Unbalanced Balance

THE ECONOMY Unbalanced Balance

Apart from inflation at home, which seemed to preoccupy Washington last week, the U.S.'s most stubborn economic problem of 1966 is proving to be its eight-year-old balance of payments deficit. Directly or indirectly, that deficit--the excess of dollars spent abroad over dollars earned there--has already helped stall negotiations for world monetary reform, caused U.S. corporations to invade the European market for dollar bonds, prompted Charles de Gaulle to keep cashing in France's dollars for U.S. gold at a $33 million-a-month clip. Last week the Administration got more bad news: imports are climbing so fast that the nation may well run a $1.8 billion payments deficit this year, as against $1.3 billion in 1965.

Melting Surplus. Only seven weeks ago, Treasury Secretary Henry Fowler insisted that the U.S. would end the chronic deficit this year, give or take $250 million. The new forecast, which came from Commerce Department experts despite official denials of its existence, seemed to erase Fowler's promise.

Ironically, the surge in imports results from the exuberance of the U.S. economy. When the total national output of goods and services grows by 5% a year, Government analysts figure that imports increase at the same pace. When gross national product swells at a rate of 8% to 9% a year, as it did in the last three months of 1965, then such is the increase in buying power that imports grow twice as fast. In the fourth quarter, they shot up 17 1/2% and Commerce experts predict that performance will continue through 1966. As a result, the U.S. trade surplus--the excess of exports over imports--continues to melt, from $6.7 billion in 1964 to $4.8 billion in 1965 to its present annual rate of $4 billion. That surplus is what the U.S. must rely on to finance foreign aid and the cost of the Viet Nam war, both of which put hundreds of millions of dollars into hands across the seas.

One way to plug the leak would be for the Administration to take some steam out of the domestic economy--but such a course would bring results slowly. Some businessmen insist that the Government needlessly hampers the efforts of U.S. firms to sell abroad by mindless application of domestic anti-trust laws, by tax penalties, and by weak commercial staffs in embassies. Washington Democrat Warren Magnuson, chairman of the Senate Commerce Committee, last week argued for legislation creating new export tax incentives, which are often of little help.

Guidelines for Tourists? Washington feels that the big drains caused by corporate investment and bank lending abroad have been substantially plugged by Government-imposed "voluntary" restraint. Last week the Federal Reserve reported that U.S. banks cut their outstanding foreign loans by $385 million during January and February. Though industry plans to step up its in vestment in foreign plant and equipment by 24% to a record $8.8 billion this year, much will come from dollars borrowed abroad. What else can the Administration do to curb the deficit? Says Treasury Under Secretary Joseph Barr: "The possible courses of action clearly point at the tourist." Of course, as Barr knows, there are political hazards in offending the millions of American tourists now flocking abroad by putting controls on their spending.

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