The Virtues of Penny Pinching

THE ECONOMY The Virtues of Penny Pinching

It was Washington's No. 1 topic last week, overpowering talk of Viet Nam, Charles de Gaulle and the Sino-Soviet split. Lyndon Johnson, who had hoped that the subject might vanish of its own accord, now found himself devoting an extraordinary amount of time to talking and thinking about it. "I remember," he told a convention of municipal officials at the Washington Hilton Hotel, "when you couldn't walk into any hostess's home without them saying, 'What do you think about McCarthy?' A month ago, it was 'What do you think about the pause?' Now it is 'What do you think about inflation?' "

Inflation was certainly on almost everyone's mind. The housewife could see it on almost every price tag in the supermarket, the businessman in the price he pays for raw materials, the consumer in the rising cost of services. In fact, inflation is so much a topic of conversation that when Los Angeles Dodger Pitchers Sandy Koufax and Don Drysdale signed last week for a new joint contract totaling some $240,000, it was widely --and wryly--noted that their raise exceeded the President's 3.2% anti-inflationary wage guidelines by quite a bit. The increase for the two amounted to about 70%, despite the fact that their 1965 productivity rose by only 32% (from 37 victories to 49).

Still, the very talk of inflation has itself been somewhat inflated. Though there are ample signs of danger, the U.S. is not yet suffering from the serious inflation that precedes, and frequently causes, severe economic trouble. Lyndon Johnson noted last week that, as far as he could tell, the economy was not "shooting off into outer space." It is to make sure that this does not happen that Johnson all week --in public and in private, over telephone and microphone--exhorted everyone from housewife to Governor, labor leader to corporation head, to fight off inflation by clamping a tight rein on his spending. "The amber light is on," he warned. "We must see that some restraint is applied."

Favorite Worry. Only a few weeks ago, the President felt confident that inflation was not a serious worry. His top economic consultants advised him that the economy was not "full of helium," and businessmen in whom he places trust assured him that inflation was not a real threat. "The favorite American pastime is worry," Johnson told a group of White House fellows when the talk turned to inflation. "It's their favorite jag." But the light turned amber--and Johnson called for an application of the brakes--when he got a look last week at a fresh stream of statistics that showed that inflation, if nothing to get panicky about yet, is certainly something to be dealt with.

First off, the President discovered that retail sales for January hit an all-time high of $25 billion despite assurances that he had received, on the basis of early data, that they had leveled off --an anti-inflation sign he publicly welcomed two weeks ago. Price rises were announced for shoes, sheet glass, fertilizers and, despite Administration efforts to avert it, most cigarettes (a penny more a pack). Most worrisome of all was a half-percent rise in the crucial consumer price index for February, caused largely by spiraling meat, milk, poultry and vegetable costs. It was the largest increase for any February since 1951, and it came after several other monthly rises and on the heels of an even greater spurt in the monthly wholesale price index.

"Prices are moving up too fast to be comfortable," the President complained to a convention of mayors. "Increases at these rates cannot long be tolerated." The President then brought up a subject that has become just about the major source of speculation in Washington: the possibility of a tax increase. Despite widespread urgings by such economists as M.I.T.'s Paul Samuelson that taxes be hiked to head off inflation, Johnson has repeatedly said that he considers a tax hike a last resort and that he has not made up his mind to ask for one. If the price situation worsened, however, he noted last week, he would have little choice.

While "I don't like to recommend a tax increase, I think that Congress would rather have a modest increase--5%, 6%, 7%, corporate and personal--then to see inflation and the value of the dollar go down."

Miserly Mood. Before he makes up his mind about a tax increase, the President seemed determined to talk the entire nation into a miserly mood in order to cool off the economic advance. Dining with some 200 businessmen at the White House, he asked: "How many of you would recommend tomorrow a tax in crease for the purpose of restraining our economy? Those of you that would, I wish you would raise your right hand." Not a hand went up. In that case, said Johnson, he would expect them to defer, stretch out or abandon at least $6 billion of a total of $60 billion in planned capital expenditures. Several agreed to try. Campbell Soup President Willam B. Murphy ordered aides to cut back on all capital expenditures except those that are "absolutely required," and not to be outsouped, H. J. Heinz Co. Board Chairman H. J. Heinz II ordered a similar review. Alcoa, Continental Oil and Reynolds Metals promised to try to trim their outlays.

