Bigger Tax Cuts for Faster Recovery

TIME'S BOARD OF ECONOMISTS

The U.S. recession is now 15 months old, and it is growing bigger and meaner all the time. The urgency of the debate now under way in Washington over how--and how fast--to turn the economy around was underscored by a drumbeat of bad news about falling production and shrinking profits. But of all the measures of the nation's deepening economic problem, none was quite so stunning as last week's report of a scary 8.2% unemployment rate in January.

The new jobless figure hit a confused and querulous American public just as it was trying to grasp the implications of one of the most astonishing budgets ever prepared by any postwar Administration. A conservative Republican President, who had been talking of a tax surcharge and preaching a balanced budget as recently as November, was now proposing tax cuts totaling $16 billion this year and a record peacetime deficit of $52 billion in the fiscal year that begins this July. Even more remarkable, given the general optimism of past Ford Administration pronouncements on the economy, was the grim and brutally candid set of projections--tucked into the President's 384-page budget --about jobs, prices and profits over the next five years (see box next page).

If the assumptions of Ford's own economists are accurate, prices will average more than 11% higher this year than in 1974, and will still be rising at annual rates of more than 6.5% through 1977. At the same time, unemployment will average 7.8% over the next three years and still be hovering at a painful 5.5% in 1980. What the Ford budget seemed to be offering the nation, as United Auto Workers President Leonard Woodcock put it, was essentially "a planned recession for five long years." Indeed, the sudden surge in unemployment and the budget's amazing projections of continuing high joblessness forcefully raise some questions: What should the President do? Isn't there a better, faster way to revitalize the economy and get America back to work?

For members of TIME'S Board of Economists, meeting in Manhattan last week, the answer was a resounding yes. Most of the eight members of the Board warned as early as February 1974 that at least a mild recession was coming --and in subsequent months urged the Government to switch to more expansive fiscal and monetary policies to alleviate the slump. Now they believe that the Administration's budget, even with its big deficit, will do very little in a $1.4 trillion economy to revive demand, spur production and thus begin restoring jobs. Asserts Tax Specialist Joseph Pechman: "If Congress were to adopt the Ford program lock, stock and barrel, the net stimulus today would be zero." Adds Arthur Okun of the Brookings Institution: "The entire reason for that deficit is that the economy is in terrible shape, and is knocking hell out of revenues and increasing federal expenditures for unemployment and other things." Banker Beryl Sprinkel, one of the few Board members to disagree, argues that the budget figures are "realistic if we have high among our priorities keeping this inflation under significant control."

Though there were differences in degree, almost all the Board members favored a bigger, more permanent tax cut than the President is offering. Apart from a $4 billion increase in the investment tax credit for business, the Administration's plan calls for a one-shot $12 billion rebate to individuals to be made in two parts, one in May and the other in September. Most Board members agreed that to get the most stimulation, the $12 billion tax rebate for individuals should be paid out in a single sum as soon as possible.

In addition, many members wanted a tax reduction for individuals that would extend into next year and beyond. Republican Murray Weidenbaum, who leans toward a $10 billion continuing tax cut, notes: "The case for a permanent reduction becomes much stronger when you look at the high unemployment rates projected for the rest of the decade." The boldest suggestions came from Pechman and Walter Heller, both liberal Democrats: they favor a permanent tax cut of at least $25 billion or so annually that would take effect next July 1. Yale's Robert Triffin, too, favors greater stimulus, but he would also like to see greater emphasis on more selective antirecession measures, such as bigger housing subsidies.

Despite the sharp rise in unemployment, the President and most of his advisers show little enthusiasm for expanding their program, arguing that such a move would only fan inflation higher without appreciably reducing unemployment. Presidential Press Secretary Ron Nessen reported last week that the latest leap in the jobless rate was within the range predicted by Alan Greenspan, chairman of the Council of Economic Advisers, who expects unemployment to peak at about 8.5% this summer. And among TIME's Board members, Weidenbaum cautioned against "hitting the panic button" and going for a massive dose of stimulus.

Weidenbaum agrees, however, that the new jobless figures do argue for a greater sense of urgency by the Administration. For one thing, Weidenbaum believes the President should "call back his energy program" and end further time-consuming hassles with Congress. At the same time, Weidenbaum would have the Government speed up the flow of federal contracts as one way of providing some jobs. Washington Labor Economist Robert Nathan wants the Administration and Congress to increase greatly the public-service job programs to provide a measure of quick relief for unemployed workers.

For most Board members, the surest way back to full employment is to lift the economy out of its trough--largely by bigger tax cuts to increase consumer spending and thus production. Without such a boost, says Okun, "I would say that there is at least one chance in four that this recession will last into 1976 and give us a 10% unemployment rate." Okun emphasizes that recession and high jobless rates result in enormous economic losses for the nation. He calculates that the U.S. will turn out about $900 billion less in goods and services over the next five years than it might have done if the downturn had not been allowed to occur.

In stressing the need for a much more expansive program, Nathan points to the budget's projections for the so-called full-employment surplus. That is a significant figure designed to show what the budget would be if unemployment were only 4% and the economy were operating at optimum capacity.

