Looking for the Whites Of the Enemy's Eyes

At an interesting watershed for the much manipulated U.S. economy, two of the nation's most prestigious economic voices last week prescribed the same course--for widely differing reasons. Gardner Ackley, chairman of the White House Council of Economic Advisers, and William McChesney Martin, chairman of the Federal Reserve Board, renewed the call for a tax increase to fend off inflation.

Ackley, testifying before the Congressional Joint Economic Committee, conceded that the economy in the first half of 1967 had performed "more sluggishly than we anticipated" and "is not advancing too rapidly today." Still, he forecast a hot second half. Said he: "A strong revival of demand is on the way --one that will produce either unacceptable inflationary pressures or a return to tight money, or more probably both, by early next year at the latest." Only a 1967 tax increase, by Ackley's recipe, will forestall such a future. Yet he an- noyed the committee members by refusing to be pinned down about either the size or the timing of the tax increase.

Not so Bill Martin, a much less political and much more independent man than Ackley, but nevertheless an early supporter of President Johnson's January request for a 6% surcharge on corporate and personal income taxes. Speaking to the Toledo Rotary Club, the FRB chairman bluntly urged higher taxes without delay. Moreover, he said he would back an increase even larger than 6%, "if warranted," after Congress makes this year's appropriations. Unlike Ackley, who based his argument on bullish expectations of a strongly rising market for durable goods, a burst of spending for factories, and an early end to the economic drag of falling business inventories, Martin accentuated the negative.

Martin's argument was founded on anticipation of a huge and inflationary federal budget deficit. Having closed the 1967 fiscal year July 1 with a deficit of about $11 billion, second highest since World War II, the Administration now estimates that the next year's will be $13.6 billion. Treasury Secretary Henry Fowler recently admitted that it might go as high as $24 billion, mostly because of the Viet Nam war. Warned Martin in Toledo: "We must have adequate, effective--and above all --prompt tax action that would whittle down the deficit to manageable proportions. Delay would permit inflationary forces to gain momentum."

Dark Spots. Behind the words of both Ackley and Martin lay the fact that the U.S. economy is pulling out of the winter downturn which is being called, in current vogue, the "mini-recession." Though the economy, as Martin noted, "is beginning to show signs of moving ahead again," many dark spots remain. Despite massive stimulation to business through an easing of credit and a sharp rise in federal spending, industrial production has slipped four months out of the past five on the Federal Reserve Board index; in May, it fell 2% below its December peak. The nation's real output of goods and services, in the first three months of this year, missed its clockwork quarterly advance for the first time since 1961.

Convinced that the Government will eventually be forced to pre-empt borrowable funds in order to finance a great budget gap, businessmen have rushed to float their own bond issues while they can. So interest rates have started climbing again. Illinois Bell Telephone Co. last week was forced to pay 6.043% interest to borrow $125 million, the highest rate for any Bell System bond issue in 45 years. Because bonds and mortgages compete for the same pool of long-term funds, rising bond rates will draw money away from home loans (see following story) thus weakening and perhaps stalling the revival of housing.

Watching these developments and listening to Bill Martin talk about taxes, Wall Street slid back into a bearish stance. Despite such favorable omens as a 7% rise in machine-tool orders, prices on the New York Stock Exchange moved downward all week. The Dow-Jones industrial average lost 17.11 points, closing at 860.26, for a 25-point decline in a fortnight.

Inspiring Caution. Wholesale and retail prices are nevertheless rising. Last week the Labor Department reported that its consumer price index jumped a comparatively sharp 0.3 point in both April and May, to reach 115.6% of its 1957-59 average. Such facts and figures inspire caution among many economists. George Katona, director of the University of Michigan's Survey Research Center, advised Congress that his latest study gives no sign consumers are ready to go on a shopping spree. And M.I.T. Economist Paul Samuelson told legislators that even though he still prediets a strong second half, such a revival "is still not here and cannot be counted on with confidence." Samuelson counseled Congress to "hold your fire on the tax increase. We still cannot see, so to speak, the whites of the eyes of the inflation enemy."

Many businessmen feel the same way. Says President Robinson F. Barker of PPG Industries: "That long-heralded improvement in the economy just hasn't appeared. There'll be a turnaround--but when?" Says Chairman Birny Mason Jr. of Union Carbide: "It's a guessing game as to what's coming. We don't foresee any deterioration--or any early improvement either." In many industries, such as rubber, railroads and chemicals, profits are being squeezed by rising labor costs or weak demand. As always, many executives blame Washington for the difficulties in the private sector of the economy. Says Vice President William Butler of Chase Manhat tan Bank: "You can always count on Government to make mistakes."

The most disquieting--and all-too-probable--mistake, in the eyes of businessmen, would be deficit spending on a scale that pumps up the Government sector of the economy at the expense of private industry. While willing to be taxed to support whatever the Viet Nam war costs, many businessmen argue that Washington should cut back spending on the Great Society, highway building and space exploration. However unpleasant and politically difficult that might prove, the alternatives--inflation or wartime economic controls--seem at least equally unpalatable.

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