To show that his Administration was doing its share, Johnson asked his Cabinet to reduce spending by $1.1 billion over the next three months in order to cut the budget deficit to $5.3 billion. He asked the mayors to cut spending too. "The Federal Government is doing it," he said. "I have asked the Governors to do it. I have asked the businessmen, the private managers, to do it, and I am asking the mayors to do it." Very shortly, he added, he would ask "the leaders of the workingmen of this country"--most notably A.F.I.-C.I.O. President George Meany--to do it. And he wanted the ladies to get in on the act. "I just wonder," said the President, "if the women of this country couldn't get out their lead pencils and put on their glasses and look at some of these price lists and say goodbye to those products that insist on going up and up. Just say, 'I don't have to have that. I will just substitute.' " The President had already revealed that he had asked Lady Bird to buy cheaper cuts of meat for the White House. Now he confessed that they had long been planning to add "two little rooms" to their house on the L.B.J. ranch. "But I asked Mrs. Johnson last night to defer those two rooms. That is a little thing, but if everybody does that, it won't get too tight, it won't heat up too much, the economy won't get out of our hands, and prices won't go up 5% in the next five months."

Rifles v. Ruffles. If the President's unorthodox strategies fail, stronger medicine may be in order--though probably not as strong as the dose that Lester Pearson's Liberals last week readied for Canada. To "pace the prosperity" there, the government hopes to raise income taxes 8%, cut back government construction 10% and levy a 5% tax on industry's cash profits, refundable with interest 18 to 36 months after payment. In the U.S., Johnson's Republican opposition insists that the most effective medicine would be a cut in domestic spending. Accordingly, when a $2.5 billion money bill hit the House floor last week, G.O.P. Congressmen saw it as an issue of "guns v. butter," or as they now call it, "rifles v. ruffles." Since much of the money was earmarked for pensions and pay raises for Government employees and servicemen, the Republicans aimed instead at what they considered to be two Great Society ruffles: a $12 million rent-subsidy program for the poor and a $10 million Teachers Corps project for impoverished neighborhoods. During a seven-hour, bitterly partisan debate, the Republicans tried to strike out the rent-subsidy funds. But the Democratic leadership had done its work well. The attempt failed narrowly, 198 to 190, with six Republicans helping to foil it. Later the entire bill passed by a comfortable 269-to-122 margin.

The Republicans obviously intend to make spending a major issue in this fall's campaign. If the Administration does not cut spending, says Minority Leader Gerald Ford, a tax hike is inevitable, and that "will hurt Democrats and help Republicans in November." Johnson is keenly aware of the issue's potency--and so far has handled it with considerable skill. Some Johnson buffs are convinced that he has intended all along to ask for a tax increase but has held off so as to get himself in the position of being urged to ask for one. If he feels it necessary to act, all the talk has so thoroughly prepared Americans for a tax increase that, according to one poll, four of every five citizens fully expect one soon.

Lucky Breaks? Still, Johnson figures that with a couple of lucky breaks he might just manage to squeeze by without one. A tapering off in Viet Nam outlays would be one such break--though that depends, of course, on how the war goes in the next few months. Another would be a leveling off in wholesale and consumer prices. To a certain extent, that may already be happening. Last week Agriculture Secretary Orville Freeman noted that in the month and a half since the figures were compiled for the latest price indexes, the prices of several key foods have dropped; preliminary figures for the latest wholesale price index also turned down slightly.

For the time being, says the President, "I'm going to sit steady. We don't want to put both feet on the brakes and turn us into a skid that is a recession or depression." For that reason, the President's voice is likely to be heard often over the land in the coming weeks of spring, earnestly preaching the virtues of penny pinching.

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