Tough Time to Take Over

The economic news had rarely looked so discouraging. National production in the first quarter dropped more sharply than at any time in the past 16 years. Consumer prices continued to spiral up at a dizzying double-digit rate. Interest rates on some bank loans hit an alltime high. If the new figures had been deliberately chosen to do so, they could hardly have underscored better the dimensions of the job that faces Federal Energy Chief William Simon, who was nominated last week to be Secretary of the Treasury. Simon may end up with more responsibility than anyone except President Nixon for dealing with the triple threat of economic downturn, inflation and credit squeeze.

The most eye-opening statistic of the week was that real output of goods and services in the first quarter fell at an annual rate of 5.8%. If output goes down again in the current quarter, many politicians surely will be talking about a second Nixon recession-and an inflationary one at that. There were other downbeat indicators: industrial production in March fell for the fourth straight month, and is now 2.8% below its November peak; housing starts last month were 36% below a year earlier. The declines did little to break the grip of inflation. Consumer prices in March shot up at a compound annual rate of 14%. Banks across the country raised their prime rate on business loans to an unprecedented 10%%.

Cruel Dilemma. Despite the glum news, the worst of the economic downturn is probably over. The March drop in industrial production was smaller than any of the previous three declines; auto sales in early April were down only about half as much as earlier in the year; the housing slump appears to be bottoming out; and U.S. industry plans heavy capital spending. Because the Arab oil embargo has ended, most economists expect real G.N.P. in the current quarter to be "flat"-that is, up or down only a trifle. While that would scarcely be an achievement to crow about, it would mark a considerable improvement over the first quarter. Still, the persistence of galloping inflation presents Simon and other federal planners with a cruel dilemma: they must somehow find ways to contain the price rises without restraining the economy so much as to abort a recovery from the weak first quarter.

It is not a dilemma to be celebrated , --and so perhaps it was fitting that the announcement of Simon's elevation was remarkably low-key. The introduction of a new senior Cabinet member is normally one of Washington's more established rituals; the President himself usually presides at a special press conference with the smiling appointee at his side. Last week's announcement, by contrast, had all the pageantry of a White House laundry pickup. Neither Nixon nor Simon was even there. Deputy Press Secretary Gerald Warren slipped the news in at the regular 11 a.m. White House press briefing and acknowledged only after questioning that the President was "extremely proud" to nominate Simon.

No matter how it was handled, the announcement would have been anticlimactic. It had been common knowledge for almost a month that Simon would succeed George Shultz as Treasury Secretary-and the announcement by no means decides Simon's backstage battle with Budget Director Roy Ash for pre-eminence in economic policymaking. As the new Treasury chief (Senate confirmation seems certain), Simon may eventually wield more influence than any other economic official. But Ash has secured a promise from Nixon of an expanded role in policy formation.

In addition, Simon pointedly is not being named to three other top economic posts held by Shultz. John Dunlop, director of the Cost of Living Council, will take over from Shultz as chairman of that group--a rather empty honor since COLC will lose most of its power when wage-price controls expire April 30. Shultz's job as Assistant to the President for economic affairs will be left unfilled. Nixon himself will succeed Shultz as chairman of the Cabinet-level Council on Economic Policy and, as Warren put it, "intends to play an increasingly expanded role in the coordination of economic policy." Simon will, however, inherit still another Shultz job: chairman of the economic "troika"--the Treasury Secretary, Budget Director and chairman of the Council of Economic Advisers--that meets periodically to advise the President. That post should give Simon a slight edge over Ash.

Simon is being replaced as energy chief by John Sawhill, a 37-year-old former budget official whom Simon chose as his deputy when the Federal Energy Office was created last December. Simon will probably continue to set broad energy policies, while Sawhill will oversee day-to-day operation of the FEO.

Phone Demon. Simon enters the Cabinet after only 17 months in Washington; Shultz spirited him away from a Wall Street bond-trading career that had made him a millionaire to take the No. 2 job at Treasury in December 1972. In that post, and later as energy czar, the 46-year-old Simon acquired a reputation for candor, accessibility to the press and to Congress, and a fierce independence. He has clashed publicly with other top Administration officials, and even found himself at odds with the President last winter when Simon ridiculed some energy-crisis observations by the Shah of Iran, whom Nixon immediately defended. A demon on the telephone, Simon sometimes makes more than 100 calls in a single evening. At a champagne party in his honor last week, his FEO staff presented him with a toy telephone.

The change in leadership at Treasury probably will produce no immediate changes in the Administration's preference for a hands-off approach to economic management. Like Shultz, Simon is a confirmed free-marketeer with an abiding faith in the power and efficacy of free enterprise. His service in Washington, Simon said recently, "taught me how impossible it is for the Government to try to settle all the little details in this incredibly complicated economy." Accordingly, he opposes any return to fixed exchange rates for the dollar against international currencies, does not want to reimpose wage and price controls, and would like to give more generous tax breaks to business. Yet Simon has said he does not oppose Government intervention in the economy from time to time, and he seems more flexible in his beliefs than Shultz. Simon's nomination may have been announced with less fanfare than any previous Nixon appointments, but few other Cabinet performances will be watched as closely.

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