Pitfalls on the Road Back to Prosperity

The U.S. economy at last seems unmistakably to be recovering from recession; many economists now think that an expected tapering off in business inventory cutting alone almost guarantees growth in U.S. output at an annual rate of about 7% for the rest of 1975. Nonetheless, the long road back to full prosperity contains many potential pitfalls, which were all too evident last week. President Ford finally produced a plan for gradual decontrol of oil prices that has a chance of passing Congress, but some threat remains of an abrupt jolt to the economy when present controls expire Aug. 31. A June spurt in consumer prices indicated that inflation is not yet dead, and a renewed rise in interest rates stirred fear among some economists that the Federal Reserve Board is not pursuing policies expansive enough to promote an accelerating recovery. Details:

Oil: Down to the Wire

It was hard to believe that reasonable men could have so much trouble avoiding a crisis whose arrival had been pinpointed so precisely so far in advance. Ever since they began wrangling over energy policy six months ago, President Ford and the Democratic leaders of Congress have known that at most they had only until Aug. 31 to reach agreement: if no new legislation is signed by then, price controls on domestically produced oil will expire and petroleum prices will shoot up faster than either side wants. Actually, the effective deadline was Aug. 1, since Congress regularly adjourns then for one month or more. Yet it was not until the end of last week, with a scant five days left for legislative action, that the outlines of a bill with a real chance of becoming law finally emerged.

Less than 24 hours before he emplaned for the European Security Conference in Helsinki, President Ford sent Congress a plan that he hopes will end the impasse. It seeks to reconcile Ford's insistence that oil prices must be allowed to rise substantially--in order to stimulate U.S. production and diminish the nation's dependence on OPEC imports --with the Democrats' fears that the rises would be inflationary and impede economic recovery. At present, "old" oil --crude pumped in amounts equal to what was produced in 1972--is price-controlled at $5.25 per bbl.; "new" oil is uncontrolled and sells at about $13. The President's new bill would gradually lift the controls on old oil over a 39-month period. Each month more oil would be decontrolled, but the schedule is so set up that the biggest impact on prices would not occur until after the November 1976 elections. The immediate effect on an economy recovering from inflationary recession would be minimal; by White House estimate, prices of gasoline and other petroleum products would rise a mere half-cent to a penny per gallon this year.

Windfall Profits. Also, the bill would establish an initial ceiling of $11.50 per bbl. for all oil; that would force an immediate rollback of about $1.50 per bbl. in the present price of uncontrolled crude. Then the ceiling price would be increased five cents each month through November 1978. The plan also calls for taxing oil companies' "windfall" profits and returning part of the money to the consumer, perhaps in the form of a tax rebate.

The bill was drafted after two days of exhaustive negotiations with House and Senate leaders, and Federal Energy Administrator Frank Zarb said that it would "meet all the substantive objections raised" by Democrats to Ford's earlier decontrol plans. That was overoptimistic. The measure indeed stands a good chance of getting through the House, but prospects for Senate passage are questionable. Democratic Powers Henry Jackson and Edward Kennedy joined last week in attacking the bill. Should the Congress be "a party to robbing the public?" asked Jackson rhetorically. Ted Kennedy criticized the compromise as "a major transfer of wealth to the oil companies paid for by the American consumer." Predicted House Majority Leader Thomas ("Tip") O'Neill: "It [the vote] will be close."

Thus it is still not certain that the nation can break out of what had become an increasingly rigid White House-Congress impasse. Ford began last week by vetoing a Democratic energy bill that would have extended present price controls to Dec. 31 and rolled back the price of new oil to $11.28 per bbl. Democrats retaliated in the House by killing, 262 to 167, a Ford plan to phase out price controls over a 30-month period and set a $13.50 price ceiling.

With the score tied 0 to 0, Ford decided to turn on the charm and invited many of his Democratic opponents and some of his Republican supporters for an evening cruise aboard the presidential yach Sequoia. Over a seafood and brown-rice buffet, he made a pitch for Congress to move on some form of phased decontrol, and hinted that he was open to comprimise. Later negotiations let to the plan that the White House unveiled at week's end.

That bill looks like Ford final offer to the Democrats; if it is rejected he has already warned he will veto any further attempts to extend controls. The nation would then be plunged into the chaos of abrupt decontrol, which could send the price of gasoline up 7-c- per gal. overnight and drain $17 billion in consumer budget power from the economy over the next year. The prospective damage to the economy provides the best hope that a compromise will be accepted, but on both sides the temptation is still strong to play out a political game of chicken to the bitter end.

