Shifting Gears to Fight Recession

After months of deliberation, President Ford seemed ready last week to face up to the threat of a deepening downturn with a more expansive economic policy. No announcements have yet been made, but it is now all but certain that the President will seek a tax cut in his State of the Union message later this month. In addition, the Administration has also apparently given up on trying to cut the budget in an attempt to quell inflation. That decision alone, tentatively taken after two days of intensive discussions between Ford and his economic advisers at the President's vacation chalet in Vail, Colo., could mean that the federal deficit for the fiscal year beginning next July will swell to a massive $35 billion. The fact that the Administration is even contemplating such a deficit, which would be by far the biggest in U.S. peacetime history, shows that Ford is coming around, despite all public denials, to a view that recession has replaced inflation as the U.S.'s No. 1 economic problem.

Frightening Evidence. Even as the policy discussions continued in Washington last week, frightening new evidence of economic deterioration was surfacing. The Labor Department reported still another disturbing jump in the nation's unemployment, from 6.5% in November to 7.1% in December. Worst off were blue-collar workers: their unemployment rate leaped 1.2% in December, to a painful 9.4%. The overall jobless level was the highest since 1961 --and one that Administration economists until recently did not expect to see before this spring. All told, 6.5 million Americans were out of work at the beginning of the new year, the largest number since 1940. In a statement that seemed intended to prepare the country for even longer unemployment lines, White House Press Secretary Ron Nessen reported last week that from some economists, "the President has heard estimates of 8%" joblessness in the coming months. That is higher than any official Administration forecast so far.

Earlier, the Commerce Department disclosed that its index of leading indicators, which is designed to project future economic trends, fell 1.5% in November and 7.3% since July--the steepest five-month drop in a quarter-century. Boding ill for consumer confidence in the months ahead, a new survey by Pollster Louis Harris reported that 80% of the American people now believe the U.S. is in a recession, and 60% see it continuing through the rest of the year. To combat the worsening economic problem, President Ford at week's end signed legislation appropriating $4.5 billion for unemployment aid and job programs.

Most key White House officials now agree that a moderate tax reduction of, say, $10 billion to $15 billion would get a swift and needed injection of purchasing power into the economy. There was also general agreement at Vail to pair such a tax cut with an energy-conservation package built around excise taxes on crude oil and natural gas (see following story).

The President's apparent decision to let Government spending grow in fiscal 1976 represents a major defeat for Treasury Secretary William Simon and his staunch ally, Federal Reserve Board Chairman Arthur Burns. They have been vigorously promoting a restrictive anti-inflation budget policy to counterbalance any tax cut. Simon and the other budget hawks argue that without any increase in present spending plans, the federal budget deficit, boosted by stagflation, will total about $20 billion in the current fiscal year, which ends in June, and swell to as much as $40 billion next year if combined with a tax cut. Simon has argued that such a massive deficit would set off another round of rapid inflation within a year.

Laggard Economy. Many other experts disagree. A report issued by the moderately liberal House-Senate Joint Economic Committee recently asserted that without a tax cut, a big budget deficit by itself would do little to stimulate the laggard economy either this year or next. Its reason: most of the deficit would come not from an increase in buying power that would boost demand and lift prices, but from a reduction in personal and corporate tax revenues caused by the recession.

Indeed, most Democratic economists favor a more expansive policy than President Ford is likely to offer. They insist that a substantial burst of stimulation now would not cause a rapid runup in prices because the economy is already deeply depressed, and that the extra purchasing power would merely sop up some of business's huge inventories of unsold goods, especially autos. Liberal economists generally want a tax cut of about $20 billion or more, heavily weighted in favor of lower-and middle-income workers, along with an expansion of unemployment benefits and public service jobs and other measures to cushion the jolt for jobless workers.

One promising plan to increase purchasing power quickly has been proposed by Walter Heller, chairman of the Council of Economic Advisers under President Kennedy and a member of TIME'S Board of Economists. Heller would pare taxes on earned income of up to $14,100 by an amount equal to 2% of income, lift personal exemptions (now $750) by about $100 and raise the investment tax credit for all businesses to 10% from the present 7% for most industries and 4% for utilities. Though the total package would cost about $20 billion, Heller estimates that much of the tax cut would be offset in 1976 by higher revenues generated by a faster economic recovery.

Whether the Administration will be willing to go that far, at least initially, is open to question. But with the President at last alerted to the chilling threat posed by a plummeting economy, a plan as expansive as Heller's can no longer be ruled out.

This file is automatically generated by a robot program, so viewer discretion is required.