A Growing Air of Concern

Halfway through what has so far been a dismal year for the economy, the Nixon Administration is still groping for a way to break the grim combination of stagnant production, roaring inflation, strangling interest rates and slumping financial markets. Last week the President met at the White House with 25 top businessmen and non-Government economists to solicit their views.

Throughout the meeting, Nixon appeared confident, jotted notes on a pad and listened intently to opinions. No fresh suggestions for improving the economy were offered, but most businessmen pressed for a cut in corporate taxes and expressed growing concern about the disruptive impact of towering interest rates on money markets. For the first time, the President expressed some uneasiness that the Federal Reserve Board's tight-money policy might tip the economy into recession. That, he feared, might prompt Congress to push for more expansionary policies and to pass "silly" legislation that would further fuel inflation. At week's end the President took several of his economic advisers to San Clemente for a round of conferences in preparation for a major economic policy speech. A prime problem is how to rein in prices while enabling the economy to recover.

Early estimates from several members of TIME'S Board of Economists, for example, indicate that output of goods and services, adjusted for price changes, is essentially flat. David Grove calculates that real gross national product, which dropped at an annual rate of 6.3% in the first quarter, dipped another .3% in the quarter ended last month. Otto Eckstein more optimistically figures that production rose--but by a lackluster rate of 1.6%. Whatever the exact figure, the pattern of a sharp first-quarter drop followed by little if any real growth in the second quarter will keep economists arguing for months about whether the situation can properly be called a "recession." More important, both Grove and Eckstein forecast only a modest resumption of economic expansion late this year and through most of 1975. A third board member, Robert Nathan, says in agreement: "There is little prospect of vigorous recovery. None of the signs of strong expansion are visible."

Bleak Outlook. It might be argued that that is not necessarily bad news: a strong expansion could worsen the nation's already horrendous inflation. Yet the outlook on prices is also bleak. True, a drop in farm goods held the rise in wholesale prices in June to an annual rate of 6%, the first less-than-double-digit figure in seven months. But even the usually optimistic Herbert Stein, chairman of the Council of Economic Advisers, points out that farm prices are rising again in July and concedes that a continuing spiral in industrial commodity prices--up 2.2% in June alone--"reveals the seriousness" of continuing inflation. Grove predicts that consumer prices in the second half of this year will shoot up at an annual rate of almost 10%, propelled mostly by a sharp acceleration in wage settlements.

Inflation is continuing to push interest rates to unheard-of peaks. Business and other borrowers need funds just to pay inflated operating costs, but they are increasingly unable to raise money in the bond or stock markets. Last week New York City officials withdrew from sale $438 million of bonds rather than pay tax-exempt interest of 7.9%. Banks, swamped by loan demand, established a 12% prime rate on business loans, and Central National Bank of Cleveland went up to an incredible 12 1/4%. The news sent the stock market through a roller-coaster week. The Dow Jones industrial average fell 32 points in the first four days to a bit less than 760, the lowest close since November 1970. Then it shot up almost 28 points on Friday, in part out of relief that no other banks had raised the prime rate above 12%. The reaction was an ironic comment on investors' state of mind; not before last week would anyone have considered a prime rate of 12% good news.

For all its public relations flurry last week, the Administration is still uncertain about how to attack inflation, the root cause of the economic troubles. Presidential Counselor Kenneth Rush first advocated Government pressure to restrain wage-price increases, then said that he did not favor guidelines or jawboning by particular unions and companies--a stand that seems to leave room only for pleas for labor and industry to behave themselves. Stein in a television interview implied that the public was to blame for inflation, because "Government policy operates within the limits of what the American people want and will tolerate."

More seriously, policymakers have not resolved a debate over how to restrain Government spending and take some of the burden of battling inflation off the Federal Reserve. The President has set a target of holding federal spending to $300 billion in the current fiscal year, or $5 billion below projections, but has so far avoided the hard decisions on where to cut. Treasury Secretary William Simon arrived at a policy meeting last week with a list of suggested cuts--but, says a White House staffer, "nobody took it seriously."

New Advice. Fortunately, some stronger economic leadership may be coming. Nixon has chosen Alan Greenspan, a Manhattan consultant to corporations and informal adviser to the President, to succeed Stein as head of the Council of Economic Advisers. The nomination can be stopped if the Senate Banking Committee does not approve an arrangement whereby Greenspan would keep his stock in his consulting firm, Townsend-Greenspan & Co., in a trust from which he would receive no income while in Washington. But if the Senators go along, the appointment will probably be made this week.

Greenspan, a highly respected economic forecaster, has been a member of TIME'S Board of Economists for three years, during which he has assessed business trends with a candor frequently not found in Washington. A pragmatic conservative, he views inflation as a problem of the highest urgency and is a strong advocate of stern budget-cutting to bring it under control. He is a dedicated foe of any kind of economic controls and also opposes tax cuts, at least for the present; he has been impatient with arguments that economic necessity must yield to political considerations. His appointment would not mean any change in direction for Administration policy. But he would probably be more independent and influential than his predecessors and could well give present policies more vigorous direction.

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