Thus it can serve as a guide as to how much stimulus might be needed to spur a sluggish economy. The greater the budget surplus is by this measurement, the more the economy is reined in and deflated. Yet, notes Nathan, while the jobless rate will continue to hover at unacceptably high rates, the Administration estimates that the full-employment surpluses will be large and sharply rising: $12 billion in fiscal 1976, $29 billion in 1977, $33 billion in 1978, $45 billion in 1979, $61 billion in 1980.

Though these figures cannot be assumed to be irrevocable forecasts, they do chart the general direction of Administration policy for the next year or so. Says Nathan: "Clearly that is a very restrictive fiscal policy--and it does little to slow down inflation. Yet that is the price the Administration seems willing to pay for rather modest results."

None of the Board members expect the Administration's grim scenario to be played out, however, because they are certain that Congress will appreciably expand the President's budget. Pechman, for one, believes the projected deficit for fiscal 1976 will have climbed by $13 billion or more when Congress is through with the budget. For example, Ford wants to reduce Government spending this year by $17 billion through, among other things, limiting the mandatory increases in federal pay and Social Security and boosting the price of food stamps for the poor. But the swift approval that the House and Senate gave to bills blocking the food stamp proposal last week suggests that many of Ford's reductions will be rejected. Pechman reckons that the most Ford can expect is to cut spending by about $4 billion. In addition, Nathan sees Congress increasing spending for public employment, energy research and mass transit.

On the other hand, most Board members agree that many Congressmen are overawed by the record deficit numbers and may be unwilling to make deep enough tax cuts for fear of touching off a worse round of inflation. That fear partly explains the reluctance of the House Ways and Means Committee to go very far beyond Ford's tax cut proposals. The $20 billion package of reductions that the committee rushed through last week--a permanent $8.4 billion cut in personal income taxes, a one-time reduction of $3.8 billion in corporate levies, and an $8 billion rebate on 1974 income taxes for individuals--is not dramatically bigger than Ford's $16 billion package.

Heller and other Board members worry that most legislators and citizens find it difficult to understand that the U.S. economy is so massive in size that revitalizing it requires seemingly huge deficits and tax cuts. As CEA chairman in 1964, Heller championed a $12 billion tax cut that quickly accelerated what had been a slowly recovering economy. Production jumped, unemployment shrank, and rising incomes and profits boosted federal tax revenues; the deficit declined and the inflation rate held at about 2%--at least until the war in Viet Nam was expanded. The whole economy has grown so much bigger since 1964 that to get the same amount of stimulus, Heller says, a $27 billion tax cut would be needed today. But, he adds, an even greater injection of purchasing power than that is warranted today. His argument: "The recession now programmed by the budget is going to be 80% worse than any other postwar recession. The drop from peak to trough will be about 7 1/2% in real gross national product, and the biggest drop we have had in any other postwar downturn was 3.9%." Most Board members insist that in an economy that flat, there is little danger of intensifying inflation by making substantial tax cuts.

On the monetary side, Board members were unanimous in urging that the

Federal Reserve Board quickly step up the increase in the money supply to an annual rate of between 6% and 8%. Their main concern is to make enough credit available for the most rapid recovery possible. Though Federal Reserve Chairman Arthur Burns has been indicating that the Fed has been loosening its supertight money policy, Board members see little evidence of it.

Sprinkel notes that money supply in the last six months has been expanding at a meager 2%, and he--among most other experts--has long been calling for a greater growth. Interest rates have been dropping rapidly and will continue to decline. But that is due more to the recession and slackening loan demand than to the Federal Reserve's credit-easing moves. In fact, Okun says, "The Fed's policy this year seems to be the marriage-manual approach to monetary ease. Make it last, go slow, stretch it out and you enjoy it better that way." Adds Sprinkel: "The policy that the Fed is now following is risky because it is going to make the decline steeper and unemployment higher. Then, under political pressure, it will have to turn to big stimulus and we end up with inflation anyway."

Higher Prices. An overwhelming majority of the Board were opposed to the Administration's plan for conserving energy by increasing tariffs and taxes on both imported and domestically produced crude oil. Their main objection: it would kick prices even higher, adding more than two percentage points to the consumer price index, which now is rising at an annual rate of 12%. Their proposals for conserving fuel ran from continuing to rely on voluntarism (Sprinkel) to imposing import quotas, allocation systems and, if necessary, gasoline rationing (Heller).

With few exceptions, Board members contend that much of the nation's present economic troubles stem directly from policy mistakes of both the Nixon and Ford Administrations. The biggest miscalculation, in the Board's view, was the persistent pursuit of overly restrictive anti-inflation programs. In this, Treasury Secretary William Simon gets most of the blame for his strenuous emphasis on budget balancing. On monetary policy, the Fed is given low marks for its stingy money policies through much of the year. Says IBM's David Grove: "Underlying the Administration's policy was a judgment that it was overridingly important to get inflation under control, and it was prepared to take the risk involved. It lost."

Congress is certain to tilt Ford's budget more toward a strong recession-fighting posture than the Administration now seems ready to risk. Even so, the price for past policy misjudgments will be high: record unemployment, and the prospect that the world's biggest and potentially most productive economy will still be running well below capacity for some time to come.

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