Prices: A Rude Surprise

Economists who had confidently believed that the now ended recession had killed double-digit inflation for good got a rude surprise last week. The Labor Department disclosed that the consumer price index leaped .8% in June, or dou ble the May rise -- equal to an annual rate of exactly 10%. The June jump involved almost every major item in the index, including electricity rates, med ical care, gasoline (up 3%) and food (up 1.5%, largely because of higher prices for meat, fruits and vegetables).

Administration reaction to the spurt was mixed. Treasury Secretary William Simon, an inveterate Cassandra, warned that "inflationary pressures remain a serious and continuing problem." White House Economic Adviser Alan Greenspan more optimistically told the Congressional Joint Economic Committee that the June rise does not foreshadow "a new burst of inflation," but conceded that it does mean the U.S. will have to settle for a "base rate of inflation" higher than 3% to 4%. One reason that price boosts may not continue at the June pace: meat prices have leveled off in recent weeks as larger supplies of beef have begun moving to market.

Further inflationary surprises may be on the way, though. Most worrisome are the possible price implications of renewed Soviet hunger for U.S. crops. Big purchases of corn, wheat and barley an nounced last week brought the total amount of U.S. grain the Soviets have contracted to buy to 9.8 million metric tons. That is still within the 10 million tons that Agriculture Secretary Earl Butz figures the U.S. can sell with only a minimal impact on domestic prices. But continuing drought in the U.S.S.R. is raising worries that the Soviets might later seek to buy huge additional quantities; at midweek the Agriculture Department lowered its previous estimate of the Soviet grain crop by 10 million tons, to 185 million. Butz now believes that the Soviets could eventually be in the market for 19 million tons--an amount equal to the 1972 purchases, which would raise prices of cereals, bakery products and grain-fed meat animals. At least some Administration officials would urge President Ford to stop any huge second round of grain sales. And last week the Agriculture Department ordered U.S. grain-export firms to advise it before beginning any new negotiations with Soviet buyers.

Last week, too, aluminum producers announced that they would go ahead with price rises of a bit more than 2% scheduled for August, and hinted that a second round of increases might follow in the fall. The Council on Wage and Price Stability fears that aluminum increases will spur large companies in concentrated industries to raise prices at the first signs of recovery. It persuaded the aluminum makers to postpone the initial increases from July to August, but has no formal power to stop them.

Money: Higher Rates

After plunging from their lofty peaks of mid-1974, interest rates are drifting up again, raising concern that higher borrowing costs could discourage business and consumer spending and hamper the budding recovery. Manhattan's pace-setting First National City Bank has raised its prime loan rate to businessmen from a low of 6 3/4% in June to 7 1/2% recently. And last week most other major banks followed suit and lifted their prime 1/4% to 7 1/2%. The effect is to lift the level of other short-term credit costs to business because many bank loan rates are scaled upward from the prime.

Last week Federal Reserve Board Chairman Arthur Burns confirmed what many experts had strongly suspected: a chief cause of the rise in rates has been a recent reining-in by the board of money supply and credit growth. In testimony before the House Banking Committee, Burns reported that the board moved to tighten monetary policy when the nation's money stock began to grow at an annual rate of 14 1/2% during May and June--primarily because tax rebates and Social Security bonuses paid out by the Treasury in that period pumped cash into the economy.

Arcane Fashion. Burns stressed that the Federal Reserve is not deliberately trying to push up interest rates. The board's latest tightening of monetary policy, he said, was merely intended to signal to the financial community that "a major relaxation of money supply" is not under way. That explanation brought a blast from Committee Chairman Henry Reuss, who wondered why the board did not simply announce its intentions instead of maneuvering in such an arcane fashion that interest rates did rise, thus delivering "a clout on the nose of the economic system."

The deeper question is whether the Federal Reserve is making enough money available to meet the needs of businessmen and consumers in a once more growing economy. Burns is sticking to his target of increasing the money supply at an annual rate of 5% to 7 1/2% over the next year or so, and insists that that will provide enough stimulation to reduce the unemployment rate during the next year "to 7 1/2%, possibly lower." Critics such as Walter Heller, Arthur Okun and Otto Eckstein, all members of TIME'S Board of Economists, believe a faster money expansion is needed to hold interest rates steady, speed up production and bring joblessness down more swiftly. If interest rates continue rising, Burns and the Reserve Board will be faced with a wrenching choice: let the climb continue, which Burns maintains he does not desire, or permit a growth in money supply beyond the present target, a course that Burns deeply fears would be inflationary.

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