keep it rising rapidly beyond next year's first half. Business psychology, after all, is an important ingredient in the advance, and no one wants to see it turn bad.

Quite a few experts are warning businessmen against talking themselves into a slowdown. "The majority of forecasters are too pessimistic," said James O'Leary, vice president of the Life Insurance Association of America, in a speech in Manhattan. The speculation about a leveling-off in 1965 has already led to a certain nervousness, notably in the stock market. Since reaching an alltime high of 891 four weeks ago, the Dow-Jones industrial average has retreated 27 points. Depressed by all the talk, as well as by Britain's financial crisis, it fell 6 1/2 points last week. The usual year-end rally could still occur--the market has risen in 50 of the last 67 Decembers--but last week's decline pretty well dashed the hopes of the bulls who had expected it to crack 900 by New Year's Eve.

Some Doing. Many businessmen are hoping that Lyndon Johnson's year-end policy statements about the economy will put some fizz back into business psychology. "My guess and my hope is that he will turn up confidence-building statements," said Raymond Saulnier, former chief economic adviser under President Eisenhower.

There is, in fact, plenty of basis for confidence. In industries as diverse as rubber, furniture and electronics, top officials last week reported record sales for 1964--and said that they expect to do at least as well in 1965. The steelmakers have already surpassed 1955's production record of 117 million tons and are well on their way to a 125 million-ton year; the automakers last week set an alltime weekly production peak of 223,500 cars. Personal income is rising by an average of almost $2 billion a month, and retail sales, running 4% ahead of last year, are headed for an alltime high at Christmas.

Precisely because the economy has performed so splendidly in 1964, the Government's policymakers realize that it will take some doing to maintain the momentum in 1965. Last week the Commerce Department predicted that capital spending in next year's first half will rise 8%, to an annual rate of $47.7 billion--a good gain, but not as great as this year's 14%. The consensus of economists is that the gross national product, which rose 6.7% this year, is due for an advance of some 5% next year, to $655 billion. While that might seem satisfactory, it would neither significantly increase corporate profits nor reduce unemployment.

New Approach. To give the economy a greater lift, Chief Presidential Economist Gardner Ackley and his colleagues on the council are readying several plans for further tax cuts, and M.I.T.'s influential Paul Samuelson has strongly counseled President Johnson to push federal spending "above the psychological level of $100 billion." The Administration figures that it will have no trouble cutting excise taxes by as much as $3 billion, but it also plans to revive the concept of "temporary" reductions in income taxes that Congress turned down when it was forwarded by John Kennedy in 1961. Instead of asking for full presidential power to act, as Kennedy did, Johnson has in mind a plan by which the President would only propose a temporary cut, leaving Congress with the power to act upon it. The Government's economists feel that the quick success of the 1964 tax cut, plus Congress' recent tolerance of budget deficits, makes the acceptance of such a proposal "very likely